A compensation strategy defines how an organization views and manages employee pay and benefits.
The strategy serves as a guide and should be defined in a written document that clearly articulates the organization’s approach to compensation management.
An effective compensation strategy serves to motivate current employees and attract new ones.
Some people think of compensation as merely salary but the real cost of total compensation includes every aspect of employee benefits.
The cost of health benefits, retirement benefits, tuition reimbursement, bonuses or other incentives are real costs that need to be considered part of total compensation.
7 Things to Consider When Developing a Compensation Strategy:
- Budget Allocation
The strategy should include the organization’s approach to allocating compensation dollars into salary and benefits. How much of total compensation budget will be spent on salary and what percentage will be spent on benefits and other incentives.
For example, for a budget of $1000 for compensation, if 90% is salary and 10% is benefits, how is that 10% spent? 7% on health benefits, 2% on retirement savings and 1% on tuition reimbursement.
Allocating budget dollars to pay and benefits can help control labor, health care and other miscellaneous benefit costs.
- Develop Salary Ranges
Developing salary ranges is critical to ensuring employee pay is competitive with other organizations. To be competitive, it is important to benchmark like jobs within the same industry and create a pay structure.
Salary ranges can be developed internally by conducting research or utilizing sites like salary.com or payscale.com to determine average salaries in a particular geographic area.
Smaller organizations often pay a vendor to help develop salary ranges, whereas larger organizations may have the HR resources to conduct the research internally.
Regardless, it is important to look at all jobs and determine what work is done, how the job is slotted and establish salary ranges that match all job descriptions.
- Salary Audits
Markets change therefore it is important to perform routine salary audits to ensure salary ranges reflect current compensation trends in a particular industry.
How competitive are those particular jobs and what is the external market demanding? Is it a growing or dying profession? Failing to keep up with market competition can lead to loss of valuable employees.
- Benefit Package
Some organizations use benefit packages, in addition to salary, to attract and retain employees. Being competitive with health, retirement, tuition reimbursement and other benefits can be the determining factor for a job candidate who is deciding whether to accept a position with an organization or an employee deciding to stay with an organization.
- Performance Management System
It is important to have a structured performance management process to ensure employees are meeting corporate objectives and are assessed on a regular basis.
This process should include development of annual goals, annual performance appraisals and a structured process for coaching and mentoring employees. Compensation strategies can positively influence employee engagement and employee productivity.
- Legal Compliance
A well-defined compensation strategy will incorporate legal requirements to ensure the organization is in compliance with all federal and state laws.
A structure would eliminate natural biases made in hiring decisions and ensure compliance with DOL FLSA laws such as minimum wage, overtime pay or Lilly Ledbetter Fair Pay.
- Structured Administration
As with any other business process, structure is important. Developing an annual review process, salary audit, raise process timeline and making sure someone is responsible to ensure all areas are completed is critical to successful compensation management.
Finally, a comprehensive compensation strategy can be the foundation for creating an environment that recognizes and rewards employee performance and helps to establish a strong culture of employee engagement. Organizations are only as successful as their approach to hiring the right people, setting clear expectations, managing performance and recognizing and rewarding employees for a job well done.
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