Competitive Compensation: What It Is and Why It’s Important

Why Develop a Competitive Compensation Plan?

In a talent market as tight as what we’re experiencing today, top candidates could have multiple offers from different companies come in at the same time. So, how can employers ensure that their offer is the one that stands out?

Instead of analyzing salary alone, savvy employers are increasingly focusing on their total compensation packages, adding benefits and perks that differentiate the company, resonate with job candidates, and give them a competitive hiring advantage.

What is competitive compensation?

Competitive compensation is the direct (monentary) and indirect (non-monetary) pay that employees receive for their work. It includes things like salary, bonuses and commissions, as well as benefits, like vacation time, insurance premiums, stock options and other perks.

Today, employers are getting creative with what they’re offering, adding extras ranging from paid days off for employee birthdays to on-site day care and “bring your pet to work” days—and everything in between. These unique benefits enable companies to amplify their company culture, and set themselves apart in a crowded hiring market.

What should a competitive compensation plan include?

While every strategy will be a little different, depending on the company, the industry and preferences of the target employee group, here are the main elements that make up most competitive compensation plans:

1. Salary

A competitive salary is the foundational element of your compensation plan. But, how do organizations ensure that their salary ranges are hitting the mark?

Step one is to research the market range of each job in your particular geographic location or the location of the potential hire. Benchmarking your ranges against other companies hiring similar candidates provides an excellent reality check.

This analysis doesn’t have to be a manual process. Compensation management software, like that offered by Payscale, simplifies the salary analysis process for specific job descriptions, and provides access to the most current data for comparison.

Next, decide how competitive you want to be relative to the market. Do you want to meet the market, lead the market, or offer a salary slightly below the market with beefed up benefits? (Typically, companies try to target between the 40th and 90th percentiles).

A number of additional factors should guide this decision, including:

  • The company’s outlook for growth in subsequent years.
  • The company’s current ability to attract and retain talent.
  • The industry, and the availability of specialists in that industry.
  • The company’s overall philosophy on pay.

2. Health insurance

Health benefits can be a dealmaker or deal-breaker when it comes to competitive compensation—particularly in the post-COVID era.

According to the 2021 Kaiser Family Foundation’s annual Employer Health Benefits Survey, annual premiums for employer-sponsored family health coverage reached $22,221 in 2021, with workers, on average paying $5,969 toward the cost of their coverage, with an average deductible of $1,669 for single coverage.

The survey goes on to note that 99 percent of large firms and 58 percent of small firms offer health benefits to at least some of their employees, with an overall offer rate of 59 percent.

Many healthcare plans are set up so that the employee and the employer each pay a portion of the premium. Generous employers may cover 100 percent of the premium cost of a basic plan, with an option for employees to pay more for a higher-level plan if they choose. The most competitive plans offer healthcare, vision, and dental insurance, with the company picking up a significant portion of the premium.

3. Paid time off

Paid time off, or PTO, is also a critical element of competitive compensation, and can be handled in a number of different ways:

  • A single PTO balance: Employees get a set number of days throughout the year that they can use for time off—including vacation, sick days, mental health days, or to attend events or take day trips. Some employers allow unused days, or a certain percentage of them, to roll over from year to year.
  • Separate PTO balances: Employees receive a specific number of designated PTO days for sick days, vacation days and appointments. This reduces the chance employees will come to work when they’re sick so they can tack days onto their vacation.
  • Unlimited PTO: This is a newer trend, that is particularly prevalent at startups. Essentially, it gives employees the freedom to take as many days off as they want, often without any waiting periods—on the condition that they are meeting the requirements of their job. While this sounds good on paper, the downside for employees (and perhaps the upside for employers) is that they’re not accruing vacation days, like they do in a more traditional structure. That means if the employee leaves the company, he or she can’t tack on accrued vacation days to exit the company earlier or be compensated financially for unused vacation.

Typically PTO is offered above and beyond any paid holidays the company offers.

4. Retirement

Prospective and current employees also want to work for a company that is invested in their future—both from a career perspective now and from a financial perspective when they retire. One of the most prevalent retirement programs today is the 401(k) plan, a tax-deferred, company-sponsored retirement savings and investment plan that enables employees to save for retirement via paycheck deduction every pay period, before the taxes are taken out. Employers can match this contribution up to a certain percentage, to help build the accumulated funds more quickly.

According to Investopedia, the average matching contribution is 4.3 percent of the person’s pay, with the most common match being 50 cents on the dollar up to 6 percent of the employee’s pay. Some employers match dollar for dollar up to a maximum amount of 3 percent. It all depends on what works with the employer’s budget. But, just note, an investment in employee retirement is an investment in retention. Employers can also deduct 401K contributions on the company’s federal tax return to the extent the contributions don’t exceed certain limitations. So, it can be a win-win for employer and employee alike.

Other features of a competitive compensation package

A competitive compensation package can also include:

Stock/equity: Some companies, particularly startups, may choose to offer stock/equity options as part of their competitive compensation package. A stock contract gives employees the right to buy (or “exercise”) a set number of shares of the company’s stock at a pre-set price. However, employees must buy the shares within a certain time period to participate. But, by giving employees stock options, companies give them more motivation to drive the company’s success in very tangible terms, and to stay with the company to see those returns pay out.

Office perks: While some people may love the trendy office perks like kombucha in the cafeteria or a dog-friendly office, Forbes’ Coaches Council found that these perks can also come off as gimmicky if not handled correctly. The key is understanding what’s most important to your employees and the new hires you want to attract. The “right answer” could range from student loan repayment options to ergonomic chairs to doughnut Mondays. Ask your existing team what they value and use that input to expand your compensation package. In this case, listening is your best path forward.

Remote work: Being able to work remotely is moving from the exception to the mainstream. According to Upwork, by 2025, 36.2 million Americans will be working remotely, nearly double the number of people working remotely prior to the COVID-19 pandemic. If it fits with the job and your company culture, allowing a remote work option can open the door to a world of opportunity (literally) when it comes to hiring. It not only broadens your available talent pool, but, many job candidates will now only consider offers with a partial or fully remote option.

Flexible hours: Offering flexible office hours can also elevate your competitive compensation package. Some companies offer adjusted summer hours, to give people more time to spend enjoying the weather, their kids or taking an afternoon dip in the pool—or any other leisure activity they prefer. Studies show that implementing this shorter workweek may actually increase productivity by creating more focused work time.

Other companies enable employees to choose their own work hours, to help with work-life balance, and enable them to work around family obligations.

Tips for writing a compensation philosophy

After thinking through your approach to competitive compensation and what your plan should include, it’s important to put it in writing—starting with your compensation philosophy. Experts recommend following these best practices:

  • Be as clear and concise as possible. Your philosophy should be around two paragraphs in length
  • Maintain an optimistic, yet realistic, tone
  • Write to the long-term vision. While policies and the specifics of your compensation plan will change over time, your compensation philosophy should be a constant
  • Ensure that your philosophy reflects at least some of the values in your company’s mission statement

In a competitive market, it takes more than salary to attract the best talent. By creating a competitive compensation plan, and developing a compensation philosophy that differentiates your organization, is creative, and mirrors their company’s culture, employers can improve retention as well as attract the additional workforce they need for long-term growth.

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