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. There’s a huge opportunity to stand out from the competition for talent. That search for talent is what’s driving 70 percent of employers to plan on making enhancements to their benefits and compensation strategies for 2023, according to Mercer.

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. Done right, your compensation strategy can be a deciding factor for why employees choose your company and how your organization reaches its growth goals.

So what are the components of a compensation strategy, and how should your organization approach each one?

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: 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:

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:

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:

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.

What do employees really want from compensation? We surveyed 1,000 employees to find out.

Read the Full Report

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:

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:

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 percent 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:

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.

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:

Find the Value of Your Total Compensation Package

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.

To see how your compensation strategy stacks up, the Total Comp Calculator helps you share with employees and candidates the tangible benefits they receive from your entire compensation strategy. It goes beyond calculating just a salary and shows employees how they benefit from perks, time off, and bonuses.