We often hear of companies with a great workplace culture that fall short in their pay packages. A solid compensation strategy will ensure that your culture and benefits aren’t at odds.

Regardless of your budget, industry and pay market position, you should be able to roll out fair pay packages with the right compensation management software to attract top talent. This article tells you how to design a foolproof strategy.

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Article Roadmap

• What Is Compensation Strategy?
• Why Do You Need a Strategy?
• Types
• Components
• Designing a Compensation Strategy
• Company Culture and Compensation
• Using Technology to Strategize Compensation
• Next Steps

What Is Compensation Strategy?

A compensation strategy is a set of plans and policies that outlines a company’s approach to reimbursing its employees. If a compensation philosophy answers “why” employees receive payments and benefits, then a compensation strategy tells us “how” they receive it.

Strategizing pay and benefits is part of the overall compensation management. It outlines:

• How a company intends to determine pay ranges for different roles
• How HR professionals calculate incentives
• The company’s position in the job market and its competitive edge
• The organizational budget and its allotments
• The company’s business goals and the culture it wishes to foment

If you want to know why companies strategize compensation, its various types and how to design a winning strategy, you’re in the right place.

Why Do You Need a Strategy?

The workforce is flush with talent. Amidst all the competition to hire the cream of the crop, your compensation strategy can attract top talent and even invite applications from talent pools that are global, diverse and an overall asset. Let’s see why these strategies are essential.

Enhances Talent Acquisition

The 2022 survey report titled Better Workplaces on a Budget found that inadequate compensation was among the top three reasons for 60% of employees quitting a workplace.

Your prospective hires will be scanning the compensation details of your job advert, so why not make an attractive offer? You’re not wrong for thinking so, but an oblique mention of the total compensation doesn’t cut it.

To attract top talent, you must communicate about your efforts to ensure that your whole incentives package — base pay, variable compensation, health benefits, life insurance, retirement plan and paid time off are competitive.

You’re essentially writing about your approach to pay and benefit, thus strategizing compensation.

Improves Employee Retention

As firms combat post-pandemic turnover, you don’t want your employees quitting because of compensation. For firms with additional funds, it’s easy to hike up the packages, but what if you’re on a tight budget?

A compensation strategy helps you out by:

Increasing pay transparency: you can provide a simple, tailored document that covers all of the components of total compensation to increase employee learning.

This document should include things employees don’t often consider “compensation,” such as the company’s contribution to healthcare costs. Help employees focus on “total rewards” rather than just take-home income.

Maximizing non-monetary rewards: startups and NGOs offer a wealth of benefits like tuition reimbursement, healthcare coupons and flexible working to supplement their pay packages.

Establishes Budgeting Frameworks

A strong compensation strategy helps you balance employee pay and business finances. How much you allot to your recruitment efforts, remuneration and 401(k) benefits speaks volumes about your management.

Develop your pay structure in a financially viable way. This step entails balancing the need for competitive compensation with the organization’s budget and financial objectives.

Enables Workplace Equity

With the workforce diversifying every day, internal and external equity should be the end goal of compensation. Leverage people analytics like demographics, location, country-wise pay grades, backgrounds and expertise to structure your packages.

Proactive equity analyses enable you to find potential pay discrepancies in your organization, allowing you to make improvements and reduce pay gaps.

Data visualizations and pay equity reports are critical components of your compensation plan. Compensation planning tools that include these modules make it easier to meet your payment targets.

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Types

Companies float their compensation strategies based on their position in the market. You have to ascertain whether the goal is to retain employees or attract new hires. There are three ways to position yourself in the market.

Meeting the Market

Employers meet the market rate by paying employees competitively as part of the most common compensation strategy. Meeting the market entails researching and averaging your workforce’s pay to match the market median. Companies follow the market rate and may even incentivize employees’ basic pay.

Advantages

• You’ll know you’re adequately compensating your staff for their knowledge and competence in their specific sector and job.
• Your organization will stay within the market, but you aren’t paying top dollar.

Disadvantages

• Employees in competitive areas, such as developers, expect to be paid well. As a result, you may have difficulty locating the talent you seek.
• Other incentives or perks that keep your staff engaged may be out of your budget.

Leading

When you pay your staff more than the established market rate, your approach is a lead-the-market strategy. To increase hiring and retention, you aggressively set compensation rates higher than your competitors.

Advantages

• Increased pay encourages staff to stay with the company. Your employees realize they won’t receive a better income elsewhere, which would probably persuade them to remain with your business.
• Employees will feel your organization values them more if they receive more pay than the going rate.
• When workers receive fair payments, they’re more motivated to work hard.

Disadvantages

• Earning a wage over the market rate comes with added pressure to perform well, even though the increase in productivity is an advantage.
• The financial risk requires you to keep a close eye on both employee and financial performance. Any errors in judgment could have severe effects on your company.

Lagging

When you set salary rates below the market rate, you use a lagging compensation strategy. There are various reasons why companies may pay employees less than the market wage. Smaller firms lack the financial resources to pay larger salaries. Others, such as nonprofits and charity organizations, use non-monetary factors to attract talent.

Advantages

• Lagging the market is affordable. Employees who receive smaller payments than the market average save money on labor costs. That’s an essential factor if the company has financial troubles.
• It permits businesses to invest in non-pay benefits. Even if you pay less, you can still attract employees by providing other incentives such as valuable flex time, remote working, childcare assistance, gym memberships or on-site health insurance.

Disadvantages

• Paying your staff less than the market average reduces your company’s competitiveness and increases the likelihood of losing top contenders. Sometimes, employees may not appreciate additional non-compensation advantages enough to reject greater offers.
• It may result in turnovers. Employees may feel undervalued by the organization, prompting them to seek employment elsewhere.

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Key Components

Offering high salaries isn’t the only aspect of a strong compensation strategy. It must be a complete, well-thought-out approach that specifies your organization’s employee compensation options and why each component is essential.

Let’s look at the elements to throw in the mix.

Base Salary

Salary is the foremost component of any strategy. The total compensation you’ll offer mostly comes from salary, while benefits, bonuses and non-monetary incentives make up the remaining portion.

Salaries consist of:

Base Pay

Most organizations pay a straight salary based on the job role and an employee’s title. Employers set this at the outset, but how do you determine the ideal base pay? The answer is market data.

Researching the market will inform you about each job title’s mean, median and maximum pay ranges. Only after you have this data can you decide whether to meet the market, lead or lag it based on budgetary considerations.

What are the results of inadequate research into base pay?

• Outdated salaries
• Workplace bias
• Overpaying
• Pay inequity
• Legal non-conformity

Now we’ll discuss using market data in your compensation strategy to determine your base pay structure.

Will you pay varying salaries for positions, titles, departments, talents and experience? Or would you prefer to pay a flat rate regardless of competence or title?

Market research will yield the following base pay frameworks:

• Job Families: Providing related positions or departments with the same pay levels independent of individual tasks.
• Individual Pay: Employees are paid differently based on their function, experience and skills.
• Market-Based: The current market determines salaries and pay grades.
• Broadbanding: Combining a predetermined number of various pay groups rather than unique titles. You could form a group for all administrative jobs.

Pay Frequency

To help employees feel more financially secure, you can vary pay frequency by introducing weekly checks instead of monthly or bi-weekly.

Some firms pay employees daily in industries with high turnover rates and labor scarcity.

Pay Raises

This component of the compensation strategy explains to your employees when and how often they receive raises. You’ll need to decide how frequently you’ll provide them and what the criterion will be.

Step pay is a compensation model in which specific employees or departments earn wage increases depending on time with the company and performance. Employees, for example, could obtain a wage raise every year they work, up to the maximum income allowed.

Many organizations also base raises on competitive rates. At this point, you alter your pay rates to remain competitive in the job market.

Finally, there are raises for skill growth. You can boost pay for an employee who learns new abilities to grow professionally and take on additional responsibilities.

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Commissions

Companies disburse commissions in addition to base pay.

Team

Salespeople receive commissions depending on their sales, similar to standard commission schemes. However, the overall team performance determines commissions and bonuses.

Residual

Employees receive a commission depending on sales, and their accounts continue to generate income even after they leave the company. Although it’s a less widespread payment type, some companies still use it as executive compensation.

Profit Margins

All salaries paid to employees come from the organization’s profits. Compensation based on profit is typical among startups.

Benefits

Contextual benefits packages significantly improve your compensation strategy. What do we mean by that? Benefits should be meaningful and meet the unique needs of your employees.

For example, if you notice the office location isn’t strategic, you can offer commuter benefits or hybrid working. Similarly, demographic research will inform you if offering childcare reimbursement is an excellent way to go.

The 2023 Mercer survey revealed that 75% of employees found tuition reimbursement to be the most meaningful benefit. About 63% of the workforce appreciated supplemental life insurance.

To include perks in your compensation strategy, you must decide which benefits to offer and how much you’ll contribute to premiums. Here are a few perks to consider:

• Medical: Since most employees view health insurance as a need, the focus is less on providing it and more on your provider network, whether or not employees may add family members, the price of premiums and more.
• Health Savings Account: Providing matching funds can motivate staff to plan their medical spending more effectively.
• Retirement: Among other contributions, a deferred compensation plan helps your employees save for retirement.

Other considerations include:

• Commuting benefits
• Home office reimbursement
• Gas card or company car
• Vacation expenses
• Employee assistance programs
• Support for tuition and ongoing education

Paid Time Off

Although you might not anticipate work schedules as part of a compensation strategy, the amount of time your workers spend working will inevitably impact their welfare and mental health.

Your time off rules are crucial to ensure that employees have the energy and capability to continue working.

Time off consists of:

• Time off, both paid and unpaid
• Paid and unpaid sick days
• Maternity leave
• Bereavement leave

As a company, you must answer three critical questions about employee leave time:

• Will you pay staff for their time off?
• How much time off will you provide?
• What kinds of time off will you offer?

Whatever you select, the overarching purpose of time off should be helping employees achieve work-life balance, well-being and role effectiveness.

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Designing a Compensation Strategy

Here’s how to develop a winning strategy broken down into simple steps.

Asses Organizational Goals

The first step is defining the company’s strategy, mission, vision and objectives. You can identify the key performance indicators (KPIs) to gauge success.

You can motivate new hires and seasoned staff by designing compensation to reward performance matching the company’s objectives. Doing so can also contribute to increased productivity and a happier workplace.

Consider how your compensation approach can help you achieve goals like pay equity, attracting top people and boosting profits.

Review the Current Strategy

The second stage is determining how your present structure operates and what your new system should accomplish. If your approach attracts and retains the proper individuals, there’s no reason to alter it.

Consider what you want to achieve if your current strategy isn’t working. Do you aim to retain your present staff or bring in new talent?

Next, identify what distinguishes the company.

You can determine whether to use the company’s present advantages to plan wages by assessing current competitive advantages.

Research Jobs and Pay Rates

Now’s the time for a three-pronged approach: reviewing job titles in your organization, gathering employee input and conducting a pay market analysis.

Examine your company’s current pay scales and the overall budget for salaries. Determine each position’s duties and responsibilities inside the company. Make sure the job descriptions appropriately reflect the roles. You’ll find a structure within which to modify your compensation strategy.

Consider employee satisfaction and morale while designing a remuneration strategy. Because it directly affects them, you can inform employees about the plan to develop an efficient pay strategy.

You could also learn how to make compensation enticing by discussing existing packages and requesting employee suggestions. Employees may offer tips on improving the compensation strategy and ensuring pay parity.

Determine market rates using data such as wage surveys and your rivals’ offerings. Then you can select how you want to structure your strategy.

An organization may conduct a pay market analysis to determine its position in the labor market. Do so by comparing the compensation supplied by other organizations in the industry to the organization’s. The study may consider criteria such as employment level, industry and geographic region to guarantee that the comparison is appropriate.

Setting a basic salary, selecting bonus and incentive programs, and developing a competitive benefits plan with other companies in the industry may all be part of the approach.

Install a Pay System

Determine pay levels for specific positions in your firm, such as job classification and pay groups, abilities or competencies. This step is transparent and provides employees with a route for pay advancement. You should also include any additional compensation and perks for each role.

A performance management system can help align the compensation strategy with the organization’s objectives by linking payment to performance. This system should include specific goals, frequent evaluations and incentives for top performers.

Ensure Compliance

After designing a compensation strategy, verify that it complies with all federal, provincial and territory legislation. You can work with a legal practitioner to ensure your compensation approach is legally enforceable.

Receive Stakeholder Approval

Submit your compensation strategy for the management team’s approval. Prepare a report that includes rivals’ plans, compensation information, and employee feedback for your meeting with higher management.

Additionally, highlight your plan’s benefits to increase the chance of a favorable answer. Depending on your plan, the executive team may accept your suggestion or ask for revisions that support the organization’s objectives.

Monitor and Revise

The effectiveness of your compensation approach depends on employees being aware of their entitlements.

Ensure that you fill them in before and after hiring. Reviewing and modifying the approach over time is crucial to maintain alignment with the business plan.

Execute the strategy and monitor the outcomes regarding the overall objectives.

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Company Culture and Compensation

Almost all sources will tell you that your compensation strategy must align with your business goals and company culture. We’ve just dealt with the organizational goals above and will tell you how to link your plan with your company culture.

This Robert Walters whitepaper found that 90% of employees surveyed in the U.K. assess the culture of a company before accepting a role. Regardless of location, this points to the fact that reflecting your culture in your strategy plays a key role in attracting top talent.

Identifying Your Culture

Did you know that a company features multiple cultures? That’s right. Across its departments and teams, a firm follows varied cultures, but the overarching principle is the one that reflects the company’s vision and mission.

The larger your organization, the more likely it has multiple cultures.

What matters here is how well you represent each type and how you can create the necessary positive balance between them for your organization to be productive.

An organization may have an internal orientation emphasizing development, collaboration, activity integration and coordination. Or it could have an external orientation, looking at the market, what’s achievable with the latest technology, what competitors are doing, and what customers want, and as a result, diversifying activities.

Internal and external attention influence long-term performance, but an organization will have a dominating preference depending on its surroundings.

The Organizational Culture Assessment Instrument (OCAI) is a splendid tool for identifying the following cultures:

Collaborative (Clan Culture)

This culture offers an enjoyable working environment. People share a lot, and it feels like a big family. Leaders are mentors or even father figures. Loyalty and tradition keep the group together. There’s a lot of participation. These groups place a premium on long-term human resource development.

The company determines success within the context of meeting clients’ requirements and caring for people. The group encourages collaboration, involvement and consensus.

If Clan Culture is a desirable option, your approach to remuneration must encourage teamwork, reliance on one another and cooperation.

You want to construct an organization that acts as a collection of close-knit and interrelated clans or a group of people with strong shared interests.

Create (Adhocracy Culture)

This style offers a lively and innovative workplace. Employees take chances. Leaders are risk-takers and innovators. Experimentation and innovation are methods of bonding. The importance of prominence is supreme.

The long-term goal is to expand and develop additional resources. The introduction of new items or services is a success. Individualism and freedom are encouraged by the organization.

You need a strategy that supports creativity and entrepreneurial behaviors in an Adhocracy Culture. As a result, your compensation must balance showing appreciation for poor achievers and demonstrating to top performers that they are valued. It must also encourage teamwork. Furthermore, your remuneration should stress employees’ adaptability, inventiveness and innovation.

Control (Hierarchy Culture)

This option is a formalized and regulated work environment. Procedures guide people’s actions. Leaders are proud of their efficient coordination and organization. It’s critical to keep the organization running smoothly. Formal rules and policies hold the group together.

Long-term objectives include stability, outcomes, and efficient and seamless task performance. Dependable delivery, ongoing planning and reasonable costs determine success. Personnel management must ensure work and predictability.

To create a Hierarchy Culture, you must develop a strategy that promotes consistency and excellence. Your compensation should include:

• Instilling the value of doing things correctly every time
• Being highly regimented and mechanical, with some prizes granted based on seniority
• Being constant, predictable and long-term oriented

Compete (Market Culture)

This culture includes a results-oriented workplace that values objectives, due dates and getting things done. Individuals are competitive and goal-oriented. Leaders are hard workers, producers and competitors. They might be demanding and have high expectations. A focus on winning helps keep the company together. The most significant factors are reputation and success.

The long-term focus is on competing activities and achieving goals. Market dominance, objective achievement and excellent metrics are the components of success. Competitive pricing and market dominance are critical. The organizational culture is competitive.

You need a strategy that promotes outcomes and high individual performance for the Market Culture. Three key principles should guide your compensation strategy:

• Payment must be equivalent to or higher than the external market to retain talent.
• Compensation should be highly accessible and publicized, offering employees rewards for performing well.
• Compensation should communicate that anyone operating below expectations must improve or face dismissal.

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Matching Strategy to Culture

The table below shows the adjustments to your compensation strategy depending on your desired dominant culture.

Culture Type	Salary	Benefits
Clan Culture	Slight variations in raises depending on performance	Shared team benefits, like yearly appreciation occasions and activities Perks that promote cooperation, like employee stock purchase plans, long-term rewards and L&D options Benefits encouraging a culture of caring, such as wellness programs, paid time off for parents and daycare benefits
Market Culture	Significant pay gap between top and bottom workers Large and frequent performance-based incentives	A high-value total pay package that gives workers the freedom to choose their perks Only top performers receive prestige-driven L&D opportunities (e.g., getting an MBA at a top business school)
Adhocracy Culture	Higher compensation only for exceptional performers Bonuses for those who develop original ideas for goods or services	Opportunities to participate in world-class events, attend conferences, join communities, record their learnings and share thoughts
Hierarchy Culture	Small wage variations among performers Much smaller salary increases for low-performing individuals Annual salary increases determined using the same criteria Bonuses distributed gradually	Some benefits are level-based Formal reward & recognition procedures to regularly display desirable behaviors

Using Technology to Strategize Compensation

Compensation management software helps human resource managers and administrators develop and manage compensation and incentive programs. It supports optimal pay strategies by streamlining personnel data and the company’s financial position.

With modules like budgeting, pay frequency and legal compliance (Equal Pay Act and FLSA), compensation software helps you frame fair, transparent and compliant compensation strategies.

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Next Steps

We’ve just given you a fair rundown of the three popular pay strategies and detailed guidelines to help you design a winning compensation strategy that combats inflation and high competitiveness.

Ready to select the right compensation software for your firm? Our free comparison report features top modules like budgeting, compliance and forecasting to guide your strategy further.

Have you used technology to design a compensation strategy? Comment your favorite solutions below!