7 Keys To An Effective Compensation Strategy
Estimated reading time: 5 minutes
Organizations use a compensation strategy to define how they view and manage employee pay and benefits.
The strategy serves as a guide and should be outlined in a written document that clearly articulates the organization’s approach to managing employee compensation.
Why Is A Compensation Strategy Important?
An effective compensation strategy motivates current employees and is used to attract new ones.
People often think of compensation as merely a salary. However, the total cost of employee compensation includes every aspect of employee benefits.
This includes the cost of health benefits, retirement benefits, tuition reimbursement, bonuses, or any other non-salary benefit considered part of a total compensation package.
7 Keys To An Effective Compensation Strategy
1. Budget Allocation
The strategy should include the organization’s approach to allocating compensation dollars to salary and benefits.
This budget allocation will determine how much of the total compensation budget will be spent on salary and what percentage will be spent on benefits and other incentives.
For example, for a budget of $100,000 for compensation, if 90% is salary and 10% is benefits, you need to determine how that 10% is spent.
One scenario might be – 7% on health benefits, 2% on retirement savings, and 1% on tuition reimbursement, totaling 10%.
Example Compensation Package Cost Breakdown
| Benefit Expense | Salary | Compensation % |
|---|---|---|
| Salary | $90,000 | 90% |
| Health Care | $7,000 | 7% |
| Retirement Savings | $2,000 | 2% |
| Tuition Reimbursement | $1,000 | 1% |
| Total Compensation: | $100,000 | 100% |
Allocate specific budget dollars to salary and benefits to help control labor, health care, and other miscellaneous benefit costs.
2. Develop Salary Ranges
Develop salary ranges to ensure employee pay is competitive with other organizations.
To be competitive, it is important to benchmark similar jobs within the same industry and create a pay structure.
Salary ranges can be developed internally by researching or utilizing sites like salary.com or payscale.com to determine average salaries in a particular geographic area.
Smaller organizations often pay a vendor to help develop salary ranges, whereas larger organizations may have the HR resources to conduct the research internally.
Regardless, it is important to look at all jobs and determine what work is done, how the job is slotted, and establish salary ranges that match all job descriptions.
3. Conduct Salary Audits
Markets change; therefore, it is important to perform routine salary audits to ensure salary ranges reflect current compensation trends in a particular industry.
For instance, we are in a tight labor market. This talent competition has forced organizations to increase pay to attract and keep top performers.
The goal of performing a salary audit is to determine how competitive particular jobs are and what the external market demands.
Ask the question, is it a growing or dying profession?
For instance, technology is incorporated into all aspects of the business. A technical job may be more competitive than a job that pushes the paper that technology now manages.
It is important to pay attention to market changes and to stay current. Failing to keep up with the competition can lead to the loss of valuable employees.
4. Determine Total Benefit Package
Many organizations use benefit packages, in addition to salary, to attract and retain employees.
Their goal is to be competitive with health, retirement, tuition reimbursement, and other benefits.
Businesses invest in generous benefits packages because they understand that those benefits may be the determining factor for a job candidate who is deciding whether to accept a position with an organization or an employee who is considering leaving.
For instance, I know employees who have stayed with organizations because the benefits were too good to walk away from.
Just remember, it’s always good to have a low turnover rate, you just don’t want to carry the dead weight of unproductive employees that add no value to the organization.
5. Manage Employee Performance
It is important to have a structured performance management process to ensure employees are meeting corporate objectives and are assessed regularly.
This process should include the development of annual goals, annual performance appraisals, and a structured process for coaching and mentoring employees.
Compensation strategies can positively influence employee engagement and improve employee productivity.
6. Maintain Legal Compliance
A well-defined compensation strategy will incorporate legal requirements to ensure the organization is in compliance with all federal and state laws.
The goal is to eliminate natural biases made in hiring decisions and ensure compliance with DOL FLSA laws such as minimum wage, overtime pay, or Lilly Ledbetter Fair Pay.
Become familiar with the US Department of Labor website and subscribe to their email so you are alerted to changes in federal laws.
7. Create a Structured Administration
As with any other business process, the structure of your compensation program is important.
Develop an annual review process that includes a salary audit, establishing a raise process timeline, and making sure someone is responsible for all compensation areas.
For instance, delegate responsibility for each area and include those responsibilities in the employee’s job description and annual goals.
A Compensation Strategy Can Improve Employee Engagement
A comprehensive compensation strategy can be the foundation for creating an environment that recognizes and rewards employee performance and helps to establish a strong culture of employee engagement.
Organizations are only as successful as their approach to hiring the right people, setting clear expectations, managing performance, and recognizing and rewarding employees for a job well done.
A compensation strategy is the first step in getting the right people in the door and keeping them.
There are lots of great books that can help you get started with building your compensation strategy.
The Compensation Handbook might be additional help for you and a great resource to add to your library!
