Take Our HR Skills Assessment to Get a Custom Learning Plan

Compensation Strategy

A compensation strategy is how your company approaches employee compensation. When developing a compensation strategy, it’s important to consider how competitors compensate their employees and where you want your organization to sit in the competitive field. A strong compensation strategy is required if you want to recruit, attract and retain top talent.

Continue reading to learn what a compensation strategy is, why one is important, types of compensation strategies and how to develop a compensation strategy for your company.

What Is a Compensation Strategy?

A compensation strategy is your company’s approach to compensating employees in terms of pay and benefits. A strong compensation strategy is required in order to attract and retain people who have the appropriate knowledge, skills, aptitudes, competencies and attitudes to get the job done.

Compensation strategy has to reinforce the culture, climate and behavior needed for your company to be successful.

Why Is Having a Compensation Strategy Important?

Your compensation strategy sets your position in the market and can impact your employer brand. A compensation strategy is important for your company to:

  • Attract top talent. An enticing compensation strategy can help you establish your company’s position as the employer of choice within your market.
  • Boost morale. A sound compensation strategy leaves your employees feeling valued and appreciated as an important part of the company.
  • Increase productivity. Providing an employee-friendly compensation package can help incentivize employees to give their best and increase their level of productivity.
  • Retain your employees. Offering a generous compensation package can help keep your employees happy and convince them to remain with your company.

Three General Compensation Strategies To Consider

There are three main compensation strategies to consider when setting salary rates: leading, lagging and meeting the market.

Leading

A leading compensation strategy aggressively sets salary rates above the market. By paying employees more than the market rate, it’s easier to attract qualified talent and retain your best employees. You also set yourself apart from other organizations and promote the perception that your company is the employer of choice.

In order to go with a leading compensation strategy, you have to have the financial health to pay employees higher salaries.

Lagging

A lagging compensation strategy is when you set salary rates below the market rate. There are several reasons to pay employees below the established market rate. Smaller organizations don’t have the financial resources to devote to salaries. Others have nonmonetary characteristics to recruit talent, like nonprofits and charitable organizations.

Opting for a lagging strategy can help lower costs and you can use the money saved to offer benefits and incentives. Paying salaries below the market rate will make it difficult to attract good employees and well-trained employees may leave for higher paying competitors.

Meeting the Market

Meeting the market is a compensation strategy where you pay employees the market rate. In this strategy, employees are paid fairly and expected to perform well.

As the most common compensation strategy, meeting the market ensures that your pay and costs match the competition. In strong financial environments, you can share bonuses and short-term incentives with employees. Though employees are paid well, this strategy may make it hard to keep your best employees as they are recruited by companies offering more money.

How To Develop Your Compensation Strategy

There are several factors to consider when you develop a compensation strategy and you want to make sure that you create the best plan for your organization. Following these steps can help you develop a sound compensation strategy for your company.

1. Determine Your Compensation Philosophy

Whether creating a strategy from scratch or revamping an existing one, you should first determine what type of compensation philosophy is best for your company.

Meet with your executive team or senior management and determine whether you want to lead the market, lag the market or meet the market.

2. Assess Your Current Compensation Strategy

Once you know what your philosophy is, assess your current compensation strategy. Identify whether your current strategy is aligned with the compensation philosophy determined by management.

If you don’t have a compensation strategy in place, you won’t need to complete this step.

3. Evaluate Jobs and Descriptions

Before diving into data and creating new pay scales, evaluate your existing jobs and descriptions. At the minimum, you want to make sure that all job descriptions are updated with the most accurate information. You can complete a full job evaluation if necessary.

4. Develop a Plan for Reviewing Market Data

To compare your salaries with the competition, you’ll have to review market data. If your company is larger, you may need to bring in assistance to help your HR department complete the review.

5. Review Salary Surveys

After you’ve developed a plan, it’s time to dive into salary surveys and other data. Using published salary surveys, you can find the median salary for almost any position.

You can access published salary surveys from local HR associations, industry associations, The Society for Human Resource Management or other places.

6. Establish a Pay System

When you set your pay scale, you need to make sure it fits your organizational needs and distinguish between different levels of jobs, providing room for salary growth. Your pay system will be based on the compensation philosophy you choose, driving how the midpoints are set and how wide pay grades will be.

There are several types of pay systems that you can choose from, including:

  • Pay grade levels
  • Delayering and banding
  • Skill-based pay
  • Competency-based pay
  • Broadbanding

7. Match Existing Job Titles to Market Study Titles

Your existing job titles won’t match up one-to-one with titles in market studies. Compare the responsibilities and skills required for each position, matching them with the closest title from the information you found in market surveys.

Surveys won’t provide data for all of your positions either — ideally, you will gather data for half of them. You can use positions that have data from surveys as benchmark positions, basing market rates for positions that didn’t have survey data off of the benchmark.

8. Match Jobs to Salary Grades

Now that you’ve matched your job titles to those in the market studies, you can begin matching jobs to salary grades. Using the data you gathered from surveys and the salary grades in your pay system, match each position to the appropriate range.

9. Address Financial Implications of the New Compensation Strategy

When you create or revamp your compensation strategy, some employee’s current salaries will be above the new salary range (known as red circled) or below the new range (known as green circled).

Typically, it’s recommended to adjust green-circled employees’ salaries to the updated range called for in the new grades. Red-circled employees should not be reduced to the new maximum, but their salary should be frozen at its current amount.

10. Ensure Your Compensation Strategy Is Compliant

After putting in the work to create a compensation strategy, you want to make sure that every component is compliant. Review the Fair Labor Standards Act (FLSA) and any other state or local legislation that may affect your compensation strategy.

11. Get Approval From Executive Stakeholders

Before you can officially communicate your strategy, you need to get final approval from executive stakeholders. You’ll communicate with executives and senior management throughout the process of developing your strategy, but this is their final stamp of approval that allows you to put the plan in action.

12. Communicate Your Plan to the Company

When your new compensation plan is put in place, all of your employees should learn about it at the same time. Host an all-hands meeting to launch the plan and follow up with emails, social media posts and other mediums you use to communicate with employees. Most importantly, make sure you have accessible resources for employees to refer to.

One of the biggest problems for employees is a lack of transparency in terms of compensation strategy. Outside of the all-hands meeting, each employee should receive a memo with their current rate, the new rate, the effective date of the increase, which pay period will reflect the increase and the reasons for their pay adjustment.

Questions You’ve Asked Us About Compensation Strategies

How will I know if our strategy is successful?
You can use different measurements to determine the return on investment (ROI) of your compensation strategies, such as employee productivity, turnover rate and performance of business goals. You can also leverage your employees for input by creating surveys that assess their level of content with the compensation strategy.
Who is responsible for developing the compensation strategy?
The person responsible for developing the compensation strategy depends on several factors. Small businesses may not have an extended HR team and develop their own compensation strategy. Larger organizations often have the HR department handle compensation strategy, collaborating with senior-level management to make sure that they are aligned with the strategy.
Eddy Logo

Eddy

Eddy is the all-in-one HR tool built with you in mind. The robust features and ease of use will benefit your company both inside and outside your HR team.

Want to contribute to our HR Encyclopedia?

Posts You Might Like

The Top 4 Reasons to Change Your Payroll Provider

The Top 4 Reasons to Change Your Payroll Provider

When it comes to choosing a payroll provider, there is so much more than just running payroll. Unfortunately, many business owners rush to choose the provider without considering many alternatives. Learn more about the four reasons you should consider making a change.

Read More »
What Are Fringe Benefits

What Are Fringe Benefits?

Employee compensation can take many different forms. Most people think of it as the money that ends up in your bank account at the end of a pay period. But for many of us, the fringe benefits we enjoy from our employer play a significant role in our compensation package.

Read More »

Want to join our network of contributing HR professionals?

Scroll to Top

Submit a Question