A compensation policy refers to a company’s practices for providing employees with pay, benefits, and other rewards.

A compensation policy outlines the specific details for determining employee compensation, such as base pay, statutory requirements, employee benefits, commissions, bonuses, overtime, severance, and equity-based rewards. 

The policy also typically describes the elements included in an employee’s total compensation, payment protocols and calculations, and eligibility requirements. 

Why employers need a compensation policy

A compensation policy is an important and necessary tool for any company. Compensation policies help employers with the following: 

Ensure equitable pay

Compensation policies create a standard for providing fair pay and benefits to employees. Compensation often has many variables, and policy helps streamline the process to ensure that all employees receive equitable compensation for their work.

A global compensation policy also helps employers manage costs and budgets more effectively to ensure they understand the total cost of their employees and can pay their employees fairly.

Stay competitive

A compensation policy allows an employer to benchmark their offerings against the market. A company can ensure competitive salaries compared to similar positions and other businesses in the industry to attract top talent. 

Also, because employee values and supplemental benefits vary across markets, a global compensation policy allows employers to cater to the needs and expectations of all their employees, regardless of their location. 

Improve engagement and retention

When employers compensate talent fairly, employees are more likely to feel motivated and perform their best work. A solid compensation policy can lead to increased engagement, productivity, and company loyalty, resulting in less employee turnover.

A compensation policy also helps companies attract, engage, and retain the best talent. Prospective employees want to receive fair compensation and ample support for their well-being through competitive benefits.

Align employees’ work with business goals

A clear compensation policy helps employees understand how their work aligns with the company's goals and objectives. For example, when companies tie monetary rewards directly to business accomplishments, employees better understand how their job performance helps the business achieve goals and how they can receive additional compensation for their hard work.

Compensation elements to include in your policy

A compensation policy typically includes the following primary elements: 

  • Base pay. Base pay is the regular salary or wage an employee earns for their work. The compensation policy should outline base pay based on job responsibilities and performance, as well as how the base pay may increase over time with merit or cost-of-living adjustments. 
  • Variable pay. Variable pay is supplemental compensation based on job performance, such as commissions and bonuses. The compensation policy should explain the variable pay types and how eligible employees can earn them. 
  • Benefits. A compensation policy typically outlines employee statutory benefits and supplemental benefits. It should specify how the employer administers benefits and how eligible employees receive them. 
  • Incentives. Incentives include employee perks or fringe benefits that motivate employees to achieve goals, such as stock options, relocation stipends, health and wellness stipends, and professional development. A compensation policy details the incentive rewards and the criteria for eligibility.

Compliance challenges of a compensation policy

Compensation is complex, especially for a company that hires and pays an international workforce. Compensation regulations vary worldwide, and a global compensation policy must be fair, competitive, and compliant across borders.

Employers must ensure their compensation packages are fair and equitable for all their talent based on location and role, and they must also comply with local employment laws around wages and benefits.
Employers can easily offer competitive compensation packages to their distributed talent by working with a dedicated benefits partner like Velocity Global. Our Global Benefits solution removes the burden of benefits administration and compliance, so businesses can focus on delivering consistent and comprehensive support to their employees.

Learn more about our Global Benefits solution and how we help craft compliant, market-specific compensation packages that go beyond statutory minimums in more than 185 countries.

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