When a company is small, compensation decisions can be made case by case. A founder has a number in mind, a hiring manager pushes for a little more to close a candidate, and somehow it gets agreed.
It works – until it doesn't.
As teams grow, those ad hoc decisions accumulate into a tangled mess of inconsistent salaries, unexplained pay gaps, and employees who quietly wonder whether they're being paid fairly compared to the colleague sitting next to them.
And by the time the inconsistencies become visible, they're already expensive and difficult to fix.
A compensation framework is the structure that prevents this from happening.
It ensures that every pay decision (every new hire offer, every promotion, every salary increase) follows the same logic, is grounded in the same data, and can be explained and defended to anyone who asks.
This guide covers everything you need to know: what a compensation framework actually is, what it includes, how to build one, and what it looks like in practice at real companies.
A compensation framework is a formalised structure that defines how a company makes compensation decisions – consistently, fairly, and in line with its broader goals and values.
It's sometimes referred to as a compensation structure: the underlying design that ensures pay decisions are never made in a vacuum, but always against a clear set of principles and defined criteria.
Without a compensation framework, different people across the business (founders, hiring managers, finance leads, HR teams) all make compensation decisions in slightly different ways.
And that leads to inconsistency: roles that should be paid similarly end up with very different salaries, candidates who negotiate hard get better offers than those who don't – and those inconsistencies compound over time into pay equity and retention issues.
With a compensation framework in place, those decisions become structured and repeatable. The same logic applies whether you're making an offer to a junior engineer in Berlin or promoting a senior sales lead in London.
These four terms often get used interchangeably, so let’s be clear on how we’re using these terms in this guide:
A compensation framework has three core components:
These three components are interconnected.
Your salary band midpoints are set by your target percentile (philosophy). Your bands are structured around your job levels (architecture). Your job levels define what role and seniority each band applies to. Pull on one thread, and the others move too.
Your compensation philosophy defines the principles that will guide every pay decision.
Everything else in your compensation framework flows from this – so it's worth getting it right before you do anything else.
Key questions to answer at this stage:
“A well-documented compensation philosophy ensures every organisation takes a deliberate approach to choices around employee rewards, creating a strong foundation for fair and strategic pay practices.”
Vaso Parisinou
Chief People Officer at Ravio
Getting leadership alignment at this stage is critical. Founders, the CFO, and the HR or Reward lead all need to be working from the same principles before any structural decisions are made.
As Vaso Parisinou, Chief People Officer at Ravio, puts it: “A well-documented compensation philosophy ensures every organisation takes a deliberate approach to choices around employee rewards, creating a strong foundation for fair and strategic pay practices.”
“Without it, companies risk inconsistent or ad hoc decisions, which can hurt employee satisfaction while also driving pay inequities and even reputational damage.”
"Building your compensation philosophy is also a process that never ends – every year you will iterate and improve on it. It's important that, especially the first time you start out, you don't reinvent the wheel and over-engineer it."
For a detailed walkthrough of this step, see our complete guide to building a compensation philosophy →
Before you can benchmark salaries or build bands, you need a clear and consistent structure for how roles are defined and levelled across your organisation.
This is your job architecture – and it's the component most companies either skip or underinvest in.
As Rob Green, Founder of Darwin Total Rewards, puts it: "Companies often jump straight to market data – but without a job architecture in place, the numbers won't match your internal reality. You're benchmarking blindly."
Job architecture covers:
Without a clear definition of what "Senior" or “Head of Marketing” means at your company, you can't make consistent decisions across teams. You also can’t map your roles accurately to benchmarking data – which means your salary bands will be built on shaky foundations.
“Job evaluation is the high value piece of the jigsaw. It gives an organisation clarity on what differentiates job levels based on key criteria and factors, to reflect the internal reality within an organisation”.
Rob Green
Founder of Darwin Total Rewards
For a detailed walkthrough of this step, see our guide to job architecture →
Compensation benchmarks aren’t a component of the compensation framework itself – but it's a prerequisite for building salary bands, and the quality of your market data directly affects the quality of your bands.
The key step here is mapping your internal roles and levels to your benchmarking provider's framework.
This is where the work you did on job architecture pays off: if your level definitions are clear, the mapping is straightforward. If they're not, you risk comparing a P3 at your company against a P4 in the data – and your bands will be off as a result.
When evaluating benchmarking providers, the most important factors are:
For a detailed guide on this step, see our salary benchmarking guide and our guide on how to choose the right compensation benchmarking provider →
Salary bands are where the compensation framework becomes tangible – the defined pay ranges that inform every hire, every promotion, and every compensation review.
Here are the core steps:
For a detailed walkthrough of salary band design, see our complete guide to building salary bands →
A compensation framework is only as good as its consistent application.
Building the structure is step one.
Ensuring it's actually used – by every hiring manager, in every compensation conversation, in every review cycle – is the ongoing work.
That means:
"Starting with the compensation philosophy helps to distil it down into the core principles, making it much easier for employees to build an intuitive understanding of how compensation actually works."
Eamonn Stanley
Head of Reward at Typeform
The three components of a compensation framework are consistent across companies - but how each is configured looks very different depending on company size, culture, and priorities.
Here are three companies whose frameworks illustrate this well.
Checkly is a ~50 person, remote-first application reliability platform. When Director of People Kaylie Boogaerts joined in 2021, there was no structured approach to compensation — and with hiring ramping up, inconsistency was becoming a real risk.
The framework Kaylie built reflects Checkly's core values of transparency, fairness, and trust:
Philosophy: competitive (market-aligned at the 50th percentile), fair (consistent approach across the entire team), and transparent (openly communicated to employees and candidates alike).
Job architecture: five levels across IC and management tracks, with role descriptions documented internally. Kaylie acknowledges this is an area of ongoing development: as Checkly grows, more granular levels and broader role coverage are next on the roadmap.
Salary bands: structured as a formula rather than traditional bands – role benchmark × seniority multiplier × performance multiplier × location multiplier – and made publicly available via an open pay calculator on Checkly's website. The formula approach keeps things simple enough to be shared openly: every employee knows exactly how their salary is calculated, and every candidate can look it up before they apply.
"When I shared an example pay formula with Checkly's leadership team, I thought it would get a bad response," says Kaylie. "But they loved the idea because it felt like a much fairer way to approach pay."
Read the full story of how Checkly built their compensation framework →
Luminovo is an AI tech company with around 70 employees across 35 locations. People Lead Hannah Reif built Luminovo's compensation structure from scratch as the team began to grow – and her starting point was deliberate: the level framework first, everything else after.
Philosophy: fair and competitive (salaries benchmarked at or above market rates using Ravio's real-time data), location-based (a cost of labour multiplier applied per country to reflect local market rates), transparent (compensation approach openly documented in the candidate handbook), and structured to eliminate negotiation bias — no salary negotiation for new hires or in performance conversations.
Job architecture: eight job levels across IC and Management tracks, with three sub-levels within each level (.1 new, .2 established, .3 advanced) based on the percentage of level expectations met. Each department builds its own detailed progression framework on top of this structure, defining the specific skills and capabilities required at each sublevel.
Salary bands: structured as salary tiers directly aligned to the sublevel framework. The market median (at or above) sets the midpoint for the .2 established sublevel; the range runs approximately 10% either side. Because pay progression is directly tied to sublevel progression, employees always know what they need to demonstrate to increase their pay – and managers don't need to make subjective judgments about who deserves a raise.
"Compensation is both art and science," says Hannah. "Market benchmarks give you information on what the companies you compete with for talent pay. How you use that data is the 'art' – based on your operating principles as a company, and the behavioural outcomes you want to drive."
Read the full story of how Luminovo built their compensation framework →
Formalize is a compliance software company that grew from 135 to 200+ people across seven countries during the period they built their compensation framework.
Global People Director Trine Palm joined to find solid internal work already done – but no external market anchor, and no structure that could be communicated credibly to employees or defended to leadership.
Philosophy: market-anchored (Ravio benchmarks as the single external reference point), equal tracks (IC3 and M1 sit in the same band – becoming a manager is never an economic decision), and fully transparent (all salary bands visible to all employees across all departments).
Job architecture: a standard IC model from IC0 to senior IC, running in parallel with a management track. Each IC level contains three sub-levels, with progression possible every six months based on demonstrated skills, not tenure.
Salary bands: built in around three weeks from scratch using Ravio. The annual review across 200 people across seven countries is now, in Trine's words, "essentially a desktop exercise – we go to the functional leaders, show them where the benchmarks sit now, flag anything that's moved, and ask what they want to do."
"Every company has a compensation philosophy, whether they've articulated it or not," Trine says. "If you can't explain to an employee why they're being paid what they're being paid, you have a problem. The data gives you the language."
Read the full story of how Formalize built their compensation framework →
Most companies don't need to build their compensation framework from scratch – and attempting to do so can lead to over-engineering something that should be simple, especially in the early stages.
Here's a practical starting point for each of the three components:
Compensation philosophy: this one you do need to define yourself, because it should reflect your company's specific values, goals, and financial position. But the questions to answer are clear and consistent. Our complete guide to building a compensation philosophy walks through each of them.
Job architecture: rather than building a level framework and job taxonomy from scratch, adopt an existing industry-standard framework. Ravio's job architecture covers both – a role library of 300+ benchmarked positions with consistent job families, titles, and descriptions, and a level framework across all career tracks (Professional P1-P6, Management M1-M5, Executive E1-E3) with clear, objective criteria for each level. When you use Ravio for benchmarking, your employees are mapped to both the role library and level framework for you by Ravio's benchmarking experts – so the job architecture foundation is in place from day one, without months of stakeholder alignment and manual mapping.
Salary bands: once your philosophy and architecture are in place, auto-create salary bands in Ravio aligned with your target percentile and up-to-date market benchmarks. Bands can be refreshed at the click of a button when the market moves – meaning no more manual Excel updates, no more stale midpoints, no more guesswork.
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