What Is a Compensation Policy?

A compensation policy, also known as a salary policy, refers to a document that defines all the rules governing the distribution of compensation offered by an employer to its employees.

Why Implement a Compensation Policy?

The benefits of implementing a compensation policy within a company include:

  • Retaining talent
  • Facilitating recruitment
  • Increasing employee motivation
  • Facilitating internal mobility
  • Promoting pay equity within the company
  • Anticipating payroll costs more accurately
  • Complying with legal requirements

What Are the Different Forms of Compensation?

There are three forms of compensation generally used by companies:

  • Fixed remuneration, such as base salary and bonuses that do not vary from one employee to another (PTO or overtime pay, for example)
  • Variable remuneration, such as bonuses or premiums that may vary based on employee performance, seniority, or work schedule (night bonuses, for example)
  • Indirect remuneration such as insurance, RRSP contributions, various allowances, or any other fringe benefits

How to Draw Up a Compensation Policy?

The steps involved in setting up a compensation policy are typically as follows:

  1. Take stock of the current situation (payroll, decision-making processes, compensation structure, etc.) and map out the positions of the company
  2. Assess current company practices (employee satisfaction, competitiveness, efficiency, etc.)
  3. Define HR and overall corporate objectives
  4. Conduct market research to better understand trends and average salaries for different roles
  5. Analyze the compensation policies of competitors
  6. Identify what employees on the job market are looking for in terms of compensation
  7. Define the fixed compensation and salary range for each of the positions of a company, based on levels of responsibility and skills required
  8. List the variable compensation, fringe benefits and non-financial advantages offered for each of the positions of the company
  9. Validate the legal conformity of the compensation policy
  10. Present the compensation policy to employees
  11. Survey employees to validate the success of the compensation policy
  12. Readjust the policy as necessary

What Are the Various Constraints Associated With a Compensation Policy?

The constraints associated with a compensation policy include:

  • Purchasing power and employee commitment
  • Legal compliance of the compensation policy
  • Consistency with corporate strategies
  • Salary competitiveness
  • Attractiveness of the compensation policy
  • Company financial constraints

What Is the Main Challenge of Compensation Policy?

The main challenge of the compensation policy is to ensure a balance between meeting company objectives, controlling the HR budget, and recognizing the work of employees, all while providing an appropriate salary on an individual level.

Start scheduling
in minutes.

Up to 21 days of free trial. Easy setup. Cancel anytime.