26 July 2024
What is an employee compensation strategy?
People come to work to get paid. How do you make sure you’re hitting their targets every time?
The basics
Why does this matter? There are loads of benefits to having an effective compensation and benefits strategy, including:
- Attracting more qualified talent
- Boost employee engagement
- Reductions to employee turnover
With that in mind, a strong strategic compensation approach can help you overcome the skills gaps that a lot of organizations are facing. You’ll attract good talent and then keep that talent for longer.
There are a range of different approaches to consider. These include:
- Salary, where someone is given a base salary depending on their role
- Salary plus commission, where someone earns additional money based on performance typically through sales
- Commission only, where there is no base salary, the employee only gets paid based on sales
- Revenue based, common in startups, this is where employees get paid based on the profits of the organization
Key components of an employee compensation strategy
The exact shape of your employee compensation strategy will vary depending on your needs and the needs of your team. However, there are some key components that most will deal with.
If you’re looking to save money, organizations might want to consider a lagging strategy. This is where you pay below the market rate. However, this can really harm your employer brand, and cause employees to leave. Using a competitive payment approach will naturally help you match what’s happening in the wider market.
When you consider salaries, you also need to consider raises. How often can an employee ask for a raise? Do you meet the cost of living as standard?
Some employers like to make use of step pay. This is where each employee gets a pay increase each year, with a maximum level set based on role. This is great if you want to create a sense of momentum in your employees.
If an employee takes the time to work on professional development, and gain new skills, does your strategy account for that? Employees typically want their pay to reflect the work they put in. If you don’t reward this approach, fewer employees will bother.
Performance-based incentives are also popular- it’s why sales teams often make use of a commission structure. High performance directly leads to high rewards!
In addition to salaries, a strategic compensation plan will also consider a broader benefits package. Things like remote work, healthcare benefits and financial wellbeing perks are all useful things that many employees benefit from.
If you can’t afford high salaries, offering thoughtful benefits can give you the edge you need. Different employees value different things, so it’s always worth taking another look at what you’re currently offering and seeing if there are any gaps.
Factors to consider in developing an employee compensation strategy
There are three key factors to think about when building out your strategy.
What is the competition doing?
Proactivity is the name of the game when it comes to a competitive payment strategy. Part of that means you’ll need to dig into what your competitors are doing and trying to match or beat them. Get a handle on what the industry standard is, and account for regional variation too.
Are we aligned with our organizational values?
Do you practice what you preach? Companies that pride themselves on honesty should aim to be transparent on wage packages, while those that focus on teamwork might want to offer team performance bonuses.
Is everything fair and equitable?
Salary negotiations and ad hoc pay decisions can lead to inequality, especially as they allow bias to creep in. Make sure you regularly schedule salary reviews, and ensure any decisions made are based on provable performance indicators. HR should also be strongly involved in the whole process, as that will minimize the risk of individual managers making calls based on their personal preferences.
Implementing an effective employee compensation strategy
A compensation strategy is most effective when everyone in the organization understands what’s in place and why. Make sure to take the time to communicate it to your employees, and speak in clear, accessible language. You’ll also want to make sure new hires are brought up to speed quickly, with most of the benefits they can expect communicated early in the hiring process (ideally even in the job description!).
Set aside time to review and update your strategy where you can, as compensation standards frequently evolve and shift. Check in with your employees about what’s working and what isn’t.
Best practice for your employee compensation strategy
Firstly, you need to make sure you’re compliant with legal and regulatory requirements, especially if you’re going with commission, or revenue-based structures.
It’s also important to balance cost-effectiveness with attracting and retaining talent. While a lagging strategy can cause harm, it is a strategy to consider. Finding that balance is key.
Finally, utilizing technology is helpful, as it makes it easier to track what’s going on holistically, with fewer errors. This can also make rolling out changes quickly easier.
Final thoughts
A robust employee compensation scheme is vital if you want to stay competitive in a busy market. But striking the balance between cost-effectiveness and staying competitive is equally as important. The benefits of getting it right are huge, so now is the best time to sit and evaluate how things are working, and how they could be better.
If you’d like to learn more about how People First can help elevate your compensation strategy, take a look at our complete guide.
