Common types of compensation strategies
What are compensation strategies? They define your method of compensating your employees for their work. Compensation strategies come in different forms and may vary across departments and positions.
Common compensation strategies include:
- Overtime pay
- Variable salary based on experience or longevity
- Employee health care
- Raises and bonuses
- 401(k) or retirement package
- Profit sharing
- Paid time off (sick days, personal days or vacation time)
- Education reimbursement or on-the-job training
- Flexible schedules
- Employee perks (gym membership, on-site childcare or free parking)
Related: How to Create a Time Off Policy
The purpose of compensation strategies
Depending on your company’s goals, you may develop strategies of compensation to reach one or more objectives. Companies might want to reduce turnover or motivate employees to perform better. A good compensation strategy can meet both these goals. Solid compensation plans can improve employee loyalty and encourage people to stay with the company.
The three main goals of a compensation strategy are to:
- Recruit and retain talent
- Align with costs
- Drive company culture and employee engagement
Developing a compensation strategy
Developing a compensation strategy requires research and analysis to stay competitive while keeping compensation affordable. When designing your strategies, follow a few key factors along with examples of compensation strategies in action:
1. Highlight your competitive edge
Attracting and retaining talented employees might mean offering more than a competitive salary. If the competition for talent is high, highlight how your company stands apart from others. Unique perks that job seekers want can make joining your organization a sought-after career move. Get creative in your compensation strategy to increase the level of interest in your business.
Example: A major sporting goods company offers its employees a 40% discount on merchandise and provides management training. Your sporting goods company offers a 50% discount, provides management training and sends its sales force to an annual retreat if they achieve a designated quota. That slight increase over the competition may help sway more people toward your organization.
2. Analyze job duties
When planning a compensation strategy, consider the duties and qualifications required for the job role. Use this information to find out what similar roles are paying and what similar companies offer besides salary. Understanding your industry can give you insight into designing an attractive compensation package with extra perks that align with your business.
Example: A retail store may attract talent with product discounts, while a real estate company might offer a company car. The perks relate to the industry and interest people who work in those roles.
3. Research compensation data
Find out what the competition is doing, and adopt compensation strategies that are more diverse than what others may offer. Use Indeed to search salaries and gather data, including state and national salary averages. You can use this information to develop salary ranges to keep pay competitive while honoring budget requirements.
Don’t forget to look beyond your industry to others where a specific professional might work. A graphic designer can get a job in almost any industry, and some employers in those areas might pay more. To attract graphic designers to your business, you need to consider their other career options, not just your direct competition, to ensure your compensation is attractive.
Example: While evaluating the salary for your staff accountant, you search Indeed and find that what you offer is $5,000 less than the average. This might lead you to bump up your salary range for that job description.
4. Consider your company culture
Look at your overall values and company culture as a guide for determining the details of your compensation package. Choose perks that align with those values. If your employees chose to work for a company with a specific culture, they likely agree with those values. Giving them related compensation can help keep them happy.
Example: You run a business that focuses on healthy lifestyles through nutrition and exercise. Perks you might offer include a free gym membership or on-site gym, nutritionist consultations, company-supported wellness challenges and healthy snacks in the breakroom.
5. Set a budget
Know how much can you spend, and perform periodic audits to make sure you’re in line with market trends and staying competitive. Your budget factors in all costs including payroll, taxes and existing benefits. Determine what you can afford to offer by performing a few calculations.
Example: You have a budget of $400,000 for compensation for your small business. Determine how much goes to salary and how you can disperse the remainder. If 85% goes to salary, you might allocate the remaining 15% by spending 8% for health care, 3% for PTO and 3% for retirement.
6. Review compliance concerns
The Fair Labor Standards Act establishes the federal minimum wage and requirements for overtime pay, equal pay, record keeping and other important factors. It also covers compensation for employees who receive tips. Many states have higher minimum wage rates, which you need to follow. Review all relevant labor laws on the state and federal levels before establishing your wages.
Example: A retail store in Alaska is hiring entry-level sales clerks. The minimum wage in Alaska is $10.34 per hour, so the starting wage for these new employees needs to be at least that amount. The state law also specifies that employers with four or more employees must provide premium overtime pay for hours worked beyond eight per day and 40 per week. The store’s compensation plan should specify these overtime terms.
7. Choose rewards
Your compensation package may be the same across the entire company, or you may offer specific rewards based on departments or seniority. Once you’ve gathered the data from the previous steps, decide how and where you’ll divide your compensation. Consider holding biannual or annual reviews where employees’ performance metrics can qualify them for raises or bonuses.
- You offer retirement packages for older or more experienced employees.
- You may require employees to stay with the company for a certain amount of time before earning bonuses.
- You may stipulate that employees qualify for 2 weeks of paid vacation after 6 months of employment, 3 weeks vacation after 2 years and 4 weeks after 5 years.
8. Write it down
Explain any rules around compensation and add them to the employee manual. While you don’t have to identify details of individual compensation plans, be specific when citing the number of sick days allowed, vacation limitations and eligibility requirements. If you’ve made sweeping changes, consider calling a meeting to inform employees of the new elements.
Compensation strategy FAQs
Common questions about building a compensation strategy include:
What are key components of an effective compensation strategy?
Effective compensation strategies are built with certain parameters. When building your compensation strategy, remember the following ideals:
- Be specific: Outline the goals and objectives of your compensation strategy. Use SMART goals to list each one and map how you will achieve them.
- Be accurate: Perform accurate research and present informed data. Stay up to date on what the competition is doing and remember to check regularly to stay aware of market trends and fluctuations.
- Be clear: Think of the questions employees might ask about compensation and answer them in your strategy. Be transparent with your communication and promptly inform employees if you’ve made changes that affect them.
- Be diligent: Build your package then reevaluate regularly. Know what the competition is doing and strive to stay competitive in changing markets.
How can you evaluate your current compensation?
Compare your package to similar businesses to see how your company stacks up. Ask for input from current employees through anonymous surveys, individual meetings or town hall discussions.
How often should you reevaluate your plan?
A yearly review of your compensation strategy is ideal. If your industry changes quickly, consider more frequent reviews to ensure you’re remaining competitive.