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What is Compensation Philosophy?

Tricia Christensen
Updated May 16, 2024
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All companies with employees must determine how and what to pay their workers, and when to offer things like raises, bonuses and other incentives. Businesses of all types tend not to do this haphazardly. Rather, they evolve what is called a compensation philosophy. This is an actual plan for how employees are to be paid, when payments will rise, and when bonuses are appropriate. Such a plan is often made available to employees, so they have a sense of the organization’s philosophy and can thus determine their treatment by the organization, as it relates to compensation, not just at present but also in the future.

Some of the things that influence compensation philosophy include present revenue of the company and expected profits in the future, market value of the jobs for which the company is hiring, and degree of competitiveness in the types of a jobs a company offers. The way an organization views its employees and its responsibility to those employees factors into the development of a compensation philosophy too. Essentially, many different elements may contribute to the way an employer determines rate of pay, raises and bonuses.

It may be easy to create a compensation philosophy in some fields. For instance those that require rising levels of expertise and education, usually have set rates, and they may have a salary range that matches market value prices and that gives employees something to aim for. Hospitals, for example, can hire employees of numerous types, and clearly compensation will be different for nurses than it is for doctors or janitors. Moreover, it will be different for nurses of different types. An LVN will have a lower salary range than an RN, doctors are paid more if they are specialists, and janitors don’t have a salary that approaches nurses or doctors. Businesses like hospitals might have to consider any jobs that are union jobs, since this may influence rates of pay or tables for advancements and raises.

One thing that many organizations must determine is how to set raises. Some companies leave this open, or in harsh economic times they may not give any types of raises or bonuses. This is usually a shortsighted approach, even if it is occasionally necessary. As employees work, the value of their pay tends to decrease if cost of living rises, while they are gaining experience and expertise in their field and showing company loyalty by continuing to work for a company. Such an approach over time may be a recipe for failure to retain experienced employees because it does not continue to assert the value of the employee and devalues him. Having a clearly stated compensation philosophy may in part solve this issue; if the company has a policy of no raises, employees who work for it know in advance this policy exists but employee retention may still be difficult.

Most companies have some form of compensation philosophy and it is absolutely essential that it be applied consistently. Failure to fairly apply any policy can lead to charges of employee discrimination, especially if there appears to be systemic failure that affects a single gender or racial group. If any changes are to be made to the way people are paid in the future, these changes must affect all employees, too. Therefore, no matter how a compensation philosophy is developed, it is not that flexible once it becomes policy.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Tricia Christensen
By Tricia Christensen
With a Literature degree from Sonoma State University and years of experience as a SmartCapitalMind contributor, Tricia Christensen is based in Northern California and brings a wealth of knowledge and passion to her writing. Her wide-ranging interests include reading, writing, medicine, art, film, history, politics, ethics, and religion, all of which she incorporates into her informative articles. Tricia is currently working on her first novel.
Discussion Comments
By Renegade — On Dec 23, 2010

If workers are from a different culture it is very important to make clear to them what the standards of compensation are. Businesses and cultures operate differently in different regions, and are based upon different ethical standards of work. Discrimination can often take place when employers fail to recognize these important differences and attribute them to ignorance or stupidity.

By JavaGhoul — On Dec 20, 2010

The standards of compensation may not be haphazard, but often the economy is. Because of this, many companies can encourage hard work but cannot guarantee that things will stay the same in the company. This is a necessary evil, because a competitive capitalistic economy is always pushing the edge and taking new risks for the greater good.

Tricia Christensen
Tricia Christensen
With a Literature degree from Sonoma State University and years of experience as a SmartCapitalMind contributor, Tricia...
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