How (and how much) you pay your employees for the work they do is among the most crucial elements of your company culture. You won't retain employees for long if they aren't equitably compensated.
In this article, we'll break down everything you need to know about creating a compensation strategy. And we'll use our compensation philosophy as an example.
What is a compensation strategy?
A compensation strategy is your organization's overall approach to pay and benefits. This includes setting salary ranges, creating your commission structure, defining methods for raises and bonuses, and designing your employee benefits package. Essentially, it's how your company handles total compensation.
At the broadest level, there are two categories of total comp: direct and indirect compensation.
- Direct compensation refers to employees' take-home cash pay. This includes an employee's base salary, extra pay for holidays or extra shifts, and performance-based rewards. When people hear "compensation," they generally think of direct (monetary) compensation.
- Indirect compensation is all the other rewards, perks, and benefits employees receive. This includes health insurance, retirement plans, stock options, paid time off, parental leave, tuition reimbursement, and just about anything else you can think of. Basically, it's non-monetary compensation.
Creating the perfect mix of direct and indirect compensation is the key to getting total comp right. How you balance these two categories will depend on your company's goals, values, and budget (as well as employee preferences and market rates). Every company's is different.
That's the question your compensation strategy answers.
5 steps to create a compensation plan
Compensation strategies vary wildly, depending on...
- Your company's goals and values
- The industry you operate in (some industries necessitate certain fringe benefits)
- What you can afford to offer
- Employee expectations
- Market data
That being said, developing a compensation strategy always follows these five steps:
1. Salary is the first step.
There's no way around it. You have to pay your employees their market value to ensure a baseline level of satisfaction. Salary is ultimately the most critical factor in everyone's decision to work for a company (especially in the age of continuous cost of living increases).
A 2023 Washington Post x Ipsos poll asked 1,148 workers aged 18-64 what their most significant factor in a job was. 45% ranked pay (salary/wages) as the most critical component — a significant proportion, considering the second most influential factor (having a good boss) was chosen by just 14% of respondents.
Salary includes:
- Base pay (annual salary or hourly pay)
- Payment frequency (monthly, bi-monthly, every two Fridays)
- Scheduled or structured pay raises
- Salary grades or range details (how far can someone go in your organization?)
- Overtime pay (this is usually mandated by law)
With base pay, fairness is the ultimate goal. At Compt, we don't negotiate salaries. Everyone at the same level gets paid the same base.
Why? Historically, this has been a huge contributor to the pay gap in the US. Women and POC negotiate for higher salaries at statistically lower levels. Even if they didn't, negotiations could result in discrimination on other grounds within your organization. To ensure pay equity, it's better to eliminate them altogether (with the exception, of course, for high-level exec roles, which there would only be one of).
2. Then, offer incentives…
Eventually, employees will expect to be fairly compensated for their loyalty and performance. That doesn't mean you have to pay them far above market rates or take unsustainable measures to retain them. Part of building a sustainable and effective compensation strategy is offering incentive pay.
During times of financial uncertainty, like high inflation or a global recession, it's crucial to support employees financially. Bonuses and incentives can help alleviate uncertainty while providing employers with flexibility in a rapidly changing market.
A few common forms of incentive pay include:
- Bonuses
- Commissions
- Non-cash rewards (i.e., vacations, gifts)
- Stock options or shares
- Profit sharing
Some companies choose to structure their employee compensation strategy with incentive pay as the primary motivator. Sales roles are the perfect example of this — SDRs typically have a low base salary but large commission potential if they meet or exceed quotas.
Incentive pay is challenging to get right. When it comes to bonuses and commissions, make sure you're balancing individual results with team/employee performance (to avoid pitting colleagues against one another).
3. Find the benefits that matter to employees.
Employees are 70% more likely to stick with a company when they're happy with the benefits package. Your benefits strategy should revolve around making the largest possible positive impact on the largest percentage of your workforce.
Your first step is running an employee benefits survey, which gives you the opportunity to ask employees which benefits matter most (and which don't). You'll find out whether your company's current package is meeting their needs and how much employees value each benefit.
When creating a benefits strategy, keep these categories in mind:
- Legally required benefits: Social Security, Medicare, unemployment insurance, workers' compensation, family and medical leave under FMLA, health insurance under ACA
- Table stakes (you have to offer these to compete): Employer-sponsored health insurance, paid vacation, retirement plans, dental/vision insurance
- Financial benefits: rewards and recognition programs, bonuses/incentives (note: while bonuses may fall under 'incentive pay,' they typically have a financial benefit connotation)
- Lifestyle benefits: Gym memberships, childcare, commuter assistance, paid parental leave, health and wellness stipends, and all the other things that make people's day-to-day better
- Personal and professional development benefits: Tuition reimbursement, learning and
- development programs, mentorship opportunities, leadership training
- Industry-specific benefits: For example, a pet toy company would definitely offer pet care stipends, even though most companies would consider them a nice-to-have.
The easiest way to offer these is to tie your employee benefits/bonus program to a perk stipend. That way, your employees can use your additional compensation how they want, when they want. And everyone's included!
***For an idea of which benefits to offer beyond table stakes, check out our article on our 20 favorite unique employee benefits.
4. Don't sleep on flexibility.
In today's workforce, flexibility is a massive draw. Employees have, personal responsibilities, hobbies, demanding family lives they need to balance.
Depending on the nature of work and what job allows, there are a few ways you can be more flexible:
- Remote work (best)
- Hybrid model (second best)
- Flexible schedules
- Unlimited PTO
- Job sharing
- Part-time work/returnships
Flexibility is sometimes tied closely to results-based compensation. In roles where it's easier to measure output objectively (i.e., sales), it's easier to justify flexible work arrangements because the results are clear.
Certain roles also permit more flexibility than others by nature. Data analytics, for instance, is commonly remote, even at companies requiring on-site presence. IT teams can easily work from home if they have the right tools to do so.
To develop a competitive compensation strategy, you and your team will have to set work flexibility policies with careful consideration for the nature of each role. It's a balancing act that requires you to weigh the needs, wants, and limitations of both your employees and company.
5. Be inclusive.
80% of employees say they want to work for inclusive companies, and their first impression of inclusivity comes from job descriptions. You have to offer inclusive employee benefits and ensure equal pay for equal work.
Here are some ways to practice inclusivity in your compensation strategy:
- Mandate diverse interview panels
- Be transparent about pay and promotion criteria from the beginning
- Have a zero-tolerance policy for discrimination and harassment
- Switch regular employee benefits (like paid maternity leave) to gender-agnostic ones (like paid parental leave)
- Offer benefits that cater to the needs of different demographics (like fertility treatments and flexible paid holidays)
- Standardize base pay for roles with more than one team member (and avoid salary negotiations)
- Create a milestone-based structure for raises and promotions that everyone in the department follows
- Train managers to recognize and address unconscious bias
You might not realize part of your compensation package excludes certain groups. On an ongoing basis, you'll want to survey your employees and monitor KPIs like employee engagement and benefits enrollment to ensure your compensation package is truly inclusive.
Determining your compensation budget
A lot of companies increase headcount to meet their growing demands, then consider how much they can afford to offer. To develop a strong compensation strategy, you need the opposite approach.
- Compensation strategy first
- Hiring (based on what you can afford) second
By hiring employees before creating a compensation philosophy you can stand by, you'll ultimately fall short. You'll make offers you can't sustain, employee satisfaction will go way down, and it will be harder to rearrange your strategy around the expectations you've set. Plus, you'll find it wayyy harder to fill your open roles when job prospects know they can get something better elsewhere.
So...
- Start with the market rate for the role (or what you currently pay employees in the role).
- If applicable. Set your commission structure, aiming for 60:40 (base pay:expected commission) or on-target earnings at 20% of a rep's annual quota.
- Figure out which benefits you need to offer.
- Pinpoint the fringe benefits your current and target employees care about most.
- Calculate how much it costs to offer your benefits package on a per-employee basis.
- Then, based on your ability to pay employees equitably and competitively, calculate how many you can afford to bring on.
- Only bring on what you can afford.
Trust us... This will help you win the talent game by a landslide.
Compensation and company culture have a bidirectional relationship.
Company culture represents the intrinsic values, beliefs, behaviors, and shared vision your organization embodies. It's the collective "personality" that affects how employees interact with each other, with clients, and how they perceive their roles.
Your compensation strategy involves how you pay your employees, financially and otherwise. It's a reflection of what your company values and how it wants to motivate and retain its workforce.
- The way you compensate your employees should mirror and reinforce your organizational culture. If you value teamwork and collaboration, your compensation strategy should include spot bonuses and peer-to-peer recognition.
- At the same time, your chosen compensation strategy influences your company's culture. If you reward individual performance, you'll foster an individualistic, competitive atmosphere. Overdone, this causes employees to feel isolated, afraid to ask for help, and focused solely on their own achievements.
Realistically, you won't get this right on the first go. Compensation packages come with hiccups and unintended consequences. Or, you may find your compensation strategy doesn't mesh well with the business direction you're headed in.
The point is you can use your compensation strategy to reinforce your company's values and guide your workforce in the direction you want. But you have to be prepared to take reactionary measures when it doesn't work out in theory the same way it does in practice. And, of course, build flexibility and inclusivity into it from the get-go to avoid the obvious pitfalls.
When hiring, follow the data that benefits your employees.
Market data is obviously a major component of setting pay ranges. But, even with data, the ideal pay system for the current job market is shrouded in ambiguity.
That's why, rather than rely too heavily on it, take all the advice and follow the steps we've outlined here when you're hiring new employees and revisiting your compensation strategy for new ones.
- Be clear with your pay range. If you're talking with a candidate, let them know upfront your salary range is between $X,000 and $Y,000 base (plus equity, benefits, time off, etc.) If they aren't happy with that, let them know you'll keep them warm for potential increases in the future.
- Set your range using data. At Compt, our compensation philosophy is to pay people market rates (as compared to other companies of our size) for a role. We start with data (which, by the way, goes beyond a "average Position X salary" Google search).
- Data isn't always right. If you notice one (or multiple) of your candidates brings up data you weren't expecting, talk to your team before you write them off.
- Don't penalize candidates for working against their best interests. If a candidate presents a data-oriented case for their salary, go with your predetermined salary range if their request falls below it.
Compt makes it easy to offer employee stipends, expense reimbursements, and rewards/recognition in one platform. You can test out different compensation strategies, offer new benefits to employees (like health and wellness stipends), and give employees the freedom to choose how they spend their total comp. We'll show you how it works.