By: Liz Sheffield
A strategic compensation strategy guides an organization’s approach to managing total employee compensation. In the past, compensation may have been just a paycheck, but today it’s much more. Employees seek employers that not only pay them a competitive wage, but also provide benefits and programs which help them address other financial costs, such as healthcare and retirement plans.
“Given strong economic performance across many U.S. industries in 2018, employees hold much higher expectations for greater increases in wages and bonuses going into 2019,” a vice president from Gartner told the Society for Human Resource Management (SHRM). “Executives will need to factor in these employee expectations to remain competitive and to attract and retain talent; otherwise, they risk losing their best workers to competitors.”
Organizations that have a strategic approach to compensation should use it to not only manage employee pay and benefits, but also to attract and retain talent. To reap the benefits of a strategic compensation strategy, it’s essential that companies proactively communicate total compensation to their workforce. When done well, strategic compensation becomes a way of building trust in the workplace.
Steps to Create a Strategic Compensation Strategy
It’s essential to have a strategic compensation approach, as the costs are a significant expense for businesses. In June 2019, the Bureau of Labor Statistics reported that “costs for employee compensation averaged $36.61 per hour worked.” Wages and salaries accounted for 68.6 percent of these costs, and benefits were 31.4 percent.
Here’s what you need to consider when creating your strategy:
1. Ask for Employee Input
Of course, employees aren’t going to be part of the team that determines salaries; however, you can ask for their input about total compensation. Find out what benefits matter most to your workforce. Younger employees may be interested in a daycare subsidy, while older employees might be more focused on retirement plans. By asking for input, you can create an informed strategic compensation approach that fits with your talent management strategy and will satisfy most employees.
2. Benchmark against Competitors
As mentioned above, your compensation plan and employee benefits are a way to attract talent. To remain competitive in your industry and the locations where you conduct operations, take time to benchmark what your competitors offer their employees. You may not be able to match them item for item, but with this information you’ll be able to address gaps during interviews. And, you may be able to get creative about other, lower-cost options you can include in your total compensation package.
3. Allocate Budget
Compensation planning doesn’t occur in a vacuum. Take a realistic look at your company’s human resource and operational budgets. Identify the total amount you can spend on any one employee. Factor in all costs, including taxes, payroll costs, existing benefits, compensation, and bonuses. Include plans for performance or merit increases that will take place as part of annual reviews.
4. Plan for Rewards
As you make your budget, consider how you can use total compensation as a way to engage employees, increase performance, and entice them to stay. For example, you might offer a retirement plan or additional vacation days to employees who have been with the organization for more than a year. You might offer stock options as a bonus after 90 days. This is a way of protecting your budget if employees don’t stay with the organization for a minimum amount of time.
5. Determine Pay Grades
One way to establish a framework for compensation is to determine pay grades based on job position and duties. For example, positions in pay grade one may be for entry-level roles, pay grade two for technician roles, pay grade three for managers, and pay grade four for executives. Having this framework allows an organization to define the amount of pay available based on the job’s requirements and level. Pay grades take the guesswork out of salaries and also provide employees with a range of what they can expect to make for any given role.
6. Confirm Compliance
Compensation strategy provides the big picture for an organization’s pay; however, the manner in which you implement and provide compensation must meet regulations. The Fair Labor Standards Act (FLSA) sets the legal requirements for minimum wage, overtime, equal pay, record-keeping, and child labor. It also has implications regarding payment practices, record-keeping, taxes, paychecks, and withholding allowances. Some states have local compensation-related regulations. Organizations should seek legal counsel to confirm compliance and ensure each compensation strategy meets requirements.
7. Communicate About Total Compensation
When you communicate about total compensation, you want to make sure all employees have access to the information they need. You also want to provide accurate, up-to-date information to avoid issues. The gap between expectations and reality is one of the largest issues between employers and employees that creates dissatisfaction. When you clearly communicate your total compensation strategy, employees know what to expect and appreciate all the benefits you’re providing, in addition to the pay. Be sure that as you communicate about total compensation, you’re using it as an opportunity to celebrate everything that’s included in the package. Employees want all the information available about compensation, so do your best to make the communication engaging. An employee communication software tool can help you deliver timely, engaging, and streamlined compensation communications.
Remain Realistic with Strategic Compensation
Many organizations want to offer amazing total compensation packages to remain competitive in the war for talent. But after they crunch the numbers, they realize they can’t afford it. In this situation, strategic compensation becomes even more important.
Use an employee benefits communication software to communicate with employees about the realities of their compensation:
- Be transparent about what is and isn’t possible. Let employees know you’re doing all you can to provide the best compensation package possible.
- Be an employer of choice in other ways. You may not be able to offer the top salaries in the industry. Still, you can offer other employee benefits, such as flexible work hours, access to on-site services, or subsidized transportation benefits.
- Be realistic in your rewards. If you have a great quarter, celebrate those results but be judicious. Once you set the standard high for compensation strategies, it’s more difficult to drop back if you experience rough financial times.
- Be intentional about how compensation supports your overall human resource strategy. Look for ways to tie your compensation plan to tenure, individual performance, team performance, or a combination.
This realistic approach helps set expectations with current employees, as well as enables you to attract and retain talent. Organizations are more appealing for candidates when recruiters and hiring managers have defined pay grades they can provide, as well as information about a robust total compensation package to share during an interview. Don’t underestimate the impact a strategic compensation plan can have throughout the entire employee lifecycle.
Finally, compensation planning requires a cross-functional strategic approach. Now that you have all the steps for an effective compensation strategy, it’s important to gather stakeholders together to review what’s most important for your organization. Once you have a compensation plan, find a means to effectively communicate so that employees understand their pay grade, the opportunity for growth, and career advancement. Having a well-defined approach to compensation will ultimately encourage a company culture of trust and transparency and create a higher job satisfaction rate among employees.