A compensation strategy is a planned approach to administering pay and benefits that is intentionally designed to attract, retain, reward, and motivate employees for their contributions. A well-designed compensation strategy will align compensation to the organization’s goals, values, and overall business strategy.
Benefits of a Compensation Strategy
A compensation strategy provides the foundation for fact-based decisions centered on meaningful data and equitable treatment. A well-developed strategy:
- Takes a holistic approach to compensation by considering both financial and non-financial elements of employee rewards, including base pay, bonuses, incentives, benefits, recognition programs, etc.
- Helps organizations attract top talent by ensuring that pay is competitive within the market
- Creates internal pay equity by implementing guidelines that promote fact-based decision-making and equitable treatment, while avoiding disparities based on gender, race, or other protected characteristics
- Motivates and rewards employees for demonstrating organizational values and advancing organizational goals
- Creates trust through clear and transparent guidelines for staff
Compensation Study: The Foundation of Your Strategy
A compensation strategy begins with an analysis of your current compensation practices. The compensation analysis will typically include three components:
- Job definition. Ensure you have credible, thorough, updated job descriptions for every job in the organization to measure against comparable jobs in the marketplace. This step will also allow you to group jobs of similar scope and complexity within the organization, which will help promote internal pay parity.
- External research. Gather data from reputable compensation surveys or online compensation platforms. The wide variety of available resources makes it important to select the best data set. The most meaningful data will come from sources that include information from many organizations, that can be segregated by industry, size, and geography. The data should be employer-reported and up-to-date.
- Parity assessment. Conduct an internal assessment to ensure internal parity and that people in similar positions with similar experience, skill sets, and education are paid similarly. The goal is to make sure there is no disparate impact on different demographic groups.
It’s critical to involve internal experts who understand the roles and functions of every position in the organization and have a nuanced overview of how they all work together. These individuals can be in HR, operations, or part of the executive suite. Your internal experts should be able to match your internal roles with data from external sources to ensure an apples-to-apples comparison, which will give you confidence that the compensation analysis is valid and make it much more useable.
4 Steps to a Compensation Strategy
Once you—or, possibly, an outside expert/consultant—have crunched the numbers and understand how your compensation compares to the area and the industry, these are the next steps.
- Determine your compensation philosophy. A skilled consultant can help the organization determine how best to pay relative to the market and the impact of total compensation, such as a bonus policy, merit pay, pay-for-performance, etc., on that decision.
- Establish pay ranges for each position, including starting salaries for new hires.
- Evaluate salaries of incumbents to determine if any adjustments are necessary, as well as the overall cost.
- Create guidelines for compensation decisions, such as timing and philosophy for salary increases, promotional increases, considerations for those who reach the top of the range for their position, whether or not to award cost-of-living increases, etc.
How to Communicate the Compensation Strategy
Keep in mind that employees may be anxious about compensation changes. It is important to set expectations up front related to the timing of the study and the potential outcomes. Communicate candidly about the purpose and goals of the study and the intended outcomes. If possible, reassure employees that individual compensation will not be reduced because of the compensation study and reinforce that message regularly.
Engage the management team early in the process. Ensure they understand the purpose of the study and their role in communicating with their teams. Take time to meet separately with managers to explain the results of the study and the guidelines for future compensation decisions. Make sure they understand the compensation philosophy and how it relates to internal and external pay equity.
Prepare managers for communicating individual compensation decisions to members of their team. Provide them with talking points for various scenarios, and ensure they are ready for these conversations. This preparation will foster consistent messaging across the organization.
One Final Point
Creating a compensation strategy is not a one-and-done situation, but a dynamic strategy that the organization will use to boost retention, recruiting, morale, and equity for years. It will come into play at every performance and salary review and every interview. Managers will need to be equipped with a deep understanding of the organization’s compensation philosophy so they can field questions and ensure that employees receive the right messages.
The Lindenberger Group can help organizations conduct, manage, and implement the results of a compensation study and make it part of an ongoing strategic plan. For more information or to discuss your HR needs, please contact us at 609-730-1049 or send us an email.