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How to Build an Effective Compensation Strategy for Your Business

By:
Ryan Shank

Are you looking to retain talent, or attract the best job seekers in the industry? A good salary will only get you so far - you need to consider a strong compensation strategy too.

This strategy forms the framework for how employees are compensated - both financially and with other perks - to motivate staff and maintain loyalty. It can impact company culture by ensuring employees feel valued.

Read on to discover what a compensation strategy is and how you can build one in your business.

What is a Compensation Strategy?

A compensation strategy is a kind of compensation plan that a company develops to manage the pay and benefits its employees receive.

It is a key part of the human resource strategy and helps a company attract, retain, and motivate key employees. As this strategy considers the organization's budget, it also ensures financial stability.

A compensation strategy should include the following information:

To determine the compensation that forms part of the strategy, a company's finances, goals, and the industry must be considered. It should also align with the HR and business strategy.

A compensation strategy is usually developed by a company's management and approved by the Board of Directors.

A well-rounded competitive strategy has the following benefits for a company:

  • Attract and retain talent: Your organization will be set apart from competitors, and your employees will be less likely to leave.
  • Execute your business strategy: The employee compensation strategy must complement the business strategy and align with the company's culture.
  • Important for budgeting: By knowing how much you pay employees, you can budget accordingly and ensure employees receive what they've been promised.
  • Equal pay: A transparent and equitable pay strategy results in more satisfied employees.

Crafting Your Compensation Strategy: A Step-by-Step Guide

Now that you know what a compensation strategy is, let's discuss how you can go about crafting one for your business.

Step 1: Analyzing your organization's needs

Before you can put pen to paper, you first need to establish your compensation budget.

This budget stipulates how much money you'll allocate to salaries, and how much will be kept aside for the benefits package. This will help you determine the cost of the benefits, like health insurance or family support.

It is crucial to remain realistic when determining the budget while balancing the company's needs. It's nice to have a generous compensation philosophy, but not at the expense of the company's financial resources.

You also need to consider the skill levels you'll require for different job roles. Higher-skilled employees will require more base pay.

Finally, you also need to consider the pay period of both salaries and any bonuses, while considering the company's finances.

Step 2: Market research

As part of the market research, you need to investigate current trends in your industry for salaries, compensations, and benefits.

How much do your competitors pay their staff? What benefits do they offer employees?

Knowing the answers to those questions can help you establish your own offering to remain competitive, retain your staff, and attract new talent.

You can collect market data through the U.S. Bureau of Labor Statistics, or use the following tools:

In some instances, you'll have to look beyond your own industry, too. For example, if you're looking for a content writer for your financial firm, you can't only look at salaries in the financial industry, as content writers can be employed across a wide range of industries.

Step 3: Designing the compensation packages

Now that the research is done, it is time to design the compensation framework.

This includes a couple of steps but usually starts with determining the salary grades based on job titles and duties.

Having this framework in place will define how much each job level is being paid, and ensure it aligns with the skills and experience required. You'll also be able to determine whether you are paying all your employees fairly, without discrimination. This will form the basis of your compensation strategy.

You can have one compensation strategy that covers all the staff, or specific rewards can be offered to certain departments or job titles. The data you gathered during steps 1 and 2 will help determine the best move here.

As part of the design, you also need to determine how much to assign to financial and non-financial incentives.

Financial incentives include base salary and financial bonuses (including annual bonuses and performance-based bonuses).

Non-financial incentives can include:

  • Paid vacation days
  • Health insurance
  • Family support
  • Stock options
  • Flexible work hours
  • Sick leave
  • Remote work
  • Childcare

While crafting the compensation package, you need to constantly keep the company budget in mind.

Step 4: Implementing the compensation strategy

Finally, it is time to implement your newly crafted compensation strategy. This should not be done behind closed doors, but should rather be a transparent process. The strategy must be clearly communicated to all staff members.

Being transparent will help assure all employees that they're being compensated fairly.

During the hiring process, a document with the compensation strategy must be made available for them to review. If you want to attract top talent, it could be useful to also have an abridged public version on your company's website.

Step 5: Regularly reviewing and updating the strategy

It is important to track how your compensation strategy is performing. You'll be able to get a good idea of the impact it is having, and how your employees are responding to it.

For example, if you notice that employee retention has improved, it could be because your strategy is successful.

You also need to remain on top of market trends, and constantly analyze your competitors using some of the methods described above. If you notice your strategy is outdated, it is time to review and update it, while also informing your personnel of any changes.

If you don't do this, you risk losing valuable staff members.

Key Components of a Successful Compensation Strategy

We've briefly touched on the components of a compensation strategy above, but let's dive into these in greater detail.

It is important to note that each strategy will look different, depending on the company culture, business strategy, and industry in which you work.

Competitive salary

As mentioned, the most critical part of your compensation strategy is your employee's base salary. It needs to not only state what the salary is and the different pay ranges but also how it's calculated.

Market rates should be used to guide your salary calculations, as employees will stay at your company (or apply for work) if they feel you're offering a competitive salary.

Benefits and perks

Benefits and perks include financial bonuses (like a profit sharing bonus) as well as non-monetary rewards.

Here are some of the best benefits that attract and retain employees:

  • Paid time off
  • Overtime (usually 1.5x)
  • Profit sharing plan
  • Stock options
  • Referral bonuses
  • Medical insurance (which should include dental and vision)
  • Life insurance
  • Disability insurance
  • Retirement benefits, like a 401(k) plan
  • Financial services and guidance
  • Tuition reimbursement
  • Health savings account
  • Wellness benefits (mental health support; gym memberships)
  • Childcare
  • Family benefits (maternity/paternity leave; adoption support)

There's no one-size-fits-all when it comes to these benefits - how you decide to compensate employees will depend on the employees' needs and company budget.

Performance-based rewards

Performance-based rewards form part of a generous compensation package. These are given to employees when they've reached a certain goal, which is usually part of the company's goals. It shows that the employee helped you achieve success.

Performance bonuses are often cash rewards or stock options.

To implement performance-based rewards, you must have clearly defined criteria that are communicated to your staff so that they know what to do to receive these rewards.

Benefits of an Effective Compensation Strategy

There are several benefits of crafting an effective compensation strategy, including attracting and retaining employees and improving employee engagement.

Attracting top talent

It's really tough to attract the A-players in today's competitive market. To make sure your company stands out and attracts skilled job seekers, you need to offer fair, market-related compensation.

Prospective employees almost always consider the salary and benefits package when considering whether to apply for or accept a job.

When setting up job descriptions, you should include the pay range to better attract the best applicants.

Some companies who have done it right and managed to grab top talent in their industries because of their compensation philosophy include:

  • Google: The tech industry is tough, and Google is able to attract some top players.
  • Costco: They offer incredible health insurance, paid vacation days, and a 401(k) for both part-time and full-time staff.
  • Adobe: Equitable pay, and unusual benefits like pet insurance.
  • Chevron: They pay for tuition or training (if related to your job title).

Retaining valuable employees

Once you attract top talent, you want to make sure these employees stay at your company.

A compensation strategy will ensure employees feel valued. If your package is competitive, employees are less likely to seek work elsewhere. By offering staff additional benefits, like career growth opportunities and training, you are letting them know you value their growth. With an effective compensation strategy, your best employees are then less likely to leave, resulting in lower turnover rates.

Here are three compensation strategy examples of companies with high retention rates:

DuPont:

  • 80% retention rate
  • Total rewards package includes paid time off, financial bonus plan, healthcare, retirement savings plan, tuition assistance, family care, and family leave.

Delta:

  • 85% retention rate
  • Total rewards package includes profit sharing, 401(k), financial planning assistance, health savings account, health insurance, family care, paid time off, and travel perks

The Coca-Cola Company:

  • 80% retention rate
  • Total rewards package includes health insurance, career development, tax-free savings accounts, financial programs, family care, tuition aid, paid vacations

Motivating and engaging employees

Compensation strategies can do a lot for employee motivation. When employees feel valued and appreciated, they are likely to work harder towards company goals.

This is especially seen with performance-based benefits, as an employee will want to up their performance and productivity to receive rewards.

A compensation package can also improve collaboration as a team works together to reach company-wide objectives.

Researchers investigating the impact of compensation on employee performance found that employees typically respond to increased pay and benefits with a positive, productive attitude.

Common Challenges in Developing a Compensation Strategy

Unfortunately, it's not always easy to craft a compensation strategy. Without proper time and research, you are guaranteed to run into some common challenges.

Budget constraints

As the organization's budget is one of the first things to assess when drafting a compensation strategy, it can be one of the biggest challenges. You need to remain in control of your expenses, while still offering staff a competitive package.

You may have to cut down on benefits while maintaining salaries, or, for example, take out a less comprehensive medical plan to save some costs.

One way that you can still compensate employees without losing money is to implement a profit sharing plan. The amount your employees earn will be linked to the profitability of the company, thereby making it a budget-wise compensation strategy.

Let's take a look at one case study by ShareWillow to get a real-world example of how profit sharing can help you stay within budget.

  • The study focused on a dentist who switched from a pro-rata to a new comparability 401(k) profit sharing plan.
  • With the original plan, the dentist contributed as much to her employees ($68,000) as to herself ($50,000).
  • By switching to a new comparability formula, she reduced her annual contribution to employees by $51,000 (paying only $17,000), while still maximizing her own contribution of $50,000.
  • Although she was able to save a lot of money, she was still able to incentivize her employees by offering them part of the company's profits.

Keeping up with market trends

It can be difficult to craft a competitive compensation strategy because you'll always have to stay on top of the latest market trends.

We've listed the tools you can use above (e.g. PayScale). You need to use these tools often to see what the market is doing and ensure you remain competitive. By updating your compensation strategy, you'll ensure you get - and keep - quality employees.

Ensuring fairness and transparency

Pay equity is incredibly important. You can't discriminate against race, gender, or age when calculating employee benefits and salaries.

If equity wasn't a priority before, management will have to develop new thinking (and management) patterns to ensure all employees are being treated fairly.

It is hard to keep everyone happy, which is why compensation strategies must be transparent and communicated to all staff.

Get Your Compensation Strategy Off the Ground With a Free Profit Sharing Template

Are you just starting to develop your compensation strategy, or is it time to review it? It might be time to consider implementing a profit sharing plan as part of your strategy.

ShareWillow offers a free profit sharing template that you can use to get started. Our software takes all the stress of profit sharing off your shoulders, so you can focus on growing your company. From how to calculate a profit sharing bonus to ensuring complete transparency, make sure to reach out to ShareWillow today.

ABOUT THE AUTHOR

Ryan is the founder of ShareWillow. He's passionate about helping businesses create incentive plans that motivate and reward employees. He previously built and sold PhoneWagon.

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