How to build a compensation framework (and stop making ad hoc pay decisions)

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.

What is a compensation framework?

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.

What does a compensation framework include?

A compensation framework has three core components:

1. Compensation philosophy: the principles and strategy that sit at the foundation of all compensation decisions. Market positioning and target percentile, total rewards approach (base salary, equity, variable pay, benefits), pay for performance stance, location approach, and pay equity commitment. This is the starting point for any compensation structure design.
2. Job architecture: the structure that defines how roles are organised and valued across the organisation. Job families and functions, job levels and career tracks, job titles and naming conventions, role descriptions, and job evaluation. Without this, you can't benchmark accurately or make fair compensation comparisons between roles.
3. Salary bands: the structure that brings philosophy and architecture together into defined pay ranges for each role, level, and location – grouped by department or role depending on your approach, with a midpoint set at your target percentile and a range that reflects expected pay progression.

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.

How to build a compensation framework: a step-by-step guide

Step 1: Define your compensation philosophy

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:

• Market positioning: will you align with the market (50th percentile), lead it (75th-90th), or lag it (25th-45th)? And will this differ by role or function?
• Total rewards approach: which compensation elements will you offer – base salary only, or equity and variable pay too? Will this vary by role or seniority?
• Pay for performance: will pay increases be tied to performance ratings, or will you separate performance rewards from base salary?
• Location: will you pay differently based on where employees work, or take a location-agnostic approach?
• Pay equity: how will you ensure consistent, fair pay across the organisation, and how will you identify and fix issues when they arise?

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."

Step 2: Build your job architecture

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:

• Job families and functions: grouping related roles into clear categories (Engineering, Product, Sales, etc.)
• Job levels and career tracks: a level framework that defines the hierarchy of seniority, typically across Professional (IC), Management, and Executive tracks, with clear criteria for what each level means in terms of autonomy, impact, scope, and expertise – also the foundation for your career progression frameworks
• Job titles: consistent naming conventions that reflect level and function without inflation
• Role descriptions: clear definitions of responsibilities and expectations at each level
• Job evaluation: deciding on an objective method for comparing the relative value of different roles, ensuring that compensation decisions reflect the actual scope and impact of a role rather than its title or which team it sits in (becoming increasingly important with the EU Pay Transparency Directive). 

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.

Step 3: Source reliable compensation benchmarking data

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:

• Data relevance: you need compensation benchmarks that actually reflect the companies you actually compete with for talent. Interrogate the contributing companies, and look for the ability to filter by the industries, locations, company sizes, and funding stages you need to align with.
• Real-time vs point-in-time data: traditional salary surveys are typically gathered once a year and can be out of date by the time they reach you. Real-time benchmarking tools that pull live data directly from HRIS integrations give a much more accurate picture of the current market
• Sample size and data confidence: a benchmark is only as reliable as the data behind it. Check whether the provider is transparent about how many companies and employees contribute to each benchmark, their openness about their benchmarking methodology, and whether they flag lower-confidence data points.
• Total compensation coverage: if equity or variable pay or employee benefits are part of your compensation strategy, you'll need benchmarks for those components too.
• Job taxonomy and level framework alignment: the benchmarks are only meaningful if the roles and levels in the dataset match your internal definitions. Check how the provider handles role mapping, and whether they do it for you or leave it to you to figure out.

Step 4: Build your salary band structure

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:

• Decide how to group your bands. There are three approaches: company-wide bands (simple, but too blunt to reflect real market differences between roles), department-level bands (a good starting point for most companies), and role-level bands (best practice, but more complex to manage). Most companies start with department-level bands and evolve to role-level as they grow.
• Apply your location approach. If you pay differently based on location, you'll need separate bands for each key location. A UK-based Software Engineer and a Germany-based Software Engineer doing the same work at the same level should be benchmarked against their respective local markets – not squeezed into the same band.

• Set the midpoint. The midpoint of each salary band should reflect your target percentile (defined in your compensation philosophy) from your benchmarking data for that role, level, and location. If your compensation philosophy targets the 50th percentile for most roles but the 75th for engineering, that should be reflected in the midpoints of each respective band group.
• Set the range. The range (minimum to maximum) reflects expected pay progression within that level. Best practice is around 15-20% either side of the midpoint – wide enough for meaningful progression, narrow enough that outliers don't go unnoticed. 

• Check for outliers. Once bands are in place, map your existing employees against them. Anyone paid above or below their band is an outlier – and that's important information about where inconsistencies have crept in that need to be addressed.

Step 5: Once you have your framework – communicate it and maintain it

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:

• Train managers – and keep training them. Managers are the people having compensation conversations day to day: making offers, discussing progression, communicating review outcomes. They need to understand the framework well enough to explain it, apply it consistently, and handle difficult conversations – which means consistent, continuous training. Learn more: How to prepare managers for pay conversations →
• Communicate with employees. Employees don't need to see every detail of the compensation structure, but they do need to understand the logic behind their own pay: where they sit in their band, what progression looks like, and how pay decisions are made to feel trust in the decisions. The EU Pay Transparency Directive is also raising the bar here – clear communication about salary ranges and progression criteria is increasingly becoming a legal requirement, not just a nice-to-have. Learn more: How to design a compensation communication plan →
• Review and refresh regularly. A compensation framework isn't a set-and-forget exercise. The philosophy and strategy should be revisited every time the business plan is. Salary bands need to be refreshed against up-to-date benchmarking data at least annually to ensure they remain market-competitive. Pay equity analysis should be run regularly to identify any patterns of inequity that have emerged. And the compensation review process is the mechanism through which the framework is applied in practice – market adjustments, performance rewards, and promotions to keep compensation fair, competitive, and consistent year round. 

Compensation framework examples

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 two companies whose frameworks illustrate this well.

Checkly: a formula-based framework built for transparency

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: job architecture as the foundation for everything else

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 →

Compensation framework template: where to start

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.