Building a compensation strategy: Your roadmap to fair pay culture

A good compensation strategy is a balancing act. It should help you prevent regrettable loss of top talent without losing control of your labour costs. Finding the right balance starts with having the right data and insights to help inform your compensation decisions in a way that supports your organisational goals.  

The right strategy and tools can help you increase employee satisfaction, improve retention, and turn your people into talent advocates. For example, according to HR Grapevine, Walmart US CEO John Furner noted a decrease in store worker turnover when the retailer implemented improved compensation packages and made a new bonus initiative available to both part-time and full-time associates.  

Now is the right time for you to communicate your organisation’s compensation management strategy and prepare your leaders with the necessary information to have open and honest conversations about pay.  

Pay transparency: Your competitive advantage

According to an Indeed survey, more than 70% of employee respondents conduct their own research about what constitutes fair pay, and 81% said they were more productive when paid fairly. Moreover, 68% of respondents said they were more likely to apply for a position if the pay level is clearly listed. 

In short, pay transparency is the degree to which an employer is open about salary and pay information and how accessible the compensation of other employees is in their workplace. And it’s not just a policy for company culture.   

There has been a global push for pay equity, and many regions around the world have enacted or proposed pay transparency legislation. These types of laws often mandate that companies disclose pay ranges to existing employees and job applicants. 

Ultimately, pay transparency is only one key part of a well-defined compensation management strategy, but this new movement can help create accountability and combat pay inequity in your workplace. Clear salary communications and an equitable compensation strategy are now essential for attracting and retaining top talent while balancing other variables like budget.  

What goes into a good compensation strategy?

Your compensation management strategy should outline how much and when to adjust pay for each of your employees.  

Your compensation strategy should aim to: 
 

• Provide equitable salary levels across your workforce 

• Boost morale, reduce attrition, and strengthen your workplace culture 

• Establish and reinforce your reputation and employment brand 

Here are four important components of a comprehensive strategy: 

1. Base pay 

Your compensation strategy should not only establish your employees’ base pay levels but also clearly explain how they are calculated. You may opt to set pay bands according to job type or set a fixed base pay rate for individual positions that increases with years of service.  

2. Incentive pay 

Do you plan to offer additional, performance-based compensation? Set rules for bonuses or commissions, such as how they are structured and who will be entitled to them. 

3. Benefits 

Consider traditional elements such as health and dental insurance and retirement contributions in addition to newer perks, such as on-demand pay, gym memberships, travel perks, and flexible work hours. 

4. Paid time off 

Today’s jobseekers want more personal leave and paid time off. Be sure to define these policies, how they differ, and how they are meant to help support employees and their unique situations.  

Seven steps to building an effective compensation strategy

Step 1. Appoint a compensation strategy manager 

Whether you outsource or appoint someone internally, a trained compensation professional should help you keep everything on track and take the weight off your shoulders. They should be responsible for: 
 

• Gathering/researching compensation data 

• Managing program implementation and administration 

• Helping ensure salary alignment with DEI best practices 
   

Step 2: Collect current compensation data for your industry 

Your compensation manager should lead this data-gathering initiative to determine such things as: 
 

• Average annual salary for roles in your industry 

• Current market rates for positions within your organisation  

• Numbers of available qualified employees on the market 

Step 3:  Rank jobs to determine pay levels 

Define what tiers of pay should exist in pay structures for all levels of employees. By creating levels of jobs and setting pay grades, you’ll be able to better provide equitable career advancement opportunities within your organization. 

Step 4: Determine your compensation philosophy 

Be sure to lay out a compensation philosophy that best reflects the values of your organisation. Start by determining your primary goal: Is it achieving better business results, reducing costs, or increasing performance levels? 

Here are three strategies for your compensation philosophy. 

1. Market leading: Setting rates aggressively above the market to stand out amongst competitors and brand yourself as an “employer of choice.” 
2. Meeting the market: Paying close to the market rate to help ensure employees are paid and perform well. 
3. Lagging: Setting rates below the market rate, usually due to a lack of financial resources, but emphasising many other non-monetary benefits.  

Step 5: Establish a pay structure 

Clearly lay out the minimum and maximum rates you will pay for every position within your company. Be sure to create clear rules around how you will award raises and promotions, and by how much.   

Step 6: Communicate 

Develop a communication plan to spread the word. Share your compensation strategy with both your existing employees and anyone applying for a job within your organisation. 

Step 7: Review regularly 

The workplace continues to evolve and change. For this reason, you will want to regularly review this compensation strategy to help ensure it remains equitable and attractive, while supporting compliance with applicable requirements.  

Strategic compensation is a powerful way to help ensure equitable pay for employees, while managing budget realities and compliance requirements in your operating regions. Not only can the right compensation strategy help you attract and retain top talent, but it can serve as a powerful way to ramp up performance, reinforce your brand, and promote pay equity across your workforce.  


^{This post was originally published on January 25, 2023 and was updated on August 8th, 2024 for recency and to include new perspectives on the topic.}