Craft a Compensation Philosophy Lay the groundwork for compensation that is competitive, cost-effective, and brand-aligned. 1Executive Summary A well-designed compensation philosophy is the foundation of an effective compensation strategy. • Employee compensation often comprises in excess of 70% of an organization’s ongoing operating expenditure, yet few organizations have plans in place to properly direct and control this expenditure. • The first step in compensation planning is the development of a compensation philosophy that clearly articulates the organization’s high-level approach to pay for each of its employee segments, including its target competitive position. A compensation philosophy should be primarily driven by business strategy and objectives. • A compensation philosophy should include: compensation objectives, current structure, basis of job value, focus of variable compensation, approach to raises and promotions, competitive intent for each employee segment, and approach to administration. • These building blocks will help you to create employee segment plans that are legal, culturally-aligned, and designed to support organizational goals. Saying you have “competitive compensation” isn’t enough – articulate your competitive position. • “Competitive compensation” is a vague term that is generally used to indicate that an organization pays at or around the midpoint of the market (P 50) for base pay, total cash compensation ( b ase + variable pay), or both. • A compensation philosophy needs to be specific in order to effectively direct compensation practices; it needs to specify the target approach (l ag, match, lead) and the target market position it desires for each employee segment. o Note: The approach and/or the specific percentile target may be invisible to employees. It depends on the desired degree of pay transparency. 2Understand the Total Rewards model before beginning the compensation design process