Putting Together an Effective Compensation Strategy

Building a well-thought-out compensation strategy is critical for an organization’s success. Any careless considerations or misjudgments can result in a major setback. When putting together a package for your employees, there are three main strategies to consider. These strategies are Leading the market, Meeting the market, and Lagging the market. Although we would all love to give our people a leading the market package, it might not be the best option. Let’s discuss the benefits and pitfalls of each.

What is a Compensation Strategy?

A compensation strategy helps companies determine how they’re going to pay their employees. This includes salary, commissions, bonuses, and benefits. Various factors are involved in formulating an effective plan, such as projected revenue, company philosophy, geographic location, current job market, interest rates, and more.

Businesses that operate in multiple states may offer two different types of strategies for the same positions. This could be due to increased competition in a certain region, the cost of living, state taxes and compliance, and future growth projections.

The Three Main Compensation Strategies:

Leading the Market–

Leading the market is when you offer more in salary and benefits than what the market values for the position. Aggressively setting salary above the competition is a high-risk, high-reward approach. This type of strategy will certainly increase the number of applicants in the talent pool, but there are some risks as well.

Pros:

✅ Recruiting Advantage– Talent will be lining up when they see top of the line benefits.

✅ Employee Retention– When employees are compensated more than their industry peers, the morale is high.

Cons:

❌ Closely Track Job Performance- With the financial risks, you’re going to have to monitor performance, to justify compensation. This may lead to an employee feeling increased pressure to perform.

❌ Vulnerable to Market Conditions- If the market takes a dive, you’re still on the hook for the high level of compensation. This could pose a problem if the conditions begin to cut into cash flow for the business.

Meeting the Market–

Meeting the market is when your offer is in-line with the industry average. Generally with this strategy, your team is keeping a close eye on the environment and making pivots accordingly. When the average pay increases for a certain role, you’re also making rapid pay increases to stay adjacent. Alternatively, If we see a slow-down in pay increase, you will also need to hit the breaks to avoid offering far ahead of the market.

Pros:

✅ Fair Pay– You’ll feel comfortable knowing that your employees are being fairly compensated for their hard work.

✅ Reputation- Your business won’t develop a reputation for under-appreciating employees.

Cons:

❌ Competition- In some skill positions, employees are only targeting the highest pay. And based on demand for certain expertise, they may be worth it.

❌ Lack of non-paid Benefits- Companies that meet the market are normally the ones that have conducted the most research on compensation metrics. That said, by replicating the market average, there is less of a focus on offering additional benefits that can increase employee satisfaction.

Lagging the Market–

Lagging the market is when you purposely offer compensation that falls below the market average. On the surface, this may appear to have a negative connotation, but companies often do this by design.

Pros:

✅ Cost Containment- Paying your employees less than the industry average will save your company money, and allow you to deploy capital to other business expenses.

✅ Increased non-paid Benefits- You can attract talent in other ways, such as offering a more flexible work/life balance, employee perks, child-care programs, etc.

Cons:

❌ Recruiting Disadvantages- Attracting new talent will be a challenge when you’re offering below average pay.

❌ Attrition Risk- Employee turnover is inevitable with this level of compensation. Having an employee-centric culture may keep some folks around, but not all.

Three tips for putting together an effective Compensation Strategy:

1. Identify the current Company Structure:

Here are a few questions that you should be asking yourself:

How is your company performing in its current structure? Is it working?

What do you want to achieve with implementing a new system?

If you’re keeping your best people happy, maybe there isn’t a problem with the current structure. In this case, if it’s not broken, don’t fix it. Move on to tip #2.

Alternatively, if you’re hemorrhaging talent and production is decreasing, it’s time to implement a new system. Spend time listing short term goals (for the next 3-6 months) as well as long term goals (for the next 1-10 years.)

How are your employees going to help you build upon these goals?

Will you take a step-back if an important employee leaves? If so, it might be worth compensating them on ‘Leading the market’ basis.

2. Figure out your budget

There are many other costs associated with running a business, in addition to employee compensation. From insurances to marketing spend to keeping the lights on, factoring in the entire balance sheet is key. Every major expenditure should be audited annually, but I suggest at least on a semi-annual basis. Be sure to identify whether or not your business is receiving the full value for services such as search engine optimization (SEO.) The tools are available to track the metrics very closely. Maybe the return on investment isn’t as fruitful as it once was for a certain advertising campaign.

Here are a few questions that will help with this exercise.

If you’re planning on offering a ‘Leading the market’ package to certain roles, can you afford to decrease spend in other ways?

How would it impact your business if you shifted resources to other areas in the company?

3. Ask your Employees

Create a survey to identify what your people value the most. Yes, there’s outside market research that will say that health insurance is the most important benefit voted on by employees. Although it can be nice to reference, that data is not being sourced directly within your organization.

Take the time to learn about your employee’s ‘why.’

Why do they work at your company?

Why did they follow a career path aligned to this specific skill-set?

You may be surprised to learn that a majority of your staff values the flexible life balance that work gives them. You can’t put a price on freedom and family time. In this case, a ‘Lagging the market’ approach may be appropriate.

This entire exercise is designed to get you thinking about questions related to these three tips. Every business will have a different recipe for employee wellness. At Luminescent Benefits, we’re here as your complimentary business expert.

To learn more, visit us at goluminescent.com or call 713-444-3242.