Editor’s note: this piece on compensation strategy was updated in November 2018. A compensation strategy lays out your organization’s point of view on how you will determine pay and benefits for employees. It aligns all of your compensation resources to your business goals, helps you decide where you want to compete, how competitive you need to be and what you choose to reward. A compensation strategy forms the backbone of your compensation plan. With a solid strategy in place, your organization can quickly make sound decisions about compensation.
In today’s tight talent market where employees have more bargaining power and greater access to salary information than ever before, getting compensation right is crucial. What you pay, how you pay, and why you pay the way you do affect your ability to retain and attract top talent. Your compensation strategy also affects your company culture, employees’ satisfaction with their jobs, and even your bottom line. With all of this said, here are five steps you can take to develop a compensation strategy so you can be more intentional with your comp spend.
1. Start by thinking about your organization’s culture, business strategy, and HR strategy.
Your culture is who you are as an organization and consists of the values and behaviors that collectively determine how and why your organization operates the way it does. Every organization has a reason for existing—what you’re trying to do—and the business strategy is the roadmap leaders develop to help you get there through the achievement of specific mission or business goals. And since you’ll need people to make all this happen, the HR strategy is your plan to attract, motivate, and retain the right employees at the right time to achieve your organizational goals. All these factors taken together should inform your compensation strategy.
2. Consider what you want to reward.
Circling back to your company culture, drill down on what kind of behavior you want to reward with pay increases. Are you focused on performance to the point where top performers get bigger raises? (Performance is the number one reason for giving merit pay increases, according to our Compensation Best Practices Report.) Or is loyalty a big part of who you are and thus rewarding tenure is important? Are there specific skills or certifications you prize so much that incentivizing employees to obtain them would be in your company’s best interest? Or do you plan to reward some combination of these things?
More and more, we observe that organizations are starting to pay employees based on the relevant skills they bring to their roles rather than traditional factors such as tenure, education (pedigree), or years of experience in an industry.
This practice is becoming more common in tech, healthcare, manufacturing and other sectors that are undergoing rapid changes. For these industries, retention and hiring the right people are often top concerns. These employers recognize that workers with certain skills are in high demand, and they need to pay a premium to attract and retain these employees. Additionally, they see that using skills to determine pay paves the way for better conversations with their employees. When a manager can talk to his direct report and say “here are the skills we value in your job, and your salary is based on the market value of these skills,” they can have a much easier and more productive conversation around pay and career development.
As you start to craft your compensation strategy, be sure to take the time to understand the skills you need in each department and each role, and determine which ones are mission-critical to your organization. Then, make sure everyone involved in making pay decisions knows what you intend to reward.
The best compensation strategy is the one that rewards what your organization values.
3. Look at your talent landscape.
I often hear from PayScale customers that they only want to compare themselves to similarly sized organizations in their own industry when pricing their jobs. However, the competitive landscape for talent is typically much broader than that. For one thing, many jobs exist across all kinds of industries. Likewise, there are often companies whose entry into a new labor market has a ripple effect on pay up and down the size spectrum (think Amazon and their network of distribution centers across the country). Now that doesn’t mean you have to adopt a compensation strategy similar to larger organizations or in a different industry to compete for top talent, but you should definitely look at what’s happening around you and have a conversation about it with key internal stakeholders. The result of that conversation should be a decision on the salary data you will use for benchmarking: industry, size, revenue and location(s) as well as how competition in the market impacts your compensation strategy.
4. Weigh what you can afford to do against what you’re willing to do.
The other key component of your comp strategy is how competitively you plan to pay—the percentile in the market where you intend to pay proficient employees—and if, for strategic reasons, that should differ by job function, level, location, or some other factor. The 2018 CBPR found that 54 percent of top-performing organizations target a higher market percentile for more competitive jobs (i.e., those where a scarcity of qualified talent is driving up pay).
Crunch the numbers here and examine a few different scenarios to ensure the affordability of your plan. And then consider: even if you can afford to target higher in the market for base pay, is that a smart decision for your organization right now? Where does variable pay fit? A full 79 percent of top-performing companies and 70 percent of all organizations surveyed in the 2018 CBPR incorporate variable pay into their comp strategies. With an attractive mix of base and variable pay, depending on your market, you may not need to target a higher percentile.
That said, there are many organizations that want to offer higher pay so they can be more competitive in the war for talent but simply can’t afford it, a situation that comes up frequently with my small business and non-profit clients. Here’s where the comp strategy becomes even more important: in these cases, I advise clients to be realistic when they define it, be transparent when they communicate it, and be enthusiastic about everything else they offer that makes them an employer of choice.
5. Gain executive buy-in.
Now that you’ve gotten this far, don’t forget what is arguably the most crucial step: getting your executives to approve the comp strategy. Data from CPBR found that organizations agree that compensation is becoming more important to executives, meaning they’re increasingly seeing the link between pay and overall company performance. And remember: a comp strategy isn’t “set it and forget it”; engage your leaders on a regular basis to look at where your organization is today and where you want to be tomorrow and set a comp strategy that can evolve along with your business.
Whether you want more help with crafting a compensation strategy, or creating a salary structure, we’ve got you covered. Here are some tools and guides that may be helpful:
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