Checklist – how to create a salary policy

A salary policy ensures that you have a responsible and fair compensation system in place and that rewards and salary increases are applied consistently in the organization. A well-designed and properly implemented policy provides the managers with valuable support in the pay review process. If you are about to create a new salary policy or update an existing one, the following areas and questions may provide useful guidance on what to include.

1. The company’s mission, overall objectives and culture

What is the company’s overall objective? What targets does the company want to achieve in the short term and the long term? What are the crucial factors for success? How does the company want to be perceived by its customers? What culture does the company want to create? How does this affect the company’s compensation structure?


2. Market position

What pay position does the company want to have compared with competitors and other companies in the market? Does the company to pay premium compared to market or does it match the market average? What is needed to move the company into its desired position in the market?


3. Forms of compensation

What forms of compensation are used in the company: fixed salaries, variable salaries, bonuses, benefits? Are these the same across the board or do they vary in different groups of employees/managers?


4. Pay setting

What do the criteria for pay look like? What behaviors does the company want to stimulate and reinforce?

How are salaries set when new employees are hired? Process and approval levels? Does the company have an explicit strategy for new hires? How does it affect the salaries?

How are salaries adjusted at salary reviews, changes to tasks/responsibilities?
How do you correct any pay-setting anomalies that are identified in pay surveys or other analyses?


5. Responsibilities and schedules

Who is responsible for what in the company’s annual salary review processes? When do the various activities take place during the year?


  • Senior management determines guidelines, takes a big-picture approach to the pay structure and is responsible for eliminating unjustified differences in pay.
  • Each manager is responsible for setting individual salaries for his/her employees. Conduct performance appraisals and salary reviews.
  • The pay-setting process uses the “grandfather principle” which means that the pay proposals made by managers must be signed off by their manager. This procedure ensures adherence to the company’s pay-setting principles.
  • HR and senior management monitor procedures to ensure that pay-setting is performed in compliance with the current salary policy.


6. Establishing and following up the salary policy

How is the salary policy established? How should the company communicate its purpose and content? Do the managers need training? What monitoring or follow-up actions are taken to assess how the policy is being put into practice in the organization? What support can HR give the managers?


7. Evaluation and development

If any changes are made to business activities or occur in the wider market which ought to be reflected in the salary policy, what is the process for developing/modifying the salary policy?