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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.
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:
Now that you know what a compensation strategy is, let's discuss how you can go about crafting one for your business.
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.
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.
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:
While crafting the compensation package, you need to constantly keep the company budget in mind.
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.
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.
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.
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 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:
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 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.
There are several benefits of crafting an effective compensation strategy, including attracting and retaining employees and improving employee engagement.
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:
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:
Delta:
The Coca-Cola Company:
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.
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.
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.
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.
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.
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.
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