Common types of compensation strategies
Compensation strategies come in many different forms and may vary across departments and positions. Some companies may offer one or more benefits in their compensation package, some of which may offset a smaller salary. Common compensation strategies include:
- Overtime pay
- Variable salary based on experience or longevity
- Employee healthcare
- 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 compensation strategies to reach one or more objectives. Companies might want to reduce turnover or motivate employees to perform better, and a good compensation strategy can meet both those 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. Follow a few key factors when designing your strategies:
- Highlight your competitive edge
- Analyze duties
- Research compensation data
- Set a budget
- Choose rewards
- Write it down
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 the others. 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.
2. Analyze 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 an insight into designing an attractive compensation package.
Example: A retail store may attract talent with product discounts, while a real estate company might offer a company car.
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.
4. 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 $4000 for compensation. Determine how much goes to salary and how you will disperse the remainder. If 85% goes to salary, you might allocate the remaining 15% by spending 8% for healthcare, 3% for PTO and 3% for retirement.
5. Choose rewards
Your compensation package may be the same across the entire company, or you may offer different rewards for different departments or seniority. Once you’ve gathered the data from the previous steps, decide how and where you will divide your compensation. Consider holding biannual or annual reviews where employees can earn performance metrics to qualify for raises or bonuses.
- You offer a vacation package for new or younger employees and retirement packages for older or more experienced employees.
- You may require employees to stay with the company a certain amount of time before earning bonuses.
- You may stipulate that employees qualify for two weeks of paid vacation after six months of employment, three weeks vacation after two years and four weeks after five years.
6. 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 changes.
Compensation Strategy FAQ
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 in your communication and promptly inform employees if you have 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.