COMPENSATION PHILOSOPHY 101
Create a compensation strategy that supports the growth of your
business.
2
STEP 1 Market analysis & benchmarking
Using fresh and relevant data from a reputable source, learn how
you’re paying compared to similar companies in your industry
STEP 2 Compensation philosophy
Create a statement that formalizes how you plan to pay and reward
your employees. This is based on information gathered in your
market analysis, your company values, and financials.
STEP 3 Pay structure creation
Guided by your compensation philosophy, construct your pay
structures.
STEP 4 Program design
Bring it all together to build your compensation program –
everything from offer letters, to compensation packages, merit,
cycles, burn analysis, and diversity, equity, and inclusion
(DE&I).
INTRODUCTION Who doesn’t love the thrill of company building? It’s
practically a prerequisite if you’re involved with a venture-backed
company. But for something as essential to the success of your
business and your employees as compensation, it’s crucial to have a
plan. That plan is called a compensation philosophy – and you need
one asap.
A compensation philosophy will help you get ahead of issues like
pay equity, pay that doesn’t match your financials, and hiring and
retaining top talent.
Stop treating compensation as an art. A compensation philosophy
builds meaning from data to structure how you pay, so that your
business, your candidates, and your employees can make the best
business and career decisions.
Creating a compensation philosophy is the second step in a
four-step process for designing a compensation program:
In this guide, you’ll learn how to develop a compensation
philosophy that sets your company on a solid compensation
foundation and replaces guesswork with clarity and
confidence.
If you’re ahead of the game and already have one, you’ll learn how
to evaluate your compensation philosophy to make sure it aligns
with your mission and goals.
Need to back up and learn about Step 1? Download The High-Growth
Guide to Compensation Benchmarking
TABLE OF CONTENTS If You Only Have 5 Minutes: Compensation
Philosophy FAQ 4
What A Compensation Philosophy Is & Why It’s Essential For Your
Business 7
The 4 Strategic Pillars Of A Compensation Philosophy 9
Best Practices 11
Examples: Compensation Philosophy Statements 15
Examples: How A Compensation Program Comes Together for Amazon,
Coinbase, and Netflix 17
Compensation Philosophy Evaluation Checklist 21
Create a compensation strategy that supports the growth of your
business.
SECTION 1:
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What’s a compensation philosophy? I don’t really have time to
ponder abstract theories.
A compensation philosophy is more than food for thought. It’s a
concrete statement about how your company will pay and reward its
employees. It’s a reflection of your organization’s values, market
positioning, finances, and goals. And it’s the basis for your pay
structures and overall compensation program.
Why do I need a compensation philosophy?
Without a compensation philosophy, you’re navigating pay decisions
around guesses, intuition, and what you think everyone else is
doing. You’re likely inefficient, overspending in some areas, and
underspending in others. A strong compensation philosophy grounded
in solid data will help you:
• Effectively manage your burn rate • Create pay packages that
align with your finances • Build transparency and trust around your
pay practices • Reach your diversity, equity, and inclusion
(DE&I) goals
with intention, instead of playing catch-up • Create a more
streamlined pay and reward process.
Where do I start?
Begin by analyzing the market with current data relevant to your
company from a reputable source. In other words: Don’t Google your
data set.
With this data, you’ll discover how the salaries you’re paying for
certain roles compare to other companies in your industry with a
similar stage of financing, also known as benchmarking.
Your compensation philosophy will explain how you’ll apply what
you’ve learned from the market analysis and benchmarking to your
business. It will answer questions like: Will you pay at or below
market? What kind of performance or behavior will you reward?
If you only have the space between meetings to get up to speed on
compensation philosophy, we’ve answered some key questions to get
you started. Come back to the rest of this guide when you’re ready
to learn more.
How long should my compensation philosophy be?
The length and the details you include are up to your organization,
but in general there are two ways to craft it.
1. You can create a one or two-paragraph summary that’s a
high-level view of your strategy. Think of this as more of a
compensation philosophy statement. To see examples, go to page
17.
2. You can also create a longer, more detailed view that includes
specifics about your market positioning and the pay percentiles
you’re targeting.
Once my compensation philosophy is written, what do I do with
it?
A compensation philosophy statement can be shared for transparency
with employees in places like your company’s intranet, FAQs, decks,
and HR materials. And you can mention key points in your
discussions with job candidates.
Longer, detailed compensation philosophies are best shared only
with executives, human resources, and other compensation
decision-makers. That will keep you from being boxed in to specific
targets if your company changes in any way.
So once my compensation philosophy is written and shared, are we
done?
Not necessarily. Your compensation philosophy might evolve as your
company does. Re-evaluate it to determine if it still reflects the
state of your organization whenever there are changes such as
shifts to hybrid or remote work, transitions in executive
leadership, or significant growth or expansion.
Create a compensation strategy that supports the growth of your
business.
WHAT A COMPENSATION PHILOSOPHY IS & WHY IT’S ESSENTIAL FOR YOUR
BUSINESS
SECTION 2:
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With a compensation philosophy, you have a solid and consistent
structure for your compensation practices so your organization
can:
• Hire – and retain – rockstar employees by communicating clear
reasons behind compensation. Often, a candidate’s or employee’s
satisfaction around pay is not just about the value of the package,
but trust that an employer is paying fairly. Your compensation
philosophy demonstrates transparency and will help build a healthy
relationship with employees.
• Align pay to your company’s finances. Will you pay at or above
market? Will you offer more equity than cash? Creating a
compensation philosophy will help you answer these questions, so
you can manage your burn rate effectively, get ahead of attrition,
and avoid over-dilution.
• Spotlight behaviors you want to drive and reward. The kind of
performance you celebrate with incentives, bonuses, and promotions
impacts your company’s culture. Will it be competitive or
collaborative? Your compensation philosophy can help set the tone
impacting overall performance and job satisfaction.
• Make pay equity and DE&I part of the process, not just an
intention. Instead of reacting or racing to catch up, you can build
an equitable and diverse workforce deliberately. And a well-
defined strategy will help pinpoint the cause of any existing
inequities, so you can correct them.
• Ease of administration for your HR and compensation team. A
compensation philosophy takes the art out of these teams’ jobs,
replacing it with data and clarity. Determining pay packages will
be easier, and awkward conversations can be avoided because HR and
compensation teams can explain their decisions with
confidence.
A compensation philosophy is a formal statement that explains how
your company plans to pay and reward its employees based on your
company’s culture, values, and financials. It’s the “why” behind
your pay structure and is the basis for all pay-related
decisions.
Create a compensation strategy that supports the growth of your
business.
THE 4 STRATEGIC PILLARS OF A COMPENSATION PHILOSOPHY
SECTION 3:
Market position
Decide how you’ll target the market and at what percentiles you’ll
pay for different roles. This is about finding a balance between
attracting top talent and your finances.
Pay mix
How will you pay in terms of cash, equity, and variable incentives
like bonuses and commissions? If you have less cash on hand, you
may decide to offer more equity. If you’re a later stage company,
you may have a heavier focus on cash.
Segmentation
Will you have a single pay strategy for your entire company or will
it vary by group? If you’re segmenting by group, it’s important to
have a rationale for this decision.
Geo strategy
Determine how you’ll pay employees in different locations. Also,
have a plan for how you’ll pay employees who move to another
region, state, or country.
Ready to start creating a compensation philosophy for your
organization? Consider the following key areas that your
compensation philosophy will define:
M arket p
SECTION 4:
BEST PRACTICES
Be clear and consistent.
Your compensation philosophy should help you answer a variety of
questions throughout an employee’s life cycle. For instance, if any
employee wants to move to another region or state, how will it
affect their pay? You need to be able to explain this clearly and
easily – especially if it leads to a reduction in pay.
Lead with data not feelings.
Compensation can be emotional because it’s tied to the health and
quality of the lives of your employees and their families. Although
you want to be empathetic, take a step back when you find yourself
making decisions based on emotions. Gather data points and
determine if they validate your feelings or if they reveal
something else.
Beware of exceptions.
Maybe there’s a case where you weren’t able to secure a candidate
at a certain salary, so you assume all of your compensation
packages aren’t competitive. That’s not necessarily true. Anything
that’s related to compensation applies to 80-90% of your
organization. The other 10% will be an exception, so make decisions
with that framework in mind.
Reevaluate when necessary.
When there’s a major change or milestone in your organization,
review your compensation philosophy to make sure it still supports
your business. These changes include transitions to hybrid or
remote work, shifts in executive leadership, or opening your first
office outside the United States.
You could also reevaluate it if you’re having trouble competing in
the market or if you sense something about your compensation
philosophy just isn’t right. No matter the reason, remember, data
should support any changes you make.
Create a compensation strategy that supports the growth of your
business.
SECTION 5:
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1. Short and to the point
Summarize your key decisions in one to two paragraphs to create a
compensation philosophy statement. This format can be shared
broadly and provides transparency about what the company values in
terms of pay.
Post it on your company’s intranet or include it in FAQs and HR
materials. You can also mention key points during conversations
with prospective employees.
2. Get detailed
Your compensation philosophy can be a longer document with
specifics about market position, pay targets, pay mix,
segmentation, and geo strategy.
This version is best shared only with executives, human resources,
and compensation decision-makers. Although you want to be
transparent about your overall strategy, you don’t want to be too
specific when sharing your targets and goals because this can paint
you into a corner if your strategy or finances change. If you say
you’re paying in the 75th percentile and then change it, people
will feel shortchanged.
The length, format and level of detail you include in your
compensation philosophy are up to your company, but there are two
general ways to do it.
Create a compensation strategy that supports the growth of your
business.
SECTION 6:
Equity is your most powerful compensation.
The problems we are trying to solve are complex, but if we solve
them, the value will be enormous. Equity allows everyone on the
team to share in this value, which is why we emphasize equity over
cash.
Rewarding excellence.
We reward employees who deliver value. Outsized results from you
will result in outsized compensation.
Pay for performance is about what you do AND how you get it
done.
Our top individual contributors make a huge impact while putting
our customers first. Our best people managers lead impactful and
healthy teams. Our compensation programs are focused on delivering
more rewards to those who are high performers or enable high
performance AND great teammates.
Recognition should be equitable and meaningful.
In a world of apathy and indifference caring is an act of
rebellion. We care about the cause, the art, the details, and one
another. We strive to provide personally meaningful recognition and
support to all contributors.
Create a compensation strategy that supports the growth of your
business.
SECTION 7:
EXAMPLES: HOW A COMPENSATION PROGRAM COMES TOGETHER FOR AMAZON,
COINBASE, AND NETFLIX
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Philosophy
• Innovate and invest for the long-term by relentlessly focusing on
the customer experience and leveraging technology
• Attract and retain highly talented employees who act like owners
and think about the company holistically
• No difference between employees and executives
Market Positioning / Pay Mix
Above market median; heavy equity, low salary (capped), no bonuses
outside of new hire sign-on
Programs
• Longer than normal vesting schedules (5-6 years) with
back-weighted amounts
• Rigorous performance review processes to ensure there are no
overpayments in “mega grants”
• Equity Grants on a differentiated and episodic (i.e., not annual)
basis to those who have demonstrated value-creating performance and
have the potential to contribute to the future long-term success of
the company
Here’s how compensation philosophy, pay mix, and programs connect
for three of the nation’s leading companies.
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Philosophy
• Equal pay for equal work • Ensure that we attract and retain top
talent from top companies we regularly
compete with for talent
Market Positioning / Pay Mix
• Target Total Cash model for base salaries. Coinbase pays what
other companies pay for base + bonus, but all in base.
• Everyone receives equity
Programs
• Peer Group change: from 85 companies to the 18 top technology and
financial services companies we regularly compete with for
talent
• No base salary negotiations during the hiring or promotion
process. Every role and level has a set pay target.
• Pay transparency: shares employee range and the level above •
Regular Market reviews to ensure that pay targets are at market
rates
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Philosophy
• To help us attract and retain stunning colleagues, we pay
employees at the top of their personal market.
• Each employee chooses each year how much of their compensation
they want in salary versus stock options. You choose how much risk
and upside you want.
Market Positioning / Pay Mix
• Target Total Cash model for base salaries. • Pay at the top of
the compensation range. • Everyone receives equity - fully vested
10 year grants.
Programs
• We calibrate to market once a year. • We do not think of these as
“raises” and there is no raise pool to divide up.
The market for talent is what it is. • Choice empowers employees to
be rewarded in ways meaningful to them. • Pay transparency: shares
employee range and the level above • Regular Market reviews to
ensure that pay targets are at market rates
Create a compensation strategy that supports the growth of your
business.
SECTION 8:
Does it reflect the values and mission of our company?
Do the behaviors it rewards align with our company’s mission and
values?
How might it affect the company culture?
Is every decision backed by fresh, reputable data?
Does it align with our current financials as well as our
goals?
Does it cover how to structure new offers post-financing?
Does it have a clear strategy for pay equity and DE&I?
Does it address how we handle hybrid or remote work?
Can I use it to confidently answer common pay questions from
employees and job candidates?
Once you’ve written your compensation philosophy, ask yourself the
following questions to determine whether it’s ready to share or if
there’s more information you need to gather:
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ABOUT OPEN COMP OpenComp helps modern employers and employees
confidently make the best business and career decisions. With
compensation intelligence, they make data-driven decisions, bring
clarity to the entire employee experience, and enhance
accountability and governance.
The Compensation Intelligence Platform by OpenComp offers the only
reliable compensation data, benchmarks, and insights for
high-growth employers and employees, from seed to pre-IPO. With our
active community of compensation experts, dedicated customer
success managers, and a unicorn-tested Services team, our customers
are creating radical change in the world.
To learn more go to OpenComp.com or email
[email protected].
If You Only Have 5 Minutes: Compensation Philosophy FAQ
What A Compensation Philosophy Is & Why It’s Essential For Your
Business
The 4 Strategic Pillars Of A Compensation Philosophy
Best Practices
Examples: Compensation Philosophy Statements
Examples: How A Compensation Program Comes Together for Amazon,
Coinbase, and Netflix
Compensation Philosophy Evaluation Checklist