How to create a compensation strategy

You’ve reached this article because you know your compensation strategy is directly linked to business success. Long gone are the times where a simple and fair pay packet was all you needed to keep your employees happy and, crucially, working for your company.

To stay competitive you need to offer an equitable, transparent compensation package to attract and retain your top talent – your compensation strategy.

In this article we’ll go through why it’s important, types of compensation you can offer, and how to create your own compensation strategy. Let’s get started.

What is a compensation strategy?

A compensation strategy is the method in which businesses manage their total employee compensation. Or in other words, how a business gives money to their employees in reward for performance, merit, long service, and various other factors on top of their regular wage.

Compensation is one of the many tools a HR Director has at their disposal to boost employee satisfaction, performance, and retention, whilst staying competitive as an employer.

Why is strategic compensation important?

As compensation impacts your total operating costs and touches every aspect of the employee lifecycle, such as recruitment, engagement, performance, productivity, and retention, it’s of great importance to your business.

In a little more detail, compensation is important because it can:

Attract talent

Of course, how much they’re able to earn is a big factor when prospective employees make the decision whether to accept your job offer, or the other place they’ve had a second interview with. A compensation strategy that’s transparent and fair can bolster a standard wage and make an offer much more attractive to any candidate. Accompanied with some diverse benefits and (if possible) flexible working, you’ll be keeping up with any competition in the recruitment market.

Retain your best people

Of course, maintaining engagement, performance, and productivity, whilst keeping your employees satisfied, doesn’t stop at the recruitment process. You’ll need to consider all elements of the employee experience to engage and retain your top performers. Compensation done properly will reward hard work and growth, so your people will feel gratified for the work they do, and will be more likely to stick around.

Drive performance

Of course, the other side of this is that your compensation strategy can provide great motivation for your employees to perform well and hit their targets. In turn, this will help your business achieve their goals – ensuring a cycle of success for both.

What is the one key element for making your compensation strategy a success?

With so many aspects of your business being impacted by your compensation plan, defining a compensation strategy which aligns with your organisation’s overall goals is vital to success. If you only take away one thing from this article, this is the point to remember.

Defining a compensation strategy which aligns with your organisation’s goals is vital to success.

Types of compensation

Here are the things you need to consider in a compensation strategy.

1. Merit increases

A merit increase is a type of pay-for-performance incentive. It involves a permanent salary raise determined by good performance. It may be based on overall performance assessment (which can be conducted in performance reviews), or based on skills or competency growth. For example, you may award a raise when someone passes training, or achieves a professional diploma. This is common in professions that require specialised qualifications.

2. Performance incentives

These are pay-outs similarly based on performance. However, these are temporary and usually given against a goal within a certain timeframe. Therefore, they are more flexible and can be changed depending on circumstances. Such as you can offer a sales bonus during slow periods to boost profit short-term.

The tricky part of this is deciding how to reward performance, depending on what is most important in your business. With a pay-for-performance structure, you can compensate for various factors such as:

• Achieving a pre-determined goal and awarding a fixed pay out
• Achieving a % of a target, such as a sales bonus
• Contribution in relation to peer contribution – think ranking systems

This can be based on a team or an individual performance. When choosing this, it may be helpful to consider whether team effort or personal excellence is more important for this department, so your incentive doesn’t jar with the team culture.

3. Profit sharing programmes

This is where the compensation is awarded based on company success. This technique is useful because compensation is always affordable and enables employees to consider how they contribute towards the bigger picture of company goals.

These are often given to senior management, but can be given to any employee.

4. Long-term awards

Some companies reward employees for length of service, such as a five-year or ten-year milestone. This can be with a one-off bonus, or a different benefit, such as an extra day of annual leave. You’ll want to consider the timeframes, approvals, and requirements for processing and managing stock awards.

Addressing compensation issues

Neglecting compensation issues within your organisation can swiftly result in discontent, low motivation, and disengagement among employees, ultimately impacting productivity, morale, and increasing turnover. That’s why it’s crucial for HR to be dedicated to identifying and resolving any compensation issues within the company.

Typical compensation challenges that businesses must address include internal fairness, external market competitiveness, perceived equity, executive pay, geographic variances, rewarding specialised roles, and managing salary progression. To address these issues, you can start by finding out where your organisation sits in the current market by using resources such as Payscale and Glassdoor. You should also conduct an annual pay equity analysis to pinpoint any inconsistencies.

Finally, you can track metrics to measure the effectiveness of your compensation practices and policies and make improvements where necessary.

Involvement in compensation planning

Another area HR is responsible for is compensation planning, which involves strategically balancing the financial interests and goals of the company with the objectives of attracting, retaining, developing, and rewarding employees. A compensation plan includes payment methods, bonus structures, criteria for raises, and more. Reviewing internal compensation data reveals your current position, allowing you to align your planning with the business goals. 

Developing a salary structure that includes salary ranges is essential for strategic compensation planning. It allows for more efficient management of compensation costs and ensures fair pay for employees. Incorporating salary grades within these ranges helps differentiate between varying levels of experience within the same role. Using a dedicated compensation management system will help you to monitor bonuses and benefits use and provide real-time data.

How to create your compensation strategy to align with business goals

1. Get to know your own business strategy

You can’t align your compensation strategy with business goals until you know what those goals are! So ensure you know them inside and out before you get started.

It’s helpful to know short-term and long-term goals so you can plan your strategy accordingly. And if this isn’t widely known to you and your employees, perhaps there’s another area of HR you may need to work on…but that’s another article.

2. Review your current compensation processes

You’ll want to ask yourself:

• How do you currently identify top performers?
• Are there any other ways people are incentivised? How do you track this if so?
• Is this universal across the organisation, or apply to certain teams specifically? What differs between teams?
• Are any incentives contractual, or discretionary?
• What are the timeframes involved, and does that marry with the business’ timeframes? Is it soon enough to feel valuable to your employees?
• Is there an approval process?
• How do you currently communicate compensation decisions to your employees?

Gather employee feedback

Here is when your employee engagement processes come into play, and if you have employee engagement software it will be even easier to gather quick feedback from your team. Either way, you’ll want to design an anonymous survey so your colleagues can share what they really think of your current compensation strategy, and what they’d like in the future.

It’s then your job to filter through the suggestions and work out what would benefit your business.

Analyse your competition and conduct market studies

Considering the types of compensation at your disposal above, you will want to investigate what other companies in the market are doing. Pay close attention to companies in your industry and your neighbourhood – as these will be after the same talent as you.

Consider investing in insights or work with your recruitment team to gather more data.

Discuss the budget with managers and stakeholders

Managers will be more in tune than anyone with what their reports are looking for. Make sure you engage with them and any other stakeholders early on, so they are brought along your journey.

You’ll also want to ensure they understand your new compensation strategy once developed. Share the insights you’ve gained from your research and any data to support your decisions, to show how you reached the conclusions. After all, their buy-in could ensure the success of your operation, as their feelings will influence their reports.

Ensure legal compliance

With any company-wide processes, you’ll want to triple check your proposed process doesn’t stumble into any illegal territory. Take time to understand relevant labour laws, regulations, and ethical standards.

You’ll also want to make sure you’re not inadvertently introducing bias into your compensation strategy.

For example, are you offering a special sales bonus to your sales team, who are mainly men, and not your front-of-house employees, who are mainly women? Do you offer a profit-sharing incentive to your senior leaders, but these are all older white people, as opposed to the more diverse middle management and junior employees?

Don’t get caught out by negligence and seek legal advice if you’re unsure.

Establish your compensation strategy

This is no easy feat! But with employee feedback fresh in your inbox, market research at the ready, and your intimate knowledge of company goals, you can be steered clearly in the right direction.

If you get to this point and you’re unsure what to do, perhaps you need to do some more research, or get your stakeholders involved in some talks and workshops to glean more insight before you start.

Communicate your strategy with your employees

Share your new plan on all the internal communication channels at your disposal.

Review and measure success

A compensation strategy shouldn’t be written once and never changed. After a settling in period, we’d recommend sending a pulse survey to get a quick ‘yay or nay’ on the changes you’ve made so far. Then you can follow up in a few months with a longer survey to get detailed qualitative data on your employees’ experience, perhaps as part of your regular eNPS process.

You may also want to work with the recruitment team to see if your new strategy has had any effect on gaining job candidates or acceptance of offered roles.

Conclusion

To summarise, HR professionals have a critical role in shaping effective compensation, rewards, and benefits strategies to enhance employee satisfaction, attract top talent, and maintain competitiveness. By aligning compensation philosophies with organisational values and strategic goals, HR can ensure fairness, compliance, and motivation among employees.

Developing comprehensive compensation plans and employee benefits strategies not only supports retention and productivity but also requires continuous evaluation and adjustment based on market trends and employee feedback. Addressing compensation issues promptly and utilising dedicated management tools are essential for developing these strategies and achieving long-term organisational success.

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