In all aspects of your business, being strategic is key. Part of that strategy should include outlining exactly how your workforce is compensated for their work.

A clear compensation strategy benefits your organization in a variety of ways, from increased transparency to a better idea of what to offer new employees you are recruiting. When developed the right way, it creates an objective structure around salary and benefits decisions that everyone in the organization can understand and follow.

Getting there, of course, requires some work. An intentional approach can help to ensure that you reap all of these hypothetical rewards, enabling you to unlock compensation as a strategic advantage for your organization.

What is a Compensation Strategy?

At its core, a compensation strategy is a framework that determines how your business offers both wages and benefits to its employees. It stretches across all levels of the business, extending from new hires to long-term employees and from entry-level positions to leadership.

What to Consider When Creating Your Compensation Strategy

Developing a compensation strategy is like putting together a puzzle. Though no two compensation strategies are the same, the most common pieces that need to be considered include:

1. Company Goals and Values: Compensation and the strategies used to pay employees should be a tool that drives the overall company goals and values. For example, if a company is
2. Benchmarking and Market Data: Use market data to determine competitive salary ranges. In addition to determining your benchmarking strategy, compensation teams should also consider:
   • Salary surveys to use
   • Market percentiles to consider
   • Benchmarking against base pay, total compensation, or other…
   • Whether to lead, lag, or lead/lag the market
3. Internal Equity and Job Levels: The career path of employees and the equity of pay based on compensable factors should also be considered and supported from the top down.
4. Pay Mix: Decide on the pay structure that balances base salary, bonuses, and other incentives. Consider whether to offer benefits like equity, performance-based bonuses, or additional perks. The mixes here will vary largely on organizational maturity as well as industry. It is also important to consider the region and country – as not all cultures value different compensation elements similarly.
5. Compliance and Legal Considerations: Be aware of wage and hour laws, minimum wage requirements, pay equity legislation, and other regulatory issues. This is particularly important for companies that span multiple locations.
6. Employee Performance and Metrics: Define clear metrics for performance-based compensation if you want to reward high achievers.
7. Total Rewards Philosophy: Consider all components of total rewards, including benefits, work-life balance, and career development opportunities. Total rewards should extend beyond just pay and benefits and create a holistic employee value proposition.

Budget typically becomes the biggest consideration on which strategy is realistic for different organizations. But culture also plays into the equation, with businesses leading the market often looking to position themselves as the employer of choice in their market or niche.

The Purpose and Importance of a Compensation Strategy

Building a compensation strategy means becoming more objective and consistent about your salary and benefit decisions. It takes unconscious bias out of the equation while also allowing you to become more proactive in the ways you leverage compensation as a benefit to attracting top talent. The impact is both immediate and long-term, as attractive compensation can play a significant role in building your employer brand.

In addition, creating more objective and transparent compensation practices also benefits your existing employees. Current employees become more satisfied with their job, which boosts morale and can increase their productivity. They’re also less likely to leave, reducing recruitment and onboarding costs for your HR office.

Finally, the increase in transparency can also help with your diversity strategy. This is an often overlooked part of DEI efforts, with the ability to reduce bias going a long way toward pay equity. Pay and benefits become more closely tied to the actual work and responsibilities, which takes even subconscious biases out of the equation.

Steps to Developing a Compensation Strategy

To achieve the hypothetical benefits of the effort, the process has to be intentional. Consider these five points to be the critical components of a compensation strategy that any organization should follow.

1. Define Your Company’s Compensation Philosophy

It is crucial to get everyone in a decision-making position on the same page. The compensation philosophy should be supported from the top-down, and establish pay practices that allow the organization to: pay for performance at the Organization & Individual level, recruit and retain talent, minimize risk-taking and align compensation with shareholder values, if the Organization is publicly traded. The Society for Human Resource Management recommends a single, formal statement that clearly defines your philosophy.

2. Establish Job Architecture and Career Leveling

An analysis of fair and objective compensation has to include an evaluation of role within your organization. Strategically minded teams will consider conducting job architecture projects that evaluate the organization as a whole. These job architecture projects can be immensely helpful to identify the various levels and jobs across departments and how they may be similar or different from each other in terms of scope and responsibilities.

3. Benchmark Your Jobs

Using your salary surveys and your available data, determining the external market value of the jobs is one step that should be completed. Understanding the data you have access to and what your competitive stance will be can help to guide decisions such as the market percentile to target, the market data to use, and whether to lead, lag, or lead/lag the market.

4. Set Salary Ranges in Accordance with your Compensation Philosophy

Based on both of the previous two steps, it’s time to build compensation structures across the organization. Here, it helps to set salary ranges rather than individual salary levels. After all, a number of different factors may still require adjustments downward or upward to ensure fair and equitable pay. At the same time, defining these ranges clearly and within your benchmark and strategy will ensure that future compensation decisions are objective.

5. Consider the People and Their Pay

With a thorough position evaluation in place, the next step is aligning job roles with compensation. That means comparing them in two ways. First, ensure that similar roles across your organization will receive similar pay. In addition, an analysis of external compensation benchmarks across industry competitors helps to understand market value and set your own salary levels accordingly.

6. Set Regular Evaluation Checkpoints to Ensure Continued Effectiveness

Finally, don’t think of your compensation strategy as a one-time effort. Instead, set regular checkpoints at which you can evaluate whether your strategy is still in line with your goals and philosophy. For example, consider checking annually that your salary ranges still align with internal and external benchmarks in the same way as they did when first putting the strategy in place.

A Compensation Strategy is Beneficial for Your Organization

A compensation strategy can be a massive benefit for your organization. It makes any individual salary decisions more consistent and objective, while also increasing employee satisfaction and building your employer brand.

At its best, this strategy includes more than just salary. Benefits, like health insurance, paid time off, and other perks, will be nearly as important as their paycheck for many of your employees. A strategy that includes both compensation and benefits has the best chance of making a true impact for your organization, paying off with better employee recruitment and retention as well as increased productivity down the road.