Developing a successful compensation strategy is a game-changer for any organization aiming to build a reliable and motivated workforce. Such incentive plans are more than just numbers on a paycheck — the right approach can foster a dedicated team without compromising any of the financial and operational goals of your business.
With a sound strategy in place, you can transform payroll from a routine cost into a strategic investment that fuels organizational success. In this article, we’ll guide you on how to streamline a compensation plan that promotes your company’s long-term growth and profitability.
8 Steps to Create A Strategic Compensation Strategy
Here are the steps on how to design a strategic compensation strategy. We’ll go into detail for each step later on in the article:
- Step 1: Evaluate your existing compensation plan
- Step 2: Gather employee input and feedback
- Step 3: Conduct market analysis
- Step 4: Set a budget
- Step 5: Establish pay grades and salary ranges
- Step 6: Ensure compliance with legal standards
- Step 7: Include incentives and bonuses
- Step 8: Clearly convey and implement your compensation strategy
Creating a Strategic Compensation Strategy – Steps Explained
Step 1: Evaluate your existing compensation plan
Understand the effectiveness of your existing setup before launching a new compensation strategy. Gather comprehensive data on your current model and evaluate whether its policies still support your company’s broader objectives. A large-scale assessment of employee satisfaction, internal pay structures, and how they specifically compare to industry benchmarks is key to formulating a better-targeted compensation plan for your business.
Such estimations will help you identify areas of improvement within your existing layout, exposing any gaps, opportunities, or misalignments in your company’s strategic goals. This will allow you to form the correct strategies in response and make more informed adjustments to ensure that the updated plan remains sustainable and relevant to your company’s vision.
Step 2: Gather employee input and feedback
A compensation framework built with employee welfare in mind increases the chances of greater organizational performance. As the primary beneficiaries of these pay structures, employees provide invaluable insights into what they consider competitive and equitable. Leverage employee feedback to tailor your compensation strategy to attract top performers and decrease voluntary turnover.
You can do this by implementing surveys or focus groups to measure overall employee satisfaction and conducting one-on-one interviews with key employees to gauge their motivations and concerns. Report important details about their company experiences and gauge how employee expectations vary across genders, departments, and job levels within your organization.
Step 3: Conduct market analysis
Doing extensive market research can help you stay ahead of the curve in an increasingly competitive landscape. Check what your competitors are doing and what the current industry trends are to make sure your business not only adapts but can exceed market expectations. You can also consult with industry experts to check whether your company is meeting these salary benchmarks or not.
As the labor market evolves, the demand for pay transparency continues to soar to newer heights, especially now with these inflationary pressures. 73% of companies recognize that changes in legislation have led to greater disclosure in their pay practices. With this in mind, employee input can be a strategic advantage.
Step 4: Set a budget
The right budget is the right balance of offering competitive pay while also safeguarding your company’s financial health. Start by taking a closer look at your current payroll expenses and assess how they stack up against industry standards — don’t forget to leave enough room for rewards, bonuses, and merit increases.
Utilize this data to calibrate and define the financial limits your company can realistically invest in these compensation packages. Anticipate future revenue projections and ensure your budget remains flexible to market shifts and demands without sacrificing sustainability.
Step 5: Establish pay grades and salary ranges
Businesses employ a range of strategies to harmonize their compensation plans with company targets. Some organizations intentionally pay above market value to lure the crème de la crème, while others prefer to directly reward their employees based on their performance alone. Choose the most suitable system that best aligns with your organizational culture.
First, assess if the current plan appropriately balances base salary, benefits, and non-monetary awards. Think of pay grades as blueprints that organize specific job positions into tiers based on predetermined factors, such as skill, responsibilities, or experience. Afterward, assign the corresponding compensation or salary levels to each work group. This simplifies salary decisions while offering employees a more transparent framework for career progression within the company.
Step 6: Ensure compliance with legal standards
It goes without saying that any company wouldn’t want to get tangled up in legal complications. Employee rights are upheld through labor laws, which cover minimum wage requirements, overtime, and equal pay policies.
Non-compliance can lead to costly repercussions and tarnish the reputation of your company. Monitor updates in labor and tax legislation to avoid legal risks. Additionally, verify if the organization is operating ethically by consulting with legal experts. See to it that your compensation plan is up-to-date and compliant.
Step 7: Include incentives and bonuses
Drive employee performance by providing meaningful incentives and bonuses. Reinforce desired behaviors and outcomes by ensuring top-performing employees are not just recognized for their contributions but are handsomely rewarded.
Foster a dynamic workplace by clearly outlining company expectations and offering optional perks to workers who surpass these specific metrics. A carefully engineered incentive system keeps the workforce inspired and affirms these salary adjustments directly reflect the professional achievements of the employees.
Step 8: Clearly convey and implement your compensation strategy
Imagine your compensation strategies as a roadmap to success. Visualize a work environment where everyone knows exactly how their efforts translate into rewards. That’s the magic of a clearly presented compensation package. By articulating and executing your pay plans effectively, you create a clear link between employee performance and earnings, thereby driving engagement and mitigating any risks from dissatisfaction or turnover.
Examples of Compensation Strategies
- Salary — Employees are paid a base salary that corresponds to their role, responsibilities, and experience.
- Salary and Commission — Employees are paid a base salary with the potential for commission to be added on top depending on performance.
- Team Commission — Similar to commission, this type of compensation strategy looks at how well a team performed as a whole. This can encourage collaboration and teamwork.
- Profit and Revenue — Employees are paid a base salary plus bonuses, commission, or other remuneration based on profit and revenue figures. Sometimes, an employee’s entire salary might be based on these figures.
- Residual Commission — Employees are paid commission based on sales and the amount of value they generate even after they’ve left the organization.
It’s About More Than Money
It goes without saying then that in the current unpredictable labor market, where organizations are struggling to secure the talent that they need to get by and grow, it’s something that needs to be given some serious consideration.
Putting together a strong compensation strategy is about more than offering high salaries and other monetary incentives, though. The very best compensation strategy includes many components and is something that requires a lot of thought to make sure that it’s not only competitive but that it also makes it clear that your company truly cares about its people.
5 Compensation Strategy Tips
When done right, a compensation strategy can be the deciding factor for an employee who’s weighing up accepting your job offer against accepting an offer with another company.
Again, though, it’s about more than just throwing money at people. Your compensation strategy needs to be a comprehensive and well-thought-out plan that defines all the ways your organization compensates employees and how it can be accessed.
So, how should organizations approach this?
1. Take Care of Salary First
Yes, we just said that a solid compensation strategy is about more than just money. And it is… but taking care of salary and other monetary components is still an important first step. It makes up the bulk of any employee’s compensation package, after all.
An employee’s salary includes base pay, pay frequency, and pay increases.
Base Pay
This is the cash amount that an employee receives annually before any deductions or the addition of any commission, bonuses, or other financial components is their base pay.
Setting this can be tricky, particularly in the current climate, because you want to ensure you’re offering fair, competitive remuneration in order to attract the right talent for you.
We recommend looking at current market data to identify low-end, median, and high-end salaries for comparable roles. This will help you to set a pay range for each role in your organization that’s fair and competitive. Having data-backed base salary ranges also helps you to make adjustments in response to market pressures such as inflation.
Pay Frequency
One of the simplest ways to improve your compensation strategy and give employees a better experience is to change the frequency of when salary is paid and/or giving employees the option to choose how often they would like to be paid.
For example, you might choose to pay employees weekly or bi-weekly instead of monthly. This is more common in industries with high turnover rates such as hospitality, but there’s no reason why organizations in other industries can’t also follow suit.
Pay Increases
One of the biggest complaints among employees is pay increases… or, rather, a lack of them.
Although pay in the United States increased 6.17 percent in November 2022 when compared to November 2021, there’s no shortage of employees complaining that they haven’t seen a pay increase for several years.
As such, more and more candidates are expecting organizations to be up-front and transparent about their pay increase policy. You should use your compensation strategy to clearly communicate not only what a candidate’s base pay is but also how and when they can earn or receive a pay increase.
2. Make Use of Financial Incentives and Indirect Compensation
Another critical component of any compensation strategy is financial incentives and indirect compensation. When these are implemented right, they can easily pad out an employee’s compensation package without weighing down too much on an organization’s bottom line.
Examples of financial incentives and indirect compensation might include:
- Overtime payments
- Stock options
- Referral bonuses
- Performance bonuses
- Commission
These are extremely common in the tech space (especially stock options) and they can easily double an employee’s compensation package.
Adding some or all of them to your compensation strategy is a great way to show employees that they’re valued and fairly compensated for their work, and they give organizations a way to up compensation with more flexibility than straight salary increases. They can also incentivize good work, particularly when stock options are on offer because when the organization succeeds, the stock value increases.
3. Offer Valuable Benefits
75 percent of employees have reported that they’re more likely to stay with an employer because of their benefits program. Similarly, more than three-quarters of American workers say that benefits are necessary for companies to offer employees.
In the current market, offering benefits that employees will value is an important way you can help your organization to stand out. Examples of common benefits include:
- Medical care, including mental health
- Dental and vision
- Life insurance
- Contributions to retirement and pensions
- Cover for short- and long-term disability
- Legal and financial services
- Family-focused benefits
- Tax-deferred investments
- Student loan repayments
- Commuter and parking programs
All you need to do is decide which of these you wish to offer, search around for the best providers, and decide how much the organization will contribute.
4. Allow Flexible Working
It was unusual for businesses to offer flexible and remote working before the pandemic. Fast forward three years (how time flies!) and it has become the norm, however, as organizations were forced to work in a more flexible, agile way—both in terms of where employees work from and how they work, too.
With the world pretty much back to ‘normal’ now, employees expect that their employers will continue to offer remote and flexible working to an extent. According to the U.S. Remote Work Survey by PricewaterhouseCoopers (PwC), over half of all employees want to work remotely three days a week or more, with 29 percent of participants indicating that they want to work remotely five days per week.
In other words: You should be offering remote or flexible working, or a hybrid approach, to your employees.
5. Keep Everything Simple
Make sure that your compensation strategy is clear, defined, easy to understand, and, most importantly, executable. There’s no shortage of potential approaches that you can take when designing your compensation strategy, but it must focus on the attraction, retention, and productivity of your people.
Your compensation strategy should also seek to inspire and reinforce the culture that your organization needs to be successful. If it is too complicated or difficult to execute, it will not have its intended impact
Also, keep in mind that your compensation strategy needs to be tied to corporate strategy. It also needs to be realistic. Compensation changes that aren’t budged for or distributed as planned will fail to have their intended impact and could harm the employee experience—the very opposite thing you’re trying to achieve.
Using Organimi’s Custom Fields to Track Employee Compensation
One of Organimi’s many great features is the custom fields option. More recently, our custom fields menu has been redesigned to provide you with an even greater user experience. We’ve introduced a brand new field type, Computed, which allows you to build new fields by combining different data points! (i.e. Total Comp = Salary + Bonus).
Organimi’s software does all the calculations for you. Simply build your formula by selecting which fields you would like computed and voila! Your comp information is stored within the employee profile. And no worries, Organimi’s custom fields have been built with the option to appear private or public, all chosen by you.
Learn more about custom fields here.