Too many organizations believe that if jobs are benchmarked against the market, that will automatically result in an effective approach to compensation. While market pricing is important, a ‘set it and forget it’ approach to compensation may leave you behind the curve. With all the challenges of recruiting and retaining employees experienced in the last few years, organizations are waking up to the importance of having a compensation strategy.
According to Payscale’s 2023 Compensation Best Practices Report, 84% of organizations have or are working on a compensation strategy. The rate of organizations saying they have a comp strategy (55%) is 7% higher than reported in 2022, and the remaining 29% are working to develop one.
Compensation strategy is a balancing act between employee expectations and financial realities. Developing a compensation strategy is always challenging. Here are a few best practices that will help you get it right.
Start with Your Enduring Values
While the external market may change, starting with a few enduring compensation values can provide consistency to your organization’s approach to compensation over the years. Often documented as a Compensation Philosophy, your compensation values could include the relationship between compensation and performance, your approach to pay equity and your target relationship to the external market.
A Compensation Philosophy should reflect a sense of fairness including:
- Respecting the value of each person's contributions
- Providing opportunities to climb to a higher salary rate
- Consistent application of the philosophy
- Providing similar pay for similar work and performance levels
A well-defined Compensation Philosophy is the foundation for setting your compensation strategies and communicates to employees what’s valued and rewarded, which allows them to visualize their long-term future within the organization.
Review the Current State
- Review any documentation of the current compensation strategy and program. If you don’t have documentation, write down how you are making compensation decisions today.
- Review documentation of any existing career frameworks and potential internal growth opportunities.
- Assess market, industry, and hiring landscape using third party, employer-provided benchmarks.
Gather Input and Feedback from Key Stakeholders
- Gather documentation related to your organization’s goals, strategy, vision, mission, and values. Review to ensure the documentation is current and reflects your future direction.
- Send a simple survey to leaders and people managers:
- What’s going well with our compensation programs/practices?
- What can be improved about our approach to compensation?
- What compensation areas are unclear?
- Where do employees experience frustration or lack of connection in their pay?
Establish a Compensation Strategy
A compensation strategy serves as the foundation for all compensation decision-making and typically includes:
- Objectives of the compensation program
- Desired competitive market position (e.g. lead, lag or match market median)
- Definition of the competitive market
- Cadence for assessing competitiveness with the market
- Total pay mix (i.e., base vs. variable pay; short-term vs. long-term incentives; performance vs. retention/attraction)
- Definitions of pay actions including merit increases, market adjustments and promotions
- How salary ranges are utilized
- How pay levels are set
- Pay-for-performance approach
- Budget process for pay increases, variable pay
Test Transparency Level
If you think employees don’t talk about their pay, guess again. In recent years the level of transparency provided within compensation has greatly expanded – with both organizations and peers sharing more than was previously done.
Given this level of transparency, create a compensation strategy that can be easily justified and explained to new and existing employees.
work on your compensation practices.
Stay Agile and Open to Change
Setting a compensation strategy isn’t something you do once. “This isn’t a static process. You don’t just create a comp strategy once and forget about it for years to come. The key is to be open to dynamic changes in the workplace and continuously look for solutions to address employees’ needs,” said Susan Norton, Senior Director of Human Resources at LiveCareer.
Bottom line? Stay true to your values and remain flexible.
If you want to take the next step in reviewing and updating your compensation strategy, reach out to Beth Ostrem or Amy Ryan for more information.
