An attractive compensation package is likely to be the deciding factor for candidates looking to join your organisation, and it’s a major reason why they’ll stay.
In a labour market impacted by skills gaps and rising living costs, employers that offer the best salaries and benefits are most likely to attract the top talent. A well-designed compensation strategy allows employers to scoop up the best candidates at the same time as boosting employee engagement and ensuring legal compliance and financial stability.
In this article, we’re taking a deep dive into compensation strategies, including actionable advice on how you can develop an approach that translates into a competitive advantage.
What is a compensation strategy?
In a nutshell, a compensation strategy is a framework that brings together all the ways an employer compensates its employees whilst remaining financially sustainable. Given the importance of compensation within an organisation’s budget, ownership will typically lie with senior management, with input from HR teams.
Any good compensation strategy should be aligned with an organisation’s wider ethos, culture, and HR strategies, thereby working to attract new talent and ensure existing employees feel valued and engaged.
What should be included in a compensation strategy?
It’s vital for employers to understand what they should include in a competitive compensation strategy that helps them attract and retain top talent.
Base pay: Setting base pay is a balancing act. Offering significantly more than competitors can be wasteful, while too little can result in valued candidates looking elsewhere. Some employers classify positions and set pay bands based on job classification, while others set a fixed pay rate for positions that increase with years of service. The important factor i that there’s a pay strategy that’s clear and transparent, so everyone knows the deal.
Additional pay: Compensation strategies should address any performance-related compensation offered to employees, such as individual bonuses for high-performers or those related to the overall performance of the organisation. The strategy should clearly outline how these additional payments are structured, who is entitled to them, and when.
Benefits: A compensation strategy includes benefits packages and eligibility criteria. These include everything from gym memberships to car allowances and flexible hours and can be a key factor in employee engagement. Some of the most attractive benefits include flexible hours, pension contributions, bonuses, paid holiday allowances, private healthcare, and more.
Why are compensation strategies important?
At the most basic level, a compensation strategy is crucial to formalise workforce remuneration processes. Beyond that, a robust approach to compensation can be a game changer when it comes to recruitment, forming part of an attractive employee value proposition.
Let’s take a look at the specific benefits employers can leverage with a well-thought-out compensation strategy.
Appeal to talent: A competitive compensation offer can position you as an employer of choice for jobseekers. A well-crafted compensation strategy can also help to plug the skills gap. Talented candidates will want to work for you rather than your competitors if the compensation package you can offer is more appealing, simplifying the process of recruiting top talent.
Enhance employee motivation: With the rising cost of living and high inflation observable in recent years, many are struggling financially, often impacting their overall well-being. Easing the financial strain for employees with a strong compensation offer can be a sound commercial decision, helping to improve the workforce’s performance, productivity, motivation, and loyalty.
Reduce turnover costs: Employees who feel valued and happy want to stay with their current employer, reducing the turnover of staff and therefore the costs associated with recruiting, onboarding, and training new hires. One way to ensure employees feel this way is to include regular salary reviews as part of your approach to compensation.
Boost employer branding: A reputation for offering fair compensation packages can enhance your brand as an employer. This can help when it comes to appealing to and hiring top candidates who want to be fairly compensated for the work they do. Demonstrating a commitment to fair employee compensation alongside other ethical and responsible practices can also have value beyond onboarding talent. For example, other stakeholders, such as potential customers or investors, could be attracted and impressed by this approach.
Ensure pay equity: Employers have a responsibility to implement equal pay, so a transparent strategy reassures employees that compensation is determined fairly and objectively. This helps keep morale and performance levels high while complying with regulations and procedures.
Improve budget management: A clear strategy simplifies the process of budgeting for compensation, ensuring employers can compensate their workforce as promised. Putting the overall plan in place with financial stability, as it clearly outlines the overall budget for salary, additional pay, and benefits.
Creating a comprehensive compensation strategy
Building an effective compensation strategy requires planning and attention to detail. While it can seem like a lengthy task, it provides an overall framework you can also use to plan goals, boost employee engagement, and create budgets.
Below we have outlined some of the steps you can take to start implementing comprehensive compensation plans.
1. Define organisational goals: A compensation strategy should align with the wider goals of an organisation, such as attracting talent, retaining existing employees, and boosting performance. Once these organisational goals have been identified and understood, you can start to craft an approach to compensation that works toward them.
2. Assess internal factors: A compensation strategy has to be financially sustainable. A compensation strategy therefore needs to be realistic and sustainable. This means it needs to work with budget constraints, ensure equal pay, and fit with the culture of the organisation.
3. Review existing roles and descriptions: Reviewing existing roles and job descriptions across the workforce is vital. Once this has been achieved, you can create a framework for organisational compensation which can be adjusted when necessary and clearly shows the targets to be achieved for salary increases and performance-related bonuses.
4. Conduct market research: As employers look to recruit top talent amid skills shortages, an attractive and competitive compensation offer can make all the difference. However, before you raise salaries too high (or drop them too low) to appeal to candidates, it’s crucial to research and examine market data and benchmarks within the sector. This can be done by analysing surveys, reports, and competitor compensation to understand market trends.
5. Gather employee input: collecting feedback on compensation can help address any gap between what they’re paid and their expectations, and encourage active participation in the company goals and plans. This can also fit into your employee voice strategy, which helps employees feel listened to and valued.
6. Define compensation principles: To ensure the compensation your organisation offers can effectively boost well-being and create a positive culture, it’s important to determine the principles beyond the overarching strategy.
7. Design a compensation structure: The next stage is to decide on the components of your compensation package. This includes the basics set out above, including base salary bands, bonuses, incentives, and benefits. To attract talent and retain top performers, it makes sense to establish salary ranges based on industry benchmarks and to ensure that equal pay is given to roles of equal value in the organisation.
8. Link performance to compensation: By aligning employee goals with organisational objectives using an effective performance management system, employers can tie compensation offerings to performance. This then works to create a system that regards productivity and improved output.
9. Communicate policies: A successful compensation strategy is one that’s clearly communicated. Being open and transparent about how compensation decisions are made can help improve employee satisfaction levels and boost both productivity and performance, as employees understand what they need to achieve to earn a salary increase.
10. Monitor and evaluate: After its implementation, a compensation strategy needs to be reviewed and evaluated to make sure it’s working well. The performance metrics, which help you identify what’s working (and what’s not) include using feedback from employees at every level and evaluating the turnover rates in the workforce. Monitoring and evaluating the strategy means you can make adjustments whenever needed to ensure you stay competitive and meet; or even exceed, employee expectations.
11. Stay compliant: Putting together a compensation strategy is the perfect way to gather information (from internal employee feedback to industry salary benchmarks) and ensure compliance with employment laws, including equal pay. Staying informed of changes to new employment law legislation is the responsibility of the business. Therefore, having compliance as an integral part of the organisation-wide compensation strategy makes sense.
A well-crafted compensation strategy is vital for attracting and retaining top talent, enhancing employee motivation, and boosting overall organisational performance. By aligning compensation with organisational goals, conducting market research, and ensuring pay equity, employers can create a competitive advantage in the labour market. By taking these steps, employers can encourage a motivated, loyal workforce while building a strong employer brand.