A compensation strategy is about more than just paying employees. It’s a tool that helps a company stay on budget, extend its runway, manage equity, attract talent, motivate and retain employees, and comply with complex pay transparency laws. The secret to a strategy that can achieve all that? A well-defined compensation philosophy.  

Despite its importance, a compensation philosophy is often misunderstood and overlooked. While it may sound abstract, it’s actually a structured framework that guides all pay-related decisions. In this article, you’ll learn what a compensation philosophy is, why it matters, and its key elements.  

What a Compensation Philosophy Is and Why Every Employer Needs One 

A compensation philosophy is a company’s documented approach to how it will pay and reward its employees, providing guidelines for determining salaries, equity awards and refreshes, bonuses, merit increases, and other short- and long-term incentives. 

By laying the groundwork for strategic compensation decisions, employers are better able to: 

  • Align with financial goals 
  • Structure competitive offers to draw top talent  
  • Keep employees motivated and engaged 
  • Make consistent and fair decisions about pay 
  • Set annual budgets and headcount plans 

Defining Your Compensation Philosophy 

Whether you’re building your company’s first compensation philosophy or revising an existing one, there are important factors to consider at the start. Be sure to involve stakeholders from HR, finance, and leadership to ensure alignment. 

Key considerations 

  • Business and financial goals: How do you want to structure pay elements to support those goals? 
  • Market positioning: How competitive do you want to be? Do you want to lag, match, or lead the market?  
  • Cash vs. equity balance: How will you weigh short-term cash incentives with long-term equity offerings? 
  • Pay elements: What role will each pay element — such as base salary, equity, and bonuses — serve? What will you emphasize for attraction, motivation, or retention? 
  • Culture: What behaviors do you want to drive and reward?  
  • Constraints: How will you address external factors like economic conditions, regulations, industry trends, and demands from investors or the board of directors? 
  • Employee demographics: What are the needs and expectations of your employees? 

Conduct market benchmarking 

Market benchmarking is the process of comparing your company’s compensation plan against the market to ensure it meets your goals and target market positioning. During this process: 

  • Identify relevant benchmarks: Decide on which factors to include, such as industry, geography, company size, and funding stage.
  • Gather and analyze compensation data: Use fresh and reliable data from a reputable source. Free compensation data is often stale, biased, and unverified.  

Apply benchmark data to your job architecture 

To help bring your compensation philosophy to life, you’ll align compensation with your job architecture. Job architecture is a framework for organizing roles, seniority, and pay ranges across an organization.  

It starts with broad job categories, like sales and marketing, which are divided into job families, such as customer success. Each family is further broken down into job levels based on the experience required, responsibilities, and complexity. For example, entry-level, mid-level, senior, and executive roles. After you’ve set your job levels, you’ll define pay ranges for each job level based on benchmark data and your target market positioning. 

Keep in mind that not all benchmarking factors are applied equally to every role. While industry trends typically influence all job levels, geography plays a larger role for staff and support positions. For executives, compensation is driven more by a company’s size and financial profile.   

Communicating Your Compensation Philosophy 

Once you’ve put all the elements together into a formal compensation philosophy, it’s time to share it. The level of detail you provide will vary depending on the group.  

People team, board members, leadership: Share the full compensation philosophy, including all details about how the company will implement its pay strategy.  

Managers and employees: Provide a high-level summary that’s known as a compensation philosophy statement. This will help them understand the company’s rationale for pay decisions without going into extensive detail.  

Share this statement during important moments like onboarding, performance reviews, and career development discussions.   

Job candidates and other external audiences: Offer a version that emphasizes the employee value proposition. Thís version usually appears on career pages or in job listings and excludes sensitive details.  

Examples of Compensation Philosophy Statements 

Here are a few examples to help structure your compensation philosophy statement: 

  • We aim to pay at the 50th percentile for cash compensation for all employees, with equity at the 75th percentile for business-critical roles. 
  • We aim to pay competitive localized rates in areas where we compete for talent.  
  • We are a pay-for-performance organization, rewarding top performers with outsize rewards. 
  • We believe employees in similar roles should receive equitable pay, regardless of personal characteristics or demographics.   

When to Re-Evaluate Your Compensation Philosophy 

One it’s launched, it would be nice to think your compensation philosophy work is done. But designing a compensation philosophy isn’t a one-off process. It should adapt as your company grows and changes. We recommend evaluating your compensation philosophy yearly and when your company is experiencing any of the following: 

By establishing and maintaining a thoughtful, data-backed approach to compensation, you can effectively motivate and sustain the talent your company needs to meet its goals, while keeping finances aligned.  

How Sequoia Can Help You Design a Right-Fit Compensation Philosophy 

Crafting a compensation philosophy tailored for your business and employees requires careful planning, data analysis, and expertise. Looking for a partner to guide you through the process? Sequoia specializes in guiding VC-backed and PE-backed companies design to compensation strategies with our expert advisors and powerful analytics and platform. To learn how we can help you, connect with an advisor.