How to Create an Effective Compensation Strategy

Even your most loyal employees are ultimately looking for one primary thing at their job: compensation. In fact, one study showed that 46% of a survey group (who were looking for a new job) reported that they wanted better compensation, including higher salary and benefits.

Company leaders and HR reps have the really important responsibility to make sure employee benefits and compensation strategies are up to par and that they are also competitive with the job market.

So, what are compensation strategies, and why do they matter? This article is your how-to guide to developing an effective compensation strategy.

What Is A Compensation Strategy?

A compensation strategy is a plan that outlines how an organization approaches pay and employee benefits. Among many things, this plan should detail the company’s rules for determining salary ranges, how bonuses and commissions are calculated, goals the company has set to provide adequate compensation for departments and individuals, and how the company will evaluate employees based on performance, qualifications, etc.

The main goal of any compensation strategy is to meet the needs of employees and reward them for the work they do, which largely reflects your company culture and the success of your business.

Why Is a Compensation Strategy Important?

The job market is more complex and competitive than ever, so a compensation strategy is the best way to hire the right people and satisfy their needs. 

Increases Employee Retention

Employee retention is a huge part of a successful business, but great employees only stick around if they have what they need from a healthy company culture. Compensation directly impacts organizational culture, which in turn reinforces and reflects the compensation strategy. People who have their needs met can perform at work and aren’t constantly seeking a different job that better suits their lifestyle. This saves you time and money on hiring and recruitment. If you want to retain your best employees, give them concrete compensation.

Improves Employee Engagement

Not only will an effective compensation strategy improve employee retention, but a wellplanned compensation strategy will also improve employee engagement. Employees will feel valued and appreciated knowing they are being fairly compensated for their work which can lead to increased productivity.

Boosts Talent Acquisition

Talent acquisition doesn’t start with a compelling job description, it starts with benefits that are suited for the leaders and company heads you really want to hire. High-quality and highly skilled employees are only going to go for jobs that offer them competitive benefits, so if you want qualified candidates, you have to pay them what they’re worth. This means using a compensation strategy to accurately research and plan out the wages and benefits you need to offer for those who will revolutionize your business.

Types of Compensation Strategies

Every plan can look a little different, but here are some important elements to a compensation strategy that you should consider when putting yours together.

Base Pay or Salary

This is the minimum amount an employee will regularly receive outside of bonuses, raises, etc. for the work they complete. Base pay may come in the form of hourly wages or salaries, but however you pay our employees, you must ensure that their monetary compensation is competitive in your industry. Use websites like www.salary.com and www.payscale.com to research the pay scale of a given region and gauge how your compensation strategy measures up.

Bonuses

Bonuses are an additional monetary reward for employees who go above and beyond or deserve some sort of recognition. They are a good way to show appreciation and show your employees that you recognize their efforts. This can also help drive performance up!

Other Pay and Benefits

• Commission : Some employees are paid for completing specific tasks or bringing in money, such as making a certain number of sales.
• Overtime pay : Overtime pay is different from base pay as employees who have an hourly wage are paid extra for any extra hours they work.
• Profit or margin sharing:  Some employers choose to reinvest profits back into their people by giving employees a percentage of the organization’s profit each month, quarter, or year.
• Paid time off (PTO) : PTO is the money employees receive while away from work.
• Employee benefits : Benefits can range from wellness programs to healthcare to flexible schedules. 

How to Develop A Compensation Strategy

If you have no idea where to start, try brainstorming with the following tips to help you build an effective compensation strategy!

1. Determine the Compensation Philosophy 

How will you approach compensation according to the market? There are three options here: lead the market, lag the market, or meet the market. 

Lead the Market: To lead the market, you take an aggressive approach with your salary rates and go above the market, which is big for attracting employees and sets you apart.

Lag the Market: Lagging the market is the opposite of leading, where you set salary rates below the market rate. This is usually what small businesses end up doing who can’t offer more competitive salaries or you’re a nonprofit organization, but they used the saved money to create incentives and other benefits.

Meet the Market: Finally, there’s meeting the market, which is…(pause for effect)…paying the market rate. This approach is matching what other companies in the industry are paying and essentially paying fairly for employees to perform well.

2. Assess Your Company’s Current Strategy

What is your current compensation strategy like? Determine whether your current strategy is in line with your company’s compensation philosophy with the leaders in your company and be prepared to make adjustments as necessary.

3. Evaluate Your Company’s Jobs & Their Descriptions

Ensure that your descriptions and posts are up to date and accurate with your newly appointed compensation strategy/philosophy (which could include a full job evaluation).

4. Review Market Data & Salary Surveys

Research and review market data so that you can compare the salaries you offer with the competition. For salaries specifically, look at published salary surveys from industry associations, local HR associations, The Society for Human Resource Management, etc. 

5. Select a Pay Structure

Your pay structure will depend on the needs of your organization and will vary based on the level of jobs you’re evaluating. Using your compensation strategy and philosophy, you can choose from systems like broadbanding, skill-based pay, competency-based pay, pay grade levels, and delayering & banding. In this stage, you should also consider how you want to handle raises, commissions, and bonus pay.

6. Re-Evaluate Your Employee Benefits

It’s also a great time to take a look at your benefits strategy. Offering perks, voluntary employee benefits or other unique employee benefits ideas in addition to compensation can boost your compensation strategy and provide a level of customization to meet the needs of your diverse workforce. Gather feedback from your employees about what they want most out of your benefits package.

7. Match Jobs to Their Salary Grades

You should compare the responsibilities and skills required for each position and match them to the right people within your organization. Use data from the salary grades in the company’s current system, as well as from surveys, to match each position to the appropriate compensation range.

Changing the new salary range means you also need to look at the internal implications of your current hires. Current employees whose salaries are below the new range will need to be adjusted while those whose salaries are above- known as “red circled”- should not be lowered; but, their salaries should be frozen in the amount at which they currently stand.

8. Review Your Strategy

The last thing you want to do is unknowingly participate in anything unethical or illegal when creating a compensation strategy, so consult the Fair Labor Standards Act (FLSA) to ensure compliance. Check any local and state legislation, too! 

Consult with the stakeholders of your organization so that senior management understands the process and impacts of your compensation strategy. They should be regularly updated throughout this entire process!

9. Communicate Your Plan to the Company

Clearly communicate your new compensation strategy to your employees and allow them to ask questions. Host a meeting with all of your employees to share the plan, and provide resources that your employees can reference later. Be sure to have a way to answer any questions. You may want to send follow-up emails or messages on internal messaging systems to help generate excitement for your new compensation strategy. Just remember to be transparent, especially if pay rates are changing.

Next Steps

Great news: you’re now a compensation strategy expert! Or, at the very least, you’re far better prepared to compensate your employees fairly, which means happier employees and better business! If you need to offer more competitive benefits, make sure you have a wellness program in place that truly supports your employees. Talk to a wellbeing specialist to learn about the best wellness programs for your organization!

References

• Ceridian Pulse of Talent Report: Burnout Impacting Majority of US Workforce. (November 30, 2021). Ceridian. Retrieved November 30, 2022 from https://www.ceridian.com/company/newsroom/2021/ceridian-pulse-of-talent-report-burnout-impacting-majority-us-workforce.
• Compensation Strategy. Eddy. Retrieved November 30, 2022 from https://eddy.com/hr-encyclopedia/compensation-strategy/.
• Lotich, Patricia. (July 6, 2022). How to Create a Compensation Strategy. The Thriving Business. Retrieved November 30, 2022 from https://thethrivingsmallbusiness.com/compensation-strategy/.
• Miller, Stephen. (November 29, 2021). Employers Use Benefits and Perks to Counter Great Resignation. SHRM. Retrieved November 30, 2022 from https://www.shrm.org/ResourcesAndTools/hr-topics/benefits/Pages/employers-use-benefits-and-perks-to-counter-great-resignation.aspx.
• What Are Compensation Strategies and Why Are They Important? (October 18, 2021). Indeed. Retrieved November 30, 2022 from https://ca.indeed.com/career-advice/career-development/what-are-compensation-strategies.