To create a solid employee compensation plan, first determine your company’s compensation strategy. Here’s what to consider for a balanced, best approach.
What is your company’s compensation strategy? All sizes of companies can benefit from determining and outlining how they compensate employees for their work and the reasons behind those policies. A solid compensation strategy will specify a pay system incorporating both monetary and nonmonetary remuneration. These typically include salaries and hourly pay, insurance and retirement benefits, bonuses, holiday pay, paid and unpaid time off, and any other perks the business deems relevant.
Once a solid strategy is shaped, advantages abound for employers and employees alike. In this article, we’ll cover the basics of employee compensation strategies.
What is an employee compensation strategy?
An employment compensation strategy is a methodology for compensating employees with direct pay and other benefits. Many companies record this strategy in a document to help them assess and determine exactly how to pay employees over time. It also helps gauge pay equality across the workforce, considering varying levels of employee skills, experience, and education. Having an effective compensation strategy for properly paying employees for their skills, experience, time, and productivity can help keep a business strong and stable as it grows. Reasons to develop a comprehensive and robust employee compensation strategy include:
- To determine what your company can afford to offer for pay and benefits.
- To determine what purposes your pay and benefits packages should serve.
- Being able to attain and retain top talent acquisition and loyalty.
- Having documented salary ranges for all positions to help ensure pay equity or relative fairness.
- To improve employee engagement so that company goals are met.
- For staying within your payroll and benefits budget.
- To help ensure compliance with legal and employment requirements.
What are the primary components of a compensation strategy?
The primary components of your compensation strategy should address your business’s compensation philosophy, purpose, and budget. It’s a good idea to include the salary ranges for each position and the options for augmentative compensation, including bonuses, benefits, and miscellaneous perks.
Determine your compensation philosophy and purpose
When contemplating your compensation philosophy and purpose, consider your company’s mission, vision, and short- and long-term goals. You want your compensation policy, in broad terms, to align with the core operational values and business strategy. To that end, you may want your pay and benefits policy to attract top talent so that you can advance and diversify in your industry. You may also want your compensation policy to reflect your dedication to positive company culture and work-life balance.
Determine your total compensation budget
Next, determine your business’s total compensation budget for all your employees. How much of your revenue can you afford to pay in salaries and wages? How much can you commit to health insurance, workers’ compensation, bonuses, commissions, discounts, and other benefits to keep good talent?
Review the market
When developing your compensation strategy, review the job market and your industry’s high, low, and average salaries for all your company’s positions. In addition, check the salaries your competitors pay. These are elements of compensation analysis. And they can help you create compensation packages that meet or exceed standard market rates considering your particular industry and competition.
Determining base salary and wages
Next, determine the base salaries and wages for all the positions in your organization. This section should explain how base pay and salaries are calculated for employees. Calculations are typically based on the skills and education needed for the position and the number of years’ related experience an employee has accumulated.
A plan for offering bonuses and incentives to meet company goals
Do you plan to offer any forms of bonus pay or incentives to encourage employees to reach individual or company goals? If so, you’ll need a strategy for structuring different types of variable compensation, like bonuses, prizes, and commissions. Many people are motivated by winning contests and earning extra money, so incentives reward employee performance. Be sure to differentiate your strategies for individual bonuses and group bonuses.
A plan for employee benefits and perks
What other benefits and perks can you provide as part of your most generous compensation package? For many employees, employer-sponsored health insurance, retirement accounts, and ongoing education and training for professional development are extremely important. Some common forms of such indirect compensation include:
- Health benefits. Many employees view this as a necessity for themselves and their families. What can you offer in terms of medical, dental, vision, and/or mental health insurance, and over what timeline?
- Paid time off, including personal days, sick time, vacation time, and family leave.
- Career training, tuition reimbursement, and stipends to cover basic expenses while the employee completes courses or training programs.
Remember to get employee input
When developing, changing, and modifying your compensation strategy, remember to get employee feedback, including from managers, accounts, and HR personnel. Feedback can pertain to existing policies and ideas as well as what else current employees would find beneficial. For example, if you started your company with a lot of new graduates, those same employees may now be getting married and starting families. Therefore, your compensation package may need updating to address childcare and family benefits. Salary surveys are a good way to collect the input you seek.
Lastly, have your compensation strategy reviewed by your legal team. Your salary grades, hourly pay ranges, and benefits should be nondiscriminatory and adhere to current labor laws.
When it comes to adequately compensating your employees for their time, experience, education, and performance, there’s a lot you can do within a total compensation package. The key is to understand what benefits and incentives will contribute to the growth and well-being of your company and people. Then develop a clear compensation strategy for executing your plan.
For additional help and insight, see our full guide to developing an employee compensation plan.