Overview

Compensation is one of the most important aspects of a company's HR practices and the employee experience. How you approach compensation impacts culture, performance, employee expectations, parity & opportunities for advancement.

As you grow, a defined compensation framework can help you maintain scalable, fair, and transparent practices. A framework also makes budgeting & planning easier and makes your pay practices more understandable for both people leaders and individual contributors. Your approach to compensation is tied closely to performance management practices as well, outlining the level of performance necessary to receive an annual salary adjustment.

A compensation framework should typically include:

• A documented approach to how compensation is determined including salary bands, and variable compensation.
• Opportunity for individual pay increases. This is called a merit increase and is typically determined once per year at the same time for all staff, or evaluated for an employee at their employment anniversary.
• In some cases, the opportunity for bonuses based on company performance. Bonuses may be available to all staff, or only for certain roles.
• A benefits package, usually including health insurance, leave policies, paid time off, 'extras' such as free snacks, stipends for wellness or entertainment, etc.
• Periodic cost of living increases (normally every 2-3 years), applied equally to all employees.

The following represents an example compensation framework.

Definitions and Examples

Creating your own Compensation Framework

Your compensation framework is unique to your company. Using the concept of the five elements outlined in the pyramid, consider your own budgets, operating model, policies, and philosophy in order to create a framework that will govern your company's approach to compensation. Ideally, most, if not all, of your framework can be shared transparently with your staff.

While there may be aspects of your specific framework that are not shared with all staff (such as who is eligible for performance bonuses, specific bonus amounts available by role level, or your specific salary bands), as much of the framework can, and should, be shared.

How to Communicate Your Compensation Framework to Staff

Transparent pay practices foster trust, minimize distractions, and help employees feel connected to the organization. Transparent pay practices don't mean that salaries are shared with staff (although some companies choose to do so), it simply means that employees understand how compensation is determined, know when compensation may be adjusted and what the opportunities for compensation adjustments are based on. Employees can trust that compensation decisions are fair and not arbitrary.

In this way, it's important that some aspects of your compensation framework be explicitly tied to your merit process and the objective feedback an employee receives on an ongoing basis during their quarterly reviews.

Your compensation framework can be documented and communicated to staff in a variety of ways. A typical roll out includes: