Understand How Compensation Philosophy Impacts Your Paycheck

Have you ever wondered why some companies pay above-market salaries, while others offer candidates below-market rates for the exact same job? Or why brand-new hires often make more than a firm’s existing staff? It usually comes down to an employer’s compensation philosophy.

In fact, nine in 10 companies have a compensation philosophy, according to a WorldatWork survey… yet about half of employees don’t even know or understand them.

Knowing a company’s compensation philosophy can work to your advantage when negotiating raises, performance bonuses or a starting salary. Here’s a look at what it is and why it matters.

Why Compensation Philosophy Matters

A company’s compensation philosophy is intended to provide the guiding principles or foundation for how employees are valued and paid. It is often called the “why” behind employee pay, because it explains a company’s competitive position relative to the market and what behaviors or achievements are recognized and rewarded.

A compensation philosophy is influenced by many underlying factors, including industry, company size, cash flow and profitability, as well as how much talent factors into a company’s success, explained Pat Wilkinson, chief human resources officer for Viventium: “It has a lot to do with where a company wants to be positioned in the marketplace and who they want to attract.”

For example, a non-profit usually has less money to spend on salaries, so they pitch the opportunity to make a difference to attract candidates, explained Ringo Nishioka, VP of human resources and operations for MoxiWorks (and creator of the HRNasty blog). If that works for you, that’s great, but don’t expect to get rich if you decide to work for a non-profit.

On the other hand, the big tech companies that have plenty of cash to compete for talent in Silicon Valley (such as Facebook, Alphabet, Netflix and Twitter) pay higher median salaries to lure “A” players who can drive growth through innovation.

Some employers don’t believe in giving anything more than a cost-of-living adjustment to workers performing the same duties year after year. To score a significant raise or bonus at one of those companies, you’ll have to contribute more to the bottom line or get promoted.

Understanding these differences can not only help you find employers and opportunities that match your compensation goals and risk tolerance, it will help you focus on elements of the pay package that align with the company’s compensation philosophy during negotiations.

For instance, when Nishioka worked for a technology subsidiary of a Fortune 50 company, he noticed that candidates leaving a start-up would request smaller starting salaries because they were used to receiving less in cash and more in equity.

“A start-up has a totally different comp philosophy,” he said. “Those candidates could have asked for higher salaries and gotten them.”

Uncovering a Company’s True Compensation Philosophy

In theory, a company’s compensation package, salary range structures, pay adjustment practices and so forth should reflect its compensation philosophy and stated market position. But that’s not always the case.

“About 50 percent of the time, a company’s salary administration process doesn’t align with its philosophy; it takes on a life of its own,” Wilkinson said.

So even if you ask a hiring manager or recruiter to explain the philosophy behind a company’s pay practices and the behaviors and results they want to reward, you may not get a completely honest answer (although it’s still a good starting point for discussion).

It’s natural for hiring managers and recruiters to put things in the best possible light. But does the company actually reward based on performance? Or is compensation driven by pay grades, salary ranges and budgets?

Talk to several people who actually work there to see what the company genuinely values and how managers use pay to attract, motivate and retain workers, Wilkinson advised.

“Not all companies are created equal when it comes to compensation,” Nishioka echoed. Proactively identifying the gaps between what a company promises in terms of compensation, and what they actually deliver, can help you see if your personal philosophy and the employer’s match up before you make a commitment.

One Response to “Understand How Compensation Philosophy Impacts Your Paycheck”

  1. wageSlave

    Compensation philosophy is important and tracking trends can be quite difficult. Discerning cause and effect is more of an art then a science as many causes exist simultaneously leading to the “market” trend. Economists try to break things down to macro and micro trends. In theory, the macro trend is the sum of the micro trends. Which eventually leads to no two economist being able to agree on any one cause and effect.

    The macro trend is that wages in the US have been stagnant for many decades. But try and define the micro cause for the macro results. It is also undeniable that compensation philosophy has changed. There was a major compensation philosophy shift away from stake holder management philosophy to an equity based share holder management philosophy.

    In my humble opinion, major shifts in banking regulations influenced this philosophy shift. Banking deregulation of the funding methods used to determine mergers and acquisitions viability has spurred destructive behavior. Some merger and acquisition activity is beneficial removing inefficiencies, but the oversupply of available under restrained purchasing capital causes the destruction of otherwise viable efficient companies and the elimination of competition that wouldn’t normally occur. How many highly skilled IT workers are looking for work because of workforce reduction to fund recent merger and acquisition activity?

    The next question is would these acquisitions be viable without the oversupply of unregulated/under regulated easy credit? Now, what do you think displaced highly skilled IT workers and retooling IT workers do to the wage equilibrium in the short term? Over supply and stagnant wages? A constant flow of this activity and many others is but a component to decade long macro trend of wage stagnation. In my humble opinion.