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How to develop an employee compensation strategy

Are you looking to develop a competitive employee compensation strategy? If so, there’s a lot more involved with this then simply determining a specific dollar value by position.

Some of the best compensation strategies involve a multi-layered process that wraps in competitors, executives, creative perks, cost, and compliance.

Let’s break down the various benefits of an employee compensation strategy and then discuss how you can create a compensation strategy for your organization.

What is compensation strategy?

A compensation strategy defines how an organization plans to compensate employees in terms of pay and benefits. A compensation strategy outlines the following:

  • What types of compensation are to be offered
  • The emphasis each piece has on the total compensation package
  • How the organization wants to compete compared to the marketplace.

This 3rd component of the strategy is intertwined with a company’s culture and can showcase how management wants their brand to be seen and experienced by current and prospective employees.

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What are the advantages of an employee compensation strategy?

A strategy is essential to ensure that the tactical execution of compensation components support what the organization wants to be executed.

Creating the strategy and having senior management approval provides HR with the guardrails they need to attract, hire, and retain the type of employee that will be happy in the organization.

  • Management Support & Buy-in: Any new initiative must have management support and buy-in for it to be successful, and the employee compensation strategy is no exception. Management needs to embrace and champion the new strategy.
  • Creates Structure & Guidelines: Structure and guidelines eliminate confusion and ambiguity. All managers and employees know salary ranges by position, how they will be compensated (salary, bonuses, commissions, etc.), and how and when they will be appraised.
  • Defines What You Want to Reward: You get what you incentivize. Most companies have 4-6 main competencies and 3-5 behaviors they want their employees to display with excellence. These factors are weighted and rated to determine an individual’s performance for merit increases. (Keep in mind, most sales organizations pay commissions not just on topline revenue – but on the profitability of that revenue.)
  • Transparency: Sharing the compensation strategy with all employees eliminates the “black box” that used to exist between HR and employees. This increases employees’ trust in and sense of appreciation from the organization.
  • Attract & Retain Employees: An attractive compensation strategy can set a company apart from its competitors in the marketplace and help secure top-tier talent. It can also help retain employees (since they feel more valued and content). As a result, they’re far less likely to jump ship the first time a competitor tries to lure them away.

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How do you develop the best compensation strategy for your business?

There are several things to consider when you begin developing a compensation strategy. This is because there isn’t a “one size fits all” compensation strategy. It depends on an organization’s goals, philosophy, size, and financial health (to name a few). In general, the basic steps required to build a strategy include:

  • Decide on a Compensation Strategy: How do you want to be positioned against your competitors? It’s important to remember that your competitors aren’t always those in your immediate industry. If you’re trying to attract and retain top notch talent, then their skill sets will apply to a variety of industries – aka, a variety of competitors. Do you want to pay more than the competition to get the very best (and to keep them away from your competition)? Or do you want to match the competition and offer other attractive benefits (like remote work)? What if you can’t afford to match or pay more? You can create an innovative compensation strategy that focuses on remote work, unlimited vacation, and other similar perks that can offset a lower salary.
  • Determine the Mix of Compensation: How much will be salary, stock options, commissions, bonus, etc. and what will you be rewarding? It’s been said that you get the behavior and results you incentivize. “Performance” is typically what most companies award merit increases on; however, performance needs to be delineated for each position.
  • Evaluate Your Current Compensation Compared to the Market: Does your current compensation package reflect the compensation strategy you’ve decided upon? How do salary surveys by title and industry compare to your current ranges? Adjustments may need to be made – especially for current employees who are below the recommended ranges that you want to retain. Make sure your ranges allow for salary growth (i.e. yearly merit increases).
  • Analyze the Cost: Can your business afford your strategy? If your strategy sets forth an above-market salary position but the numbers don’t fit with your cash flow, perhaps you need to consider decreasing salary and increasing variable compensation – which should be based on company revenue and profitability growth.
  • Ensure Compliance: Make sure every component of your compensation strategy is compliant with the Fair Labor Standards Act (FLSA) – which regulates wages, hours. and record keeping.
  • Gain Approval from the Executive Team: Not only is this a legal and procedural necessity, but it also garners “buy-in” from senior leadership.
  • Communicate the Plan to Employees: Every employee should find out about the new plan at the same time to ensure proper communication and guard against a drop in morale.

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Need help developing financial strategies in your business?

At New Life CFO, we provide fractional CFO services for companies of all sizes and industries, and we’d love to help yours, too. We can assist your company in developing and maintaining healthy financial forecasts and strategies that keep you competitive, successful, and thriving.

If you’d like to learn more about these services, reach out to us online. We’d love to talk.

If you need improved financial results immediately, watch our three-part series on how to create financial stability now and improve profitability for the long term.