What is a compensation policy?

A compensation policy is a combination of the philosophy and practices a company adopts when determining employees’ pay, rewards, and benefits. Every company will have its own compensation policy, though you may find that certain industries have similar or comparable approaches to pay and benefits.

While “compensation” primarily refers to salary, incentives like bonuses, commission, equity, allowances, and other types of perks are often referred to as “total compensation” and included in the company’s policy.  

What does a compensation policy cover?

The goal of a compensation policy is not to strictly dictate what or how every employee should be paid. Instead, it should outline specific policies and make clear the approach and protocol behind compensation structure, total rewards, and statutory requirements.

Additionally, a compensation policy may cover compensation review frequency, overtime guidelines, and severance policy.

Why do companies need a compensation policy?

Having a compensation policy in place ensures fairness and creates a standard for how salary, rewards, and benefits are managed within an organization.

For example, if ‘Employee A’ has a verbal agreement with their manager that their overtime rate is $25 an hour but ‘Employee B’ has an overtime rate of $20 an hour for the same work, this could be seen as an uneven or unfair pay discrepancy.

Additionally, compensation can be complex, tricky, and dependent on a number of variables. That’s why having guardrails and policies in place is important for any organization.

Disclaimer: This article and all information in it is provided for general informational purposes only. It does not, and is not intended to, constitute legal or tax advice. You should consult with a qualified legal or tax professional for advice regarding any legal or tax matter and prior to acting (or refraining from acting) on the basis of any information provided on this website.