Compensation philosophy: What it is and why your company should have one
28 de April, 2025
In today’s job market, transparency is closely linked to trust. According to Deloitte’s Global Human Capital Trends 2024 study, 84% of leaders agree that the more transparent a company is, the greater its employees’ trust will be.
This transparency can – or should – take place in various aspects, such as sharing information about strategies, decisions, results and also remuneration policies.
As far as salary and employee benefits policies are concerned, they can only be communicated transparently if their guiding principles are clear, consistent and tangible.
It is precisely this idea that underlies the concept of a compensation philosophy. Find out what it is and why organizations should have one.
What is the compensation philosophy?
The compensation philosophy refers to the formalization of the principles behind the salaries and extra-salary benefits awarded to employees. This philosophy clarifies why people receive what they receive.
A good compensation philosophy ensures alignment between the company’s salary policy – and its benefits plan – and its values and organizational culture. In addition, it must take into account not only the business objectives but also the needs and expectations of the employees.
While the compensation philosophy functions as a statement of the company’s principles and beliefs regarding employee compensation, remuneration policies are the materialization of these principles and beliefs.
Examples of compensation philosophies
Organizations can build their compensation philosophy based on different criteria and principles. Here are some examples.
1 – Market-based philosophy
In these cases, companies use data from their sector of activity and the geographical location of their employees as a reference to define a competitive remuneration and benefits policy.
The principle of this philosophy is alignment with the practices of the market in which the company operates.
2 – Performance-based philosophy
Linking employee compensation to their performance is one of the most common principles in building a compensation philosophy.
When professionals feel that they are properly rewarded for their productivity and performance, they tend to feel more motivated and involved. In turn, organizations are in a better position to retain their talent and achieve their strategic business objectives.
3 – Equitable philosophy
This compensation philosophy is based on the idea that people who perform the same job should receive the same remuneration, regardless of their individual characteristics (such as age, gender, nationality, geographical location or others).
Pay equity is an increasingly monitored metric and, in June 2023, the European Pay Transparency Directive was published, which aims to combat pay discrimination and reduce the pay gap.
This is a particularly critical issue in Portugal which, according to the assessment made by the European Institute for Gender Equality (EIGE) in the Gender Equality Index 2024, was the only EU country to worsen in terms of equality at work.
4 – Flexible philosophy
This approach allows the organization to consider various factors, both objective and subjective, when defining a remuneration policy. These factors may include, for example, a combination of market studies (an objective criterion) and the company’s own measures (which may have subjective criteria).
Although this compensation philosophy has the advantage of being able to adapt to specific needs and contexts, it can also lead to situations of inequality or even discrimination.
5 – Personalized philosophy
This model is based on market conditions, individual performance and business performance. In practice, it involves setting certain objectives and thresholds which, when achieved, have a certain reward associated with them: for example, a salary increase, a bonus or a promotion.
This philosophy tends to motivate employees and teams to achieve the objectives set, while at the same time promoting the company’s competitiveness.
Why have a clear compensation philosophy?
Creating a compensation philosophy can be a complex job and must involve the human resources and finance teams, as well as the leadership. But the advantages of having a clear remuneration philosophy should make your company want to go down this road.
These advantages include:
- Attracting talent: the “war for talent” is a reality in many sectors of activity and having a compensation philosophy is a tool for employer branding allowing the company to stand out from the competition and attract qualified professionals;
- Retaining professionals: the existence of a transparent and fair compensation philosophy helps to increase the satisfaction and motivation of employees, who tend to become more involved and look forward to their continuity and progression in the organization;
- Fairness: although there may be some exceptions (which take into account factors such as seniority or experience, for example), most compensation philosophies promote a feeling of fairness and equality, which also has a positive impact on employee satisfaction;
- Employee experience: clear communication of a compensation philosophy makes interactions between company and employee – particularly interactions regarding issues such as compensation and benefits – more objective and less ambiguous, thus improving the employee experience;
- Company competitiveness: by having an attractive compensation philosophy, the company improves its ability to attract and retain talent, which makes it more competitive in its sector of activity and in the job market.