12 Key Elements of a Model Pay Policy

A model pay policy ensures fairness, competitiveness, and clarity for the employer and employees. A well-designed policy and consistent practices help to attract and retain top talent, and compliance with federal, state, and local requirements. 

1. A clear expression of values. A pay philosophy links organizational values that drive decisions about compensation. For example, a pay philosophy could be grounded in core values of fairness and equity, attracting and retaining top talent, transparency, etc.
2. Personnel. The policy should specify who makes and reviews decisions about pay, including salary offers and pay increases.
3. Transparency. The policy should be clear, easy to understand, and readily available to all employees. The policy should provide transparency about policies and practices. Employers should encourage regular and open discussion of compensation.
4. Salary ranges. One key approach to transparency is to provide clear pay salary ranges for each position. These ranges should be included with job postings, and the ranges should be updated regularly to ensure market competitiveness and to reflect changes in the cost of labor.
5. Factors considered in setting pay. The policy should identify reasonable factors considered in setting pay. For example, the policy could specify how related experience or specialized skills are considered in setting pay within a salary range. Employers should not inquire about prior salary or base pay decisions on prior salary. This practice is unlawful in some jurisdictions because it can perpetuate pay discrimination. Employers also should avoid ad hoc decisions based on a specific situation or individual negotiation at time of hire.
6. Locality pay. Cost of living and cost of labor can vary significantly by geographic area. Some employers adjust base salary based on the employee’s work location or for select higher-cost areas. Employers should adopt a formal policy that sets clear expectations about how locality pay applies to all employees.
7. External competitiveness. The pay policy should offer salaries and benefits that are at least comparable to what similar positions pay in the same geographic area. This information can be obtained through salary surveys or industry benchmarks.
8. Internal alignment. Pay policies and practices should ensure fairness within the organization. Employees with similar experience, skills, and job duties should receive similar compensation. This typically requires regular reviews to ensure internal alignment. Such reviews can help to address alignment between incumbent employees and new hires performing similar work, or between employees performing similar work in different offices or departments.
9. Practices relating to pay increases. The policy should identify opportunities for raises associated with promotions, cost-of-living increases, bonuses, commissions, incentives, etc. A clear step system can help to promote morale with expectations of opportunities for pay increases with tenure. But note so-called “pay-for-performance” or “merit”-based pay practices can perpetuate bias and have unintended consequences for morale.
10. Benefits and perks. Employers should also detail benefits that add value to the total compensation package, such as health insurance, paid time off, retirement plan contributions, and other benefits.
11. Compliance with federal, state, and local laws. The policy must comply with all applicable laws and regulations regarding fair pay, minimum wage, overtime pay, and other legal requirements. The legal landscape is constantly evolving, with federal, state, and local laws requiring job postings to include salary ranges, prohibiting employers from inquiring about salary history to set pay, and requiring employers to submit summary pay data reports.
12. Communication and implementation. Finally, employers should seek out regular opportunities to communicate pay policies to managers and staff, reinforce uniform practices consistent with policies, and regularly review compensation to address concerns and ensure fairness.

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