Compensation Policy

The compensation policy is the basic document, which drives the detail of the compensation practices in the organization. As the compensation strategy sets the high level compensation goals of the organization, the compensation policy describes the details of the individual compensation components, their behavior and their role in the compensation scheme of the organization.

What is the compensation policy?

The compensation policy describes the details of the compensation components in the organization, how they are used and the conditions for the employees as the compensation component can be applied in their specific situation.

Each organization uses many compensation components and they have to be described. The compensation policy provides the basic explanation of the compensation component, how it is calculated, who is eligible for the usage and the approval procedure.

The compensation policy belongs to most read and discussed internal policies of the organization as it drives the salaries of the individual employees. Each employee is interested in the structure of the salary and the potential total cash achievable in the organization. The compensation policy is the main tool to find out the details about the compensation components and the way, how to achieve the highest total cash.

Compensation Policy Overview: Basic and Most Important Components of the Policy
Compensation Policy Overview

The compensation policy drives the effort and performance of employees as the employees will find the smart and easiest way how to achieve the highest possible income with the smallest possible individual performance. The compensation policy has to be set the smart way as it avoids the potential work-around and abuse.

What is important in the compensation policy?

The compensation policy has to be transparent and it has to provide just the only way of the interpretation.  It is extremely important, the employees and managers are not unsure about the compensation component and they understand clearly, what conditions are applied for the approval of the specific compensation component.

The transparent compensation policy supports the high performance corporate culture organization as the employees understand, what behavior and performance levels are expected to be eligible for the specific compensation component and it drives the behavior and performance specifically the right way for the organization.

The policy has to cover all the compensation components, which are used in the organization and affects large populations. The exceptional managerial component tools can be referenced from the general compensation policy, but they should not stay hidden. The employees cannot trust the compensation policy, which does not mention all the compensation components.