Compensation

What Is a Compensation Strategy?

Exude Human Capital / December 16, 2024 December 16, 2024

A compensation strategy dictates how a business intends to pay its employees for their work. It includes immediate financial rewards, such as bonuses and salaries and long-term benefits like equity. The strategy should align with the business’s mission and vision while remaining competitive, fair and motivating for employees.

The best way to entice and retain top talent is by constructing a total compensation strategy. It offers more than a basic salary — it influences overall employee performance and job satisfaction by adding various employee perks.

Key Components of a Compensation Strategy

Developing a compensation strategy is not a cookie-cutter technique. How comprehensive you make it depends on what you can offer and who you’re trying to attract. When creating a compensation strategy, adding valuable benefits in line with the market salary is vital.

Consider these three key components to cover all your bases:

Compensation Models

When constructing a compensation strategy, various ways exist to structure employees’ base salaries. The final decision depends on the level, demographic and main career goals of the individuals of interest. Here are three standard compensation models you can use:

Location-agnostic pay: This approach pays employees’ according to a particular market, such as the company’s home country. It promotes fairness and simplifies payroll but may not account for exchange rates and regional living costs.
Localized compensation: This model involves paying employees an average salary according to the cost of living in their region. It provides a company with a competitive edge in local job markets but rates require regular updates to keep up with economic changes.
Performance-based compensation: This approach offers a base salary and rewards determined by employee, team or company performance. It promotes engagement and productivity, but the metrics must be transparent and achievable.

Salary Benchmarking

When setting a salary, it’s vital to find that sweet spot. If it’s higher than the market, it’s wasteful. It won’t attract or keep talented people around if it’s too low. Salary benchmarking allows companies to evaluate their internal compensations according to their external value. It involves detailing each job’s primary components and comparing them to similar positions in other businesses.

Organizations should follow these steps when benchmarking salaries:

Compile salary data: Use various sources to gather data on the roles you want to benchmark. These include salary software, HR publications, data-sharing networks, professional networking sites and employer salary surveys.
Select a compensation strategy: Consider your geographic location, business strategy, current salary ranges and company size when making your decision.
Implement salary ranges: Set a minimum and maximum salary range for new employees. Assess their experience, skills and progress potential to decide where on this scale to place them.
Document everything: Ensure you’re transparent with the process you use to benchmark salaries. Doing this ensures you get approval from management, set competitive yet fair ranges and understand how they’ll entice talent and keep them around.

Equity Compensation

Equity compensation involves providing employees with performance shares, options and restricted stock. These investment vehicles replace cash paid to employees and represent a percentage of ownership in the company.

This compensation model encourages retention and gives employees a share of the company’s profits. However, it often accompanies below-market salaries.

Types of Compensation Strategies

Every company compiles its compensation packages differently. The compensation strategy depends on the budget, vision and talent level the organization is searching for. Here are the most common compensation strategies:

Straight salary: A straight salary is a base amount paid to workers according to their job title and role.
Salary with commission: This salary type is commonly used with a sales compensation strategy. It offers employees a percentage of commission based on a sale, profit, or collection on top of a base salary.
Only commission: Companies typically pay independent salespeople commissions based on their sales. This salary type is common with performance-driven organizations because it follows the technique of rewarding desired behaviors through pay.
Team commissions: Salespeople earn commissions and bonuses according to the team’s performance.
Revenue or profit margin-based: This type is common with startups. It involves organizations paying employees based on their earnings.
Residual commission: While uncommon, some companies offer it to top performers. They pay them commissions on sales even after they leave the organization.
Leading compensation: Paying above the market rates to ensure the company attracts and retains talent.
Meeting/market-based compensation: Companies offer benefits and salary ranges similar to those of their competitors. However, they risk losing talented employees to better offers.
Lagging compensation: This method involves offering salaries and benefits below the market rate. This strategy is common among nonprofits and smaller businesses trying to save money.
Skill-based compensation: This strategy rewards employees more when they achieve specific certifications or develop new skills, incentivizing them to keep building their expertise.
Perks and benefits: This strategy helps improve employees’ work-life balance and overall satisfaction by offering non-financial perks and benefits. These include remote work options, access to on-site amenities, flexible work hours and paid time off (PTO).

Factors to Consider When Implementing a Compensation Strategy

You need to assess the performance of your current method and the expectations for your new one. Here are the top factors to consider when building a compensation strategy:

Establishing the Base Salary

Since compensation funds are often the largest operating cost, businesses must consider the base salary carefully.

There may not be a reason to change your current structure if it’s attracting and retaining the most talented individuals. However, if it isn’t, you need to consider what you want it to achieve. Do you want your current employees to stay long-term, or do you want to hire fresher talent?

Once you have a goal for your compensation strategy, you need to address your budget. Consider how much you can afford to pay in salaries and benefits. Then, you can move on to choosing the base pay structure. This stage is vital to your strategy’s success, so determine whether you want to offer a blanket salary or compensation based on roles, skills or titles.

Consider different pay rates before determining your base salary range. For example, individual pay compensates each employee at a different hourly rate based on their skills, role and experience. You can also choose broadbanding, which pays groups a fixed or market-based rate. Job families are another option — paying similar departments or jobs at the same rate regardless of the tasks they fulfill.

Determining Raises

Once you select a base salary, it’s time to decide on a raise structure. This step involves setting the timeline for when to provide a raise and what benchmarks employees must meet to qualify. Will they be annual, performance-based or a combination of both? You can also consider cost-of-living adjustments and provide raises accordingly.

Many companies determine raises according to the market to build competitive compensation packages. Another method is progression pay, which is based on the performance of the individual or organization. You can also offer a raise to employees who take on new responsibilities, professional developmental opportunities or advance their skills.

Offering Incentives

Consider adding other incentives on top of employees’ base salaries, such as bonuses to specific departments or all employees. For example, you could offer a bonus to customer service representatives for reducing response times or give salespeople commissions.

Creating a Benefits Package

The last factor to consider when developing a compensation package is the benefits. These are perks like PTO, fringe benefits and health insurance. You can also offer health reimbursement arrangements (HRAs), which allow you to reimburse your employees for tax-free medical expenses. Doing this gives them more freedom to choose which ones to cover first.

Due to the growing diversity in the workplace, your employees may value certain benefits over others. They will find some more important than others depending on their age, gender and work environment.

Stipends are an easy method of balancing all your employees’ needs. Offer monthly allowances for different expense categories, such as remote work, transportation, health, education and wellness. These can help them develop a more meaningful lifestyle. You can also provide more flexibility by offering them one stipend and letting them choose how to spend it.

Steps to Implement a Compensation and Benefits Strategy

Implementing a strategy involves utilizing several techniques to ensure it will be a compelling offer in the long run. The goal is to create an offer that provides equity, growth and transparency. These financial incentives should align with the company’s strategy by helping organizations stay within budget. Follow these steps when you’re ready to implement your compensation strategy and attract top talent:

Evaluate the current compensation strategy: Identify pay ranges, reward systems and the criteria to achieve them. Look at the types of compensation you offer, including perks and benefits. If you don’t have anything yet, run a salary audit to assess the remuneration you offer.
Get feedback from employees: The goal of requesting salary-related feedback is to understand what types of compensation different demographics might be interested in. For example, older employees may be more interested in retirement plans, while younger staff might lean toward learning opportunities.
Utilize market studies: It would be ideal to match or raise the salary according to competitive rates, but this isn’t always possible. Discuss the budget strategies with stakeholders and understand what you can actually offer. If a competitive rate is impossible, think of other ways to incentivize and attract top talent, such as new skills development and flexible work policies.
Determine pay grades for different levels: It’s important to set a framework for equitable and competitive pay at every level. Decide on the pay grades for varying types of employees, from entry-level to executive. Every rank should also offer unique perks. Pay grades ensure equity and that those positions in higher demand or requiring a unique skill set receive better rates.
Ensure compliance with the Fair Labor Standards Act (FLSA): This act stipulates the requirements for minimum wage, overtime pay, child labor and record-keeping. HR professionals should also check that policies are in line with the amendments taking effect in July 2024, which stipulate the pay requirements for administrative, executive and professional (EAP) employees.

Creating a Rewards Strategy

Once you’ve established the basic compensation strategy, it’s time to develop a rewards strategy to keep employees motivated and retain top talent. Consider employee feedback and market research to craft a rewards strategy that will work for the organization’s unique needs. Your goal is to strike a balance between what employees may want and what aligns with the company’s budget and vision.

If it’s within the budget, adding monetary perks can help the company tangibly support employee welfare in a way that goes past basic compensation. This type of rewards plan can include programs like retirement planning and debt management. It can also help manage other aspects of personal life by offering benefits like child care and mental health support.

Companies can offer perks without spending money. One of the best ways is to implement reward strategies focusing on improving company culture and work-life balance. Work-life balance is so important that 60% of Generation Z employees report it’s one of the most important factors in evaluating new job opportunities.

Offer flexible scheduling so employees can adapt their work schedules to suit their personal lives. Provide career growth opportunities through mentorship or continuous learning programs that enrich employees’ professional development.

Evaluating Your Compensation Strategy

Once you’ve established a compensation strategy, it’s important to evaluate it to ensure it meets the various facets of the company’s vision and the employee’s desires. Here are some of the factors to consider:

Organizational alignment: The compensation strategy should align with the overarching business vision and financial plan.
Turnover rates: The compensation strategy should be based on the turnover rates of the department it’s designed for. Determine the extent to which the compensation strategy may affect the turnover and make alterations where needed.
Climate: Consider what workers may find beneficial in the current environment. For instance, during a pandemic or other stressful situations, top talent may prioritize offers allowing remote or flexible working.
Necessary benefits: Finding the sweet spot where benefits don’t negatively affect return on investment (ROI) is important. That’s why one of the first steps in creating a compensation strategy involves understanding which benefits your employees may prioritize.

Develop an Effective Compensation Strategy With Exude Human Capital

If you want to develop a compensation strategy that aligns with your organization’s vision and attracts and retains top talent, our consultants can help you formulate a strategy that meets all the criteria. At Exude, we specialize in building solutions that help companies and employees thrive. We offer consulting services in human resources, leadership development, equity and inclusion.

Our experts help organizations make more holistic decisions and design every solution with your unique needs in mind. Our mission is to support yours. Feel free to contact us today and we will be in touch shortly.