What is Your Organization’s Compensation Strategy?


Every employer has to manage compensation.  Some do it much more effectively than others. Let’s take a look at a few of the key factors on which you may want to focus some attention.

Base Pay. Whether you pay an hourly rate or a salary, this is the rate you and the employee agreed upon when you first hired them, or re-negotiated at a later date – perhaps during an annual evaluation, or at the time of a promotion.

While most small employers don’t have a formal or written ‘compensation strategy’, most have a sense of where they want to be in relationship to other employers in their industry or in their proximity. Maybe you want to be known as the market leader, and pay more than others in order to get the best talent. Maybe you want to be competitive, which may place you more in the middle of the market. And maybe you lag the marketplace, perhaps because you don’t necessarily need high-skilled labor, perhaps because you don’t have the resources to be more competitive, or perhaps because you’ve decided to invest more money in benefits, or non-pay perks.

What you need to know as an employer is where you are positioned relative to the market: leading, lagging, or in the middle, and whether that’s the position that serves you best as an employer.

Along with base pay, though, come expectations of increased pay due to experience, high performance, learning new skills, etc.

It’s important that you give thought to how and when you will make those adjustments, how they will impact your budgeting and profitability, and whether they will be sufficient to motivate and retain your people.  You also need to be ready to make additional changes if economic or other forces cause faster increases than planned.

When establishing base wages, we also recommend establishing ranges for each position – from starting wage of a position to maximum wage for that position, along with guidelines for when and how to adjust and/or increase.

Incentive Pay: In addition to base pay, you may need to consider incentive pay as an important part of your compensation strategy. Monetary incentives include a wide range of commission structures, bonuses, and referral compensation – all based on specific pre-determined criteria. Other forms of incentive pay include profit sharing and stock options. Even overtime pay and performance related pay increases are forms of incentive pay, as well.

While much more common in some positions than others, and in certain types of organizations, incentive pay can become a significant motivator towards high performance. It is critical, though, that in creating incentive pay plans, you thoroughly consider the criteria, potential costs, and ramifications to individuals and to the organization.

Basic Benefits: Benefits include all of those perks you provide on top of base pay and incentive pay. The benefits you offer may be a fairly small part of your organization’s overall pay plan, or it may be a very significant part of total compensation strategy. Either way, it is reflective of the importance you and your organization place on those benefits and their impact.

For the average employer, benefits account for about 31% of total compensation. You need to know what that percentage is for your business, and whether it actually demonstrates the importance you place on them.

Most employers, when offering benefits, start with paid time-off benefits, such as vacation and sick pay (or a combined paid time off accrual), holiday pay, and perhaps time off for volunteering, or for continuing education. Unpaid time off is also considered a perk, and can include time off for personal or medical leave, maternity or paternity leave, and even sabbatical leaves.

At minimum, your responsibility as an employer is to provide what is required by law, but your compensation philosophy and strategy will determine how far above that requirement you go in terms of what you offer to your people.

Insurance related perks such as health, dental, vision, life and disability are very common benefits, as are retirement plans. Less common are stock options and profit sharing, but they can be a significant factor in attracting and retaining employees.

An important part of the equation with all of these benefits is the type of coverage or value the employees receive in comparison to the amount of money the employee has to invest. If you pay 100% of low-value health insurance, the employee may actually be better off with another employer who pays 50% of a high-value health insurance plan. The value to investment may be difficult to compare, but you’ve got to know that your people take that calculation into account when they make their decisions.

While base pay is generally the largest portion of total compensation, basic benefit packages are becoming increasingly comprehensive, competitive, and creative. Again, how do your benefit offerings stack up when compared to other employers who are competing for your people?  Just as with wages, you need to know if you are leading the market, staying competitive, or falling behind in terms of your compensation strategy.

Non-Monetary Incentives. There are a host of additional incentives that you can also consider, many of which are low cost to you, and low or no-cost to your people, but which can be of high value to you both. These non-monetary incentives can significantly improve your reputation as an employer, and your ability to hire and retain staff.

Flexible work schedules and remote work opportunities are prime examples. Wellness plans, recognition and reward programs, and employee assistance plans fall in this category, as well. Others include flexible spending accounts, time off for volunteering or for continuing education, etc.

All of these are examples of benefits that enhance your employee’s experience without costing a lot of money. This is especially an area where creativity can help you improve your competitive advantage.

Whether you have a well-thought-out compensation strategy or not, take a look at where you are, and where you would like to be in each of these areas of base pay, incentive pay, basic benefits and non-monetary incentives. Identify the gaps, prioritize actions steps you might take, and start bridging those gaps.

Alternative HR, LLC (https://alternativehr.com) provides outsourced HR and fractional HR services, including compensation and benefits analysis and support. If you need assistance finding market wages, analyzing compensation, developing wage ranges or creating compensation plans and strategies, contact info@alternativehr.com, or call 888.335.8198.