It’s time to review your compensation strategy

Many companies these days are experiencing difficulty filling open positions in the current labor market. Unemployment is low and competition is high. Some are offering a higher base salary than their competitors to attract top performers. However, this strategy might not always work out the way you expect.

Some worry such a measure can leave insufficient funds to give raises to existing workers, which would lower employee engagement and jeopardize retention. Or, it might entail scaling back on some healthcare perks. Even worse, despite some company’s best efforts — employees talk. What will existing employees think when their new coworker starts making $10,000/year more than everyone else?

Payroll constitutes a significant (if not the largest) expense at most companies. Without unlimited resources, however, employers must take a hard look at pay decisions. Where they choose to allocate funds can majorly impact the recruitment of new hires, morale of existing staff, overall productivity, and reputation.

Employee compensation strategies vary from organization to organization. However, compensation is a key part of any overall business strategy. A good compensation strategy spells out a company’s compensation programs, and gets executives, managers, and human resources on the same page. In addition, it keeps things fair for employees. Outlining pay scales and incentives for employee performance will ensure that compensation is based on smart choices, not potential favoritism.

Considerations when composing your compensation strategy

Formulating an effective compensation strategy begins by thinking about the company’s mission, values, and goals. Identifying such things helps you stay true to your brand and your long-term objectives while remaining within the framework imposed by budget management. You only have so much money, so figure out how to allocate it in ways consistent with what you want to achieve.

Some of the factors that go into compensation decisions include:

Competition

How do competitors compensate their employees? What is the typical salary range for various positions in your industry, and how do you compare? Is some top talent in such high demand due to their skill sets, or your geographical location, that you will need to take special measures to compete for their services?

Encouragement

What behaviors and competencies mean the most to the company? How can you structure the compensation plan to reward the actions valued most? For instance, if customer service is a top priority, how might you identify and reward those workers who consistently or exceptionally display this ability?

Real numbers

What is your organization’s monetary situation? What can the company realistically afford to do? How might financial categories be further broken down? If, say, you have a certain allotment for raises this year, should it be distributed evenly across the board or as variable pay increases based on performance or longevity?

Pay equity

How does the business ensure equal employee pay for equal value of work? Are you taking steps to ensure pay equity, and make things fairer for women, minorities, and others prone to wage gaps? How might problems in this area affect retention, image, and legal obligations?

Growth

Where does the company want to be in six months, a year, or even five years? What type of human capital will this involve in terms of both quantity and quality? How might expanding or accomplishing certain goals affect your current compensation plan? A good compensation strategy looks at meeting the organization’s future needs.

Setting salary rates

As an organization goes about constructing its compensation plan, it is important to note that workers nowadays have a pretty good idea of their worth in the current market. Multiple websites conduct salary surveys and post results by job title, even taking into account variables such as geographical region, education, skill set, and years of experience.

With both job applicants and current staff members aware of going rates for their services, compensation decision-makers at a company also need to be well-versed in market data. A benchmark salary range provides the starting point from which to adjust your pay scale. Depending on your compensation strategy, this could involve going higher, lower, or meeting the market.

Here is a brief synopsis of each:

Paying above the market

Adopting what is often dubbed a “leading” compensation strategy involves offering a greater salary than what competitors pay. Competitive compensation gets the attention of job seekers and boosts the morale, productivity, and retention of current workers.

Companies in industries requiring highly specialized or hard-to-find talent often find it imperative to go higher than the market rate in order to land and keep the type of workers they need to operate successfully. A lead-the-market plan, though, requires having sufficient financial resources to carry it out – something many small businesses may not possess.

Paying below the market

An opposite compensation strategy is called “lagging.” This plan sets salary rates below average. It tends to work best when job openings are few and people looking are many, when a company lacks competition in its geographical area, or when a business has such a great reputation that people want to work there for the experience.

As one might expect, lagging places often experience a good deal of turnover. People leave when the job market changes or when they have built a resume that appeals to higher-paying employers. However, to attract and retain workers, companies paying under the norm often provide substantial non-salary perks such as remote options and flexible schedules.

Paying market average

The most common compensation strategy is to pay employees the going rate, which is called “meeting the market.” It makes workers feel that they are being justly compensated while sparing the company the extra costs of paying a lucrative wage. While employees are not all paid the same, the overall average falls at the norm for a given type of work.

The different types of compensation strategies are not set in stone. Employers often mix them to suit their individual needs. A hard-to-fill position, for instance, may require a company that usually uses a meet the market strategy to switch to a lead strategy in this case in order to gain an edge over the competition.

Beyond base pay

When people think about what they earn, their annual salary generally comes to mind. While this figure certainly plays a large part in attracting and retaining workers, base pay is only a part of a compensation package. However, base pay is not the only type of compensation to consider. Total compensation includes a great deal more.

The cash value of a position can rise considerably when an employer offers financial incentives for achievement. This performance management tactic awards a monetary bonus for completing certain tasks or excelling at things deemed valuable by the company.

Benefits are another key component of total compensation. Stock options, contributions to retirement plans, health insurance, gym memberships, and paid time off all add to the overall worth of employment in a given position. Especially in these post-pandemic times, employers realize remote work options and flexible schedules deserve serious consideration as ways to increase the attractiveness of the organization without upping base pay.

Communicating your compensation strategy

After completing your compensation strategy, do not bury it away. Rather, share pertinent information. Your legal team, for instance, should be aware of the document’s existence. Being able to refer to a thoughtful, company-wide compensation policy can prove valuable if a pay discrimination case should arise.

Workers benefit from understanding the elements of your compensation policy that pertain directly to them so they know how to maximize their pay. They can see which behaviors and credentials lead to greater rewards.

Such knowledge not only helps you get what you want out of employees, it also limits the perception of unfair treatment.A manager who denies someone a raise, for instance, has a shared reference to point to when defending his decision.

Similarly, employees kept in the dark about compensation practices often assume they are being underpaid, whether true or not. This feeling negatively affects morale, productivity, and retention.

Don’t forget about compensation when hiring to fill new positions as well. Include pay ranges and compensation information up front in job descriptions. After all, you don’t want to bring a candidate all the way through the interview process for them to back out because a mismatch in pay expectations.

Your compensation strategy and the future

Creating a compensation plan is not a one-and-done endeavor. While elements such as your company’s mission may remain constant, others are bound to change — new priorities and different market conditions, to name two. Periodic reviews ensure your compensation strategy remains fair, legal, and in line with current economic and labor conditions.

Establish who will continue to monitor market data (likely candidates are professionals from either the human resources department or accounting) and what developments should trigger the reevaluation of compensation policy.