Attractive compensation packages are crucial for attracting, motivating, and retaining a top-notch workforce. But they are also expenses that business leaders must balance against other priorities. So, how can you develop a compensation strategy that will support your organization’s ability to grow, scale, and achieve its goals while managing the budget?
As a human resource (HR) executive and consultant at The CEO’s Right Hand, I specialize in designing thoughtful reward and compensation strategies tailored to the unique needs of a business. So, in the following post, I will explain what a compensation strategy is, its purpose, and the steps involved in designing one.
What is a Compensation Strategy?
A compensation strategy is a documented approach for paying employees in a way that will attract, motivate, and retain them while driving company performance and culture. An ideal strategy essentially marries your organization’s requirements with the needs of prospective employees, aligning each party’s desire for performance. The goal is to create a symbiotic relationship whereby the pay encourages productivity, fuels business success, and creates a fulfilling and motivating workplace environment. Of course, this will differ based on your company’s industry, locations, and desired culture.
One could liken a compensation strategy to a pricing strategy in that you strive to understand the constraints of the business, the competitive environment, and your customer’s needs before deciding how to position your company and products.
Why Do Companies Need Compensation Strategies?
The main reason for developing a compensation strategy is financial planning. People are typically the biggest expense for a company, rivaled only by marketing in industries that require substantial advertising. Therefore, before hiring, you must perform high-level budgeting to clarify what you can afford.
The other purpose of a compensation strategy is to create alignment within your organization about how you plan to attract and retain employees. Each labor market (aka job market) is unique, so you must determine the best way to acquire and manage talent, given the nuances and constraints of your industry, locations, and business model.
For example, suppose you are in the hospitality industry. Depending on where your business operates, there might be national and regional rules and regulations and perhaps a worker’s union impacting your business. Those factors will affect how you hire, train, and treat your workforce.
How to Develop a Compensation Strategy
So, what does it take to build a compensation strategy? Well, as you might imagine, it is both an art and a science, with details that vary from one company to the next. So, let’s go through the steps together so you can understand the basics.
1. Clarify the Company’s Goals and Objectives
The first step in creating a compensation strategy is to develop a clear understanding of the overall business strategy. In other words, what (exactly) does the company hope to accomplish in the next three to five years? What are the milestones, and just as importantly, how does it intend to fund its initiatives?
Understanding what is coming down the line and the expected timeline is vital to this process as it helps you assess the urgency of various plans and what to prioritize.
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2. Craft a People Strategy to Match the Business Strategy
Once you know what lies ahead for the business, create a document where you can describe what kind of company this is, the type of work you must accomplish, and the roles to fill. The goal here is to capture what you know about the size, scale, and scope of the organization you wish to build. That will help you develop the perspective necessary to perform steps three and four.
For example, will this be a professional services company with a leader or two, a dozen consultants, a small marketing and sales team, and administrative support? Or are you looking to staff a chain of supermarkets with 500 grocers, baggers, and store managers, in addition to centralized operations, finance, human resources, and marketing? Do you need people in specific locations, or is remote work possible for some roles?
3. Establish the Foundational Architecture
Once you are clear on the information above, you will be ready to build the job architecture of the company. In this step, you think through the entire organization of the future, department by department, asking yourself questions like the following.
- What job families will exist within this company and each department?
A job family is a functional group of roles doing similar work. For example, the most common job families are Finance, Marketing, Sales, Operations, Legal, and Human Resources. - How many job levels will there be across the organization?
A job level is a step within a group of functionally related positions employees might move through during their careers. For instance, an HR analyst may become an HR manager, director, and then the head of HR. - How many separate roles do we need to fill within each job family, and at what level?
- What will be the titles of those roles?
- What percentage of our budget should we allocate to each job family? And what will the salary range be at each level?
Although it may sound similar, job architecture goes beyond organizational charts. Organizational charts are more about what your company is like today, and the connection between existing positions, whereas architecture looks to the future and what you intend to build.
4. Conduct a Competitive Market Analysis
In this step, you gather competitive market data, compare it to the information collected in steps one through three, and perform an analysis. There are many possible data sources, but most fit into one of the following categories, listed from the most expensive (and most reliable) to the least expensive (and, you guessed it, least reliable):
- Third-Party Aggregators
These companies run comprehensive salary surveys and market analysis studies, then scrutinize the data to provide insights that allow HR strategists to compare apples-to-apples. Data includes job descriptions, compensation, and benefits details by industry, company size, and location. This level of information is trustworthy but pricey. - Self-Reported Data
Websites like Glassdoor or Fairygodboss invite people to report their salaries and experiences independently, typically in exchange for access to the data. Mining this information can help companies gauge the strength of their employer brand, but you do have to take it with a grain of salt. Since the data is self-reported, its accuracy can be suspect, and you cannot break it down well enough to perform a proper comparison. - Pay Transparency Data
With new laws requiring salary ranges in job postings, company-reported pay-range data is now available. However, this is not a requirement in every location, and some employers submit broad ranges, so while the information is interesting, it is currently unreliable.
The purpose of this step is to understand the labor cost for each role. The cost of labor is vastly different from one location to the next, even within the same country. So, comparing what your company wants to the pay and benefit expectations of the market can help you decide where you need to be flexible.
5. Develop a Compensation Philosophy
Next, consider your overall compensation philosophy. In other words, given your existing company culture, size, maturity, strengths, weaknesses, and budget, what approach to compensating will help you achieve your vision?
For example, will you choose one of the following strategies for setting salaries, or will you mix and match?
- Lead – Pay top dollar to attract top talent, competing with companies like Apple and Google.
- Lag – Pay salaries comparable to a year ago and make up the difference with other incentives.
- Meet the Market – Pay people in the middle of expected salary ranges.
Any of these strategies can work if you are creative. For instance, common lag compensation strategy examples include retail jobs, which typically pay a low hourly rate but compensate with perks, like employee discounts or college tuition reimbursement, that appeal to certain people.
But we also see this occurring in other industries. For example, we know of a company with an excellent reputation in the professional services space that hires inexperienced college graduates and offers on-the-job training. The organization knows people will move on within a few years, but the trade-off is worth it to them, and employees leave happy because they have valuable experience on their resumes.
Aside from salary, your compensation philosophy should also highlight the company norms and values. For example, how do you care for your employees’ needs? What behaviors are important to you? How do you want to be perceived as an employer and organization?
6. Create an Integrated Total Rewards Approach
At this point, you will be ready to explore the financial and non-financial compensation options that will best support your employees. And this is where it gets fun. We look at compensation, benefits, training and development, career progression, long-term incentives, etc. Whatever it takes to address employee needs so that they feel cared for, valued, and empowered to do their jobs. That is how you attract and retain top performers and keep them engaged while minding your budget.
Companies are incredibly imaginative when building complete pay systems because employees who feel cared for tend to stick around. So, for example, in addition to monetary rewards, such as base salary, overtime pay, benefits, and variable pay (like bonuses or stock grants), we’re seeing compensation plans that include the following and more:
- Unlimited PTO
- Extended family leave
- 4-day workweeks and flexible schedules
- Tuition or college loan reimbursement
- Health club and fitness app memberships
- Public transportation reimbursement
- Childcare credits or on-site childcare options
- College and career guidance services
- Support for transgender people and their families
- Support for fertility treatments and adoptions
- Abortion care
- Volunteer time and donation matching
- Employee recognition programs
Companies offer these benefits and services to meet the needs of their employees but also to take a stand. In doing so, they influence their corporate culture and become an employer of choice for a particular segment of the population that finds what they offer valuable.
7. Document Your Compensation Strategy and Communication Plan
In today’s competitive hiring environment, current and potential employees expect transparency. So, once you have done all this fabulous work and have the support of your organization’s leaders, document your strategy and develop a communication plan.
Communication can (and will) flow from various sources. That includes internal and external facing digital and printed materials, your CEO, individual managers, human resources representatives, and even employees and partners who share their stories as they move about the world. So, the tricky part about communication is ensuring that all these sources are informed and aligned. Therefore, it is vital to think this through and educate your managers to ensure that current and prospective employees deeply and accurately understand the value of working with your organization.
It can help to think about communication through the lens of the talent life cycle. In other words, ask yourself questions like the following.
- What information do recruiters and prospective employees get during the hiring phase? Many companies share their philosophies on their websites. Do you wish to do the same? Here are a couple of examples to consider:
- How do we talk about compensation plans so that people understand everything we do that results in dollars in their pockets (401k contributions, benefits, etc.)?
- How can we ensure that employees get the information they need when they need it? Certain benefits and perks will appeal to employees at specific times of their lives, so how can we make sure they know we have their backs when the time comes?
- How will we educate and train our managers to share information with compassion?
8. Execute Your Strategy, Track the Results, and Evolve
Perhaps the best part about developing a compensation strategy is that once you have done this work, it becomes much easier to execute your plans, track your progress, and communicate with stakeholders. It becomes a tool for gaining and maintaining alignment with your finance team and departmental leaders as the business evolves.
For example, a year into hiring, you can compare your progress to the architecture you built in step three. That will inevitably fuel discussions about what is and is not working about your pay structure and career progression plans so you can rebalance.
It is also essential to know that this is not a one-and-done process. Like any other strategy, you must revisit these plans periodically to address changes to your business model, people strategy, industry regulations, or labor costs. For instance, many organizations make this an annual exercise and use it as an opportunity to adjust salary ranges ahead of their employee review cycle.
The Bottom Line
Building a comprehensive compensation strategy is not easy. But I promise you will be glad you did because it is essential for growing and scaling a successful company. I recommend asking your HR team if they have the skills and experience to do this in-house or consider hiring a C-level fractional human resource service to guide you. And, if you wish to learn more about how an organization’s structure can evolve, please download our guide on building a winning team.
