5 Components of a Compensation Strategy

If you’re looking for new ways to attract and retain employees while staying financially stable in a volatile economy, look no further than your compensation strategy.

In fact, 70% of employers plan to enhance their benefits and compensation strategies in 2023, according to recent data from Mercer. Organizations that provide a compelling total compensation package have a far easier time recruiting new employees. In fact, top talent will compete for a spot at your company, giving your company its pick. This is in direct contrast with other companies that are struggling to even receive a single application for their open positions.

But putting together a compensation strategy that’s sure to impress isn’t just about offering high salaries. It needs to be a comprehensive, thoughtful plan that defines all the ways your company compensates employees and why each component matters to your company and your employees.

Once you develop a strong compensation strategy, implementation is the next challenge. By centralizing internal policy documentation, performance management, and payroll into one system, BambooHR makes it simple to create a cohesive experience. Learn more about our award-winning HR software today!

What Is a Total Compensation Package?

A total compensation package includes far more than just a salary or wages paid. Total compensation packages can consist of cash, as well as extra types of compensation like paid vacation, retirement account contributions, profit sharing, and more.

Companies that can articulate and communicate their total compensation package from the onset through the digital offer can increase the number of job applicants who become actual employees.

There are two distinct types of compensation that can make up a total compensation package:

Direct Compensation

Direct compensation refers to the cash pay employees receive. This includes an employee's base salary, as well as bonus wages from holidays or overtime shifts. It can also include merit pay, such as bonuses for excellent performance. When people hear the word "compensation", they most often think of direct compensation.

Indirect Compensation

Indirect compensation refers to the other types of compensation that companies can offer aside from money. This includes equity in the company, such as stock options and profit sharing. Some additional examples of indirect compensation include paid vacation and sick days, health insurance, worker's compensation, and other non-monetary benefits.

5 Key Components of a Compensation Strategy

1. Salary Is Still the First Step

Salary is the most important component of a compensation strategy and makes up the bulk of total compensation, with benefits, bonuses, and perks making up the rest of the package (we’ll discuss each of these in subsequent sections). Salary includes:

• Base pay (hourly pay or annual salary)
• Frequency of pay
• Scheduled pay raises, if applicable

Base Pay: Fairness Is the Ultimate Goal

Base pay can feel tricky, but the safest bet is to use reliable market data to find the minimum, median, and maximum pay for comparable roles. This helps you set a pay range for each role at your organization that’s fair and representative of your industry. Of course, you can choose to pay below, at, or above market rates, but that will depend on your overall compensation budget and how competitive the candidate market is for your particular industry.

Without market data, it’s all too easy to fall on bias or subjective, inequitable standards to set your pay ranges, like using the employee filling the role to set the pay range for it. This kind of approach puts you at risk in a number of ways, including:

• You could end up offering wages that aren’t competitive and lose talented employees.
• Similarly, you won’t be able to attract good candidates with out of date wages.
• You could end up overpaying for certain positions.
• You could be liable for pay discrimination.

Market-based pay ranges help you ensure pay equity across salary decisions and help your organization stand out as an employer that cares about fair and equitable pay:

• You’ll be more conscientious and consistent in how you approach wages.
• You can reduce bias in salary decisions.
• You’re better equipped to help employees understand how and why they’re compensated the way they are.

With data-backed, fair pay as the foundation of your compensation strategy, your organization can also navigate difficult decisions, like adjusting salaries in response to inflation.

Frequency of Pay: How to Support Employees Through Scheduling

If you’ve already set fair pay ranges, that doesn’t mean there’s no more wiggle room or ways for you to improve this part of your compensation strategy to better appeal to prospective and current employees. As we showed above, base pay is only part of an employee’s salary.

You can change the frequency of pay, for example, by adding weekly paychecks instead of monthly or bi-weekly to help employees feel more financially secure. In industries with high turnover and difficulty attracting workers, some employers are even adopting a strategy of paying employees daily.

Pay Raises: Why It’s Important to Be Upfront About Pay

More than anything, the key will be to clearly communicate your compensation strategy with employees and candidates—and most importantly, to tell them how they specifically fit into the whole picture. Before starting a new job, people expect their new employer to tell them their wages, including:

• What their base pay will be and how often they’ll get paid
• How and when they can earn or receive a raise

And after someone is hired or even if they’ve been with you a while, giving them that information will help them be more engaged with their work rather than worrying about their pay. Particularly with raises and promotions, people will want to know that they can grow in your organization and that you’ll invest in their future.

2. Use Bonuses and Incentives to Build in Flexibility

Now for another part of the total compensation package: bonuses and incentives. These can be commission-based or given as additional compensation outside of employees’ job tasks. Here are some common examples of indirect compensation:

• Performance bonuses
• Overtime
• Stock options
• Commission
• Referral bonuses
• Company performance bonuses

Employees deserve to be fairly compensated for their work, and most will expect some kind of raise or additional pay for their loyalty and performance. That doesn’t mean you have to give higher raises than your organization can sustain or pay employees above market rate. Instead, you can build a sustainable and flexible compensation plan by including different forms of indirect compensation. The organization isn’t committing to pay higher than market wages, but employees can still be motivated by bonuses and incentives.

When financial uncertainty looms on the horizon, whether due to high inflation or a global recession, financial support will become increasingly important to employees. Bonuses and incentives can be a great way to help mitigate financial uncertainty for employees while allowing employers to continue to be flexible in a shifting market.

3. Offer Benefits that Matter to Employees

Over three quarters of American workers say benefits are a necessity for companies to offer employees, with health insurance being the top benefit they look for at a new company. And seeing as healthcare costs continue to rise, organizations can’t afford to skip this type of compensation as a component of their compensation strategy.

As an employer, there are two main ways you can tailor benefits as part of your total compensation package.

1. Choose which benefits you’ll offer.
2. Decide how much you’ll contribute towards employee premiums.

What Benefits Will You Offer?

In a crowded employer market, benefits are an important way you can stand out as an organization. Benefits can include:

• Medical: Since most employees tend to see health insurance as a necessity, it’s less about offering it and more about your provider network, whether or not employees can add family members, the cost of premiums, etc.
• Dental and vision
• Health savings account (HSA): Offering a matching contribution can encourage employees to better budget for medical expenses.
• Life insurance
• Retirement: As with an HSA, a matching contribution can encourage employee participation and promote financial planning.
• Short and long-term disability
• Mental health services: Adding an employee assistance program to your benefits can help employees access free, short-term support quickly.
• Legal and financial services (e.g., access to free or low cost legal and financial advisors)
• Childcare and family benefits

4. Don’t Forget Time Off—Why It’s a Key Component of a Compensation Strategy

In a report by Mind Share Partners, a nonprofit focused on mental health in the workplace, 84% of respondents “reported at least one workplace factor that negatively impacted their mental health in the past year.” These were the top two workplace factors:

1. Emotionally draining work (37%)
2. Challenges with work-life balance (32%).

While you might not expect work schedules as a component of a compensation strategy, the time your employees spend working unavoidably affects their mental health and wellbeing.

Your compensation strategy can make the situation better (or worse) for your employees. In other words, your time off policies play a significant role in whether or not employees feel sufficiently compensated and appreciated for their efforts, and those policies are therefore instrumental in ensuring employees have the energy and ability to continue their work.

Time off includes:

• Paid and unpaid time off
• Paid and unpaid sick time off
• Parental leave

As an organization, you need to answer three crucial questions about employee time off:

1. Will you compensate employees for time off?
2. How much time off will you offer?
3. What types of time off will you offer?

Whatever you decide, the overall goal of time off should be to support employees in their work-life balance, wellbeing, and effectiveness in their roles. Current trends in time off policies highlight the rising priority of more balance and more flexibility.

• Nearly 70% of employers say they offer or plan to offer flexible work schedules in 2023, ranging from flex time during the day to a four-day workweek.
• 78% say they offer or plan to offer working from home as a benefit for employees.

5. Use Perks to Tailor Your Compensation Strategy to Your Employees

The needs of every person in your company can't be met with a one-size-fits-all compensation strategy. You can use perks to customize compensation to the unique population within your company and tie your compensation strategy into areas both the company and employees value. Perks can also be a way to differentiate your company culture from others.

Benefits have a wage-base value, while perks are offered on top of wages and can cover something employees would have likely had to pay for themselves. As always, keep your employees in mind and think about their specific needs when choosing what to offer.

For example, if total health and wellness is important to you or your employees, your company can include discounted or free gym memberships while also providing regular catered lunches. Or perhaps your company has a lot of employees with young families, so providing discounts or memberships to local children’s attractions could make an impact.

Here are some other ideas for perks you could offer:

• Commuter benefits
• Company events
• Cell phone allowance
• Home office allowance
• Company vehicle or gas card
• Vacation funds
• Employee resource groups
• Pet-friendly options
• Tuition and continuing education support

Next Steps: Upgrade Your Compensation Strategy

Each of these components will be critical to developing a competitive compensation strategy that will guide your company both now and well into the future.

Focusing on what matters to your employees and ensuring they understand how their compensation package benefits them will be a deciding factor in why employees come to your company—and why they stay.