A well-defined compensation philosophy serves as the cornerstone of effective human resource management in the public sector. An effective philosophy ensures alignment with organizational goals, enhances employee engagement and supports regulatory compliance.
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Authors: Erik Henry Smetana Georg Krammer Ronnie Charles


A compensation philosophy aligns an organization's pay practices with its mission, values, and strategic objectives. Aligning compensation with strategic goals ensures that every employee understands and contributes to the organization's broader mission.

Competing for the best and brightest

Attracting and retaining top talent is paramount across the public sector's competitive landscape. Competition may become fierce in such fields as education, utilities, engineering and healthcare, which demand specialized skills. A well-defined compensation philosophy helps organizations remain competitive by offering appealing total rewards packages. The perception of higher pay in the private sector for all jobs may not always be the case. Public sector organizations can compete with private sector salaries by providing robust benefits, job security and a framework for advancement.

Ensuring fairness and equity with a compensation philosophy

A compensation philosophy further establishes guidelines for developing fair and equitable pay and benefits packages. Guidelines around fairness help to prevent discrimination and ensure compliance with pay equity laws, which maintain and build employee trust and morale.

Gallagher consultants Shari Dunn and Nancy Arenas explored the need for strategic responses to new pay transparency laws in their article, Use Pay Transparency Laws to Drive Better Pay Decisions for Your Organization, saying that "failure to identify and correct inequities puts organizations at risk of losing employees' trust and facing costly legal action."1

For public universities, regularly conducting pay equity audits can ensure that all faculty members receive fair compensation, regardless of gender or ethnicity. Similarly for K-12, our team recently worked with a school district to help leaders better align pay between its classified employees (custodians, food service assistants, bus drivers) and certificated employees (teachers, counselors, psychologists, principals) by analyzing and enhancing their compensation philosophy and pay practices.

Involve employees to enhance motivation and engagement

A transparent and equitable compensation philosophy ensures employees feel valued and rewarded for their contributions, leading to higher engagement and productivity. To support employee engagement, organizations that involve their workforces in establishing a compensation philosophy help to foster trust and motivation.

Gallagher recently guided a municipality through a process to involve all levels of its employees in workshops to better understand workforce priorities and to ensure buy-in to the city's proposed compensation philosophy. This approach recognizes that meaningful communication about the compensation decision-making process enhances employee engagement and productivity.

Taking employee involvement to the next level, a local government might implement a performance-based pay system to reward employees who exceed their performance targets. For example, teachers who consistently achieve high student test scores and who receive positive feedback from students and parents would be eligible for additional pay. Such incentives would reward teachers who reach beyond their regular duties and demonstrate excellence.

Supporting organizational culture

A compensation philosophy reflects and reinforces an organization's values and culture. For example, a police department might align compensation with a culture of teamwork by implementing a team-based bonus system. The department recognizes that collaboration and cooperation is essential for effective law enforcement and community safety. Toward that end, they develop metrics to include successful joint operations, positive feedback from community members and the number of successful arrests made through collective efforts. At the end of each quarter or year, individual officers receive rewards based on their participation in team activities, sharing knowledge and resources, and supporting their colleagues.

How to develop a compensation philosophy

Follow these practical steps to develop a compensation philosophy for your organization.

  1. Identify and engage the right stakeholders.
  2. Engaging such key stakeholders as HR professionals, management and employee representatives ensures a comprehensive and inclusive approach. For instance, a state government department might form a compensation committee with representatives from various other departments and/or stakeholder groups to gather diverse perspectives.

  3. Define organizational objectives.
  4. Clearly articulate the objectives of the compensation philosophy to align with the organization's mission and strategic goals. For example, a public health organization might prioritize equitable pay to motivate all employees to contribute to community health initiatives. Your organization may benefit from outside expertise that can guide the agency in identifying its most important compensation philosophy objectives.

  5. Understand and confirm the market landscape.
  6. Conducting thorough internal and external research helps benchmark your compensation plan against similar organizations. This research ensures competitiveness while maintaining internal equity.

    Gallagher recently advised a public transit system by providing nationwide data from published private sector survey sources to account for the highly specialized aspects of certain transit operations. Much like the talent markets from which organizations recruit their people (national, regional, and local), the compensation market often is similarly specialized by industry and geography.

  7. Consider financial impact and stability.
  8. Balancing compensation goals with financial realities is essential for public entity sustainability. A school district might increase pay over several years to manage budget constraints while moving toward more competitive salaries. Our team worked with one large district that needed to make significant adjustments to bring their workforce to the desired market target — changes they could not achieve in a single fiscal year. We worked with the leadership team to develop a multi-year approach that addressed the shift to market while also incorporating annualized cost of living adjustments.

  9. Align with institutional goals, mission and vision.
  10. Your organization's compensation philosophy must support the broader organizational objectives. For example, in the face of recruitment challenges, a signing bonus might make sense. Gallagher recently worked with a municipality that decided to offer $10,000 to $30,000 hiring bonuses (to be paid out over time for retention purposes) for licensed civil engineers because of the limited talent pool in that profession.

  11. Consider the role of non-monetary rewards.
  12. Non-monetary rewards such as professional development opportunities and flexible work arrangements can enhance your compensation strategy. Remote or hybrid work, for example, can offer significant flexibility to employees in a public sector agency.

  13. Draft, revise, and finalize.
  14. Documenting your compensation philosophy, soliciting stakeholder feedback and revising it accordingly ensures the statement is comprehensive and applicable. Your organization might hold workshops to gather employee input as well. Be sure to emphasize to employees that your agency's compensation philosophy is a goal and not a promise. Managing workforce expectations allows the leadership team to adjust the compensation philosophy based on changing industry and market conditions.

  15. Monitor, review, and update.
  16. Continuously assessing and adjusting your compensation philosophy ensures it remains relevant and practical. Schedule an annual compensation philosophy review to reflect market changes and evolving organizational goals.

    A well-defined compensation philosophy provides an essential framework to help your public sector organization attract, retain and motivate employees while ensuring alignment with organizational goals and compliance with regulatory standards. Enhance employee satisfaction, support your organizational culture and achieve strategic objectives by developing and implementing a comprehensive compensation philosophy.

Gallagher can help

Gallagher offers HR and compensation consulting and risk management services to help public sector institutions enhance organizational wellbeing. We work with you and your team to support workforce design, compensation, classification and strategic program implementation. Further, we provide risk management, property and casualty insurance, and alternative risk solutions.

Let's discuss your specific questions.



1Dunn, Shari and Nancy Arenas, "Use Pay Transparency Laws to Drive Better Pay Decisions for Your Organization," ajg.com, October 2023.


Consulting and insurance brokerage services to be provided by Gallagher Benefit Services, Inc. and/or its affiliate Gallagher Benefit Services (Canada) Group Inc. Gallagher Benefit Services, Inc. is a licensed insurance agency that does business in California as "Gallagher Benefit Services of California Insurance Services" and in Massachusetts as "Gallagher Benefit Insurance Services." Neither Arthur J. Gallagher & Co., nor its affiliates provide accounting, legal or tax advice.

This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation.