Why you need a compensation strategy
Creating an effective compensation strategy for your business is essential for ensuring that you retain employees and can draw from top talent when the need to hire arises. An organization’s compensation strategy needs to be fair, equitable, and motivating enough to make your employees feel valued.
By taking the time to create a fair and equitable compensation philosophy for your business, you can ensure that you attract and retain the best employees in a competitive job market. A well-designed compensation philosophy will also help motivate employees, leading to improved performance and productivity.
The Fair Labor Standards Act (FLSA)
The Fair Labor Standards Act (FLSA) is a federal law administered by the U.S. Department of Labor that sets minimum wage and overtime requirements, regulates child labor, and requires employers to keep certain records related to their workforce.
The FLSA ensures that all workers in the United States are protected from unfair labor practices such as uncompensated overtime and exploitation of minors. It is important for employers to fully understand the provisions of the FLSA to ensure compliance with federal law.
In addition to complying with FLSA regulations, employers should also consider other factors when creating their compensation strategies such as industry standards, geographic location, job requirements, market trends, economic conditions, and other internal and external influences.
Employers should also be mindful of the costs associated with their common compensation strategies such as wages, benefits, taxes, and other expenses.
What are the key components of an effective pay strategy?
Key elements to consider when building an effective pay strategy are establishing a budget, determining levels of pay, reviewing similar jobs, evaluating your employees, and developing a comprehensive plan.
Establishing a Budget
First, establish a budget for your compensation strategy. This should be based on the roles in your company and what is necessary to attract and retain the right talent. Consider factors such as industry standards, local labor laws, cost of living in the area, and budgeting for raises or bonuses.
Determining Levels Of Pay
Once you have a budget established, your company needs to determine the salary ranges for each role. This will help you avoid overpaying or underpaying employees.
You should also consider any bonuses, commissions, and other forms of incentive pay that can be offered as part of the compensation package.
Related: Pay Grading Top 5 Essential Tips
Reviewing Comparable Positions
Consider what comparable positions in your industry use as a salary range for similar roles and job levels. You can use compensation data from surveys and other external sources for benchmarking purposes.
Evaluating Your Employees
Evaluations based on employee performance, experience, and qualifications can help determine the appropriate compensation level for each role. Consider any additional responsibilities or value they bring to the organization to ensure a fair and equitable benefits and compensation package.
Developing A Comprehensive Plan
Once you’ve established the salary ranges, evaluated your current employees, and reviewed pay ranges for comparable positions, it’s time for your company to develop a comprehensive compensation plan for implementing a current compensation strategy.
This should include details on how a salary increase, benefits package, or bonus will be awarded, as well as any other incentives that you’re offering (such as the option of remote work, which offers workers more flexibility).
Related: HR & Comp Pros: Try our Information Technology Compensation Survey
What are the different components of compensation strategies?
The different components that make up effective compensation strategies include base salary, bonus pay, stock options, commission-based pay, incentive pay, profit sharing, and other benefits.
Base salary
Base salary is the most common form of compensation and involves providing a fixed, regular payment to employees for their work.
Bonus pay
Bonus pay is an additional reward that can be awarded based on performance or reaching specific goals.
Stock options
Stock options and commission-based pay give employees a financial stake in your company.
Incentive pay
Incentive pay rewards employees with cash or other bonuses based on reaching specific goals.
Additionally, an organization can offer profit-sharing and paid vacation benefits to help ensure certain jobs are not lost to competitors.
Related: Who are the top salary benchmarking companies and get the latest information about CEO salaries.
Now let’s discuss the different compensation strategy philosophies
To create an effective compensation strategy that allows your company to retain talent and succeed in a competitive job market, you need to consider the three following pay strategy philosophies. They are lag-the-market, meet-the-market, and lead-the-market.
Lag-the-market strategy
A lag-the-market compensation strategy is one example of remuneration plan in which employees are paid wages lower than the market rates median. This compensation approach can be beneficial for an organization that has financial constraints and needs to reduce costs to remain competitive while avoiding costly employee turnover.
The objective of this business strategy is usually to make up for the difference with other advantages, such as additional benefits and improved working conditions.
Additionally, compensation strategies like this can enable an organization to attract job seekers from a larger pool of potential candidates by offering more competitive compensation.
However, employers need to be aware that market data shows that a lag-the-market compensation strategy may not always be well received by employees, which could lead to decreased morale and employee engagement, hindering your ability to retain the best talent.
Therefore, an organization should weigh the pros and cons of a lag-the-market compensation strategy carefully before deciding to implement it.
Related: Try our Real Estate Compensation Survey
Meet-the-market strategy
A meet-the-market compensation plan is a type of remuneration plan in which companies pay employees salaries that are equal to the current market median for the role or region.
This type of compensation strategy can help organizations ensure that they can attract and retain top talent by offering them competitive salaries. Additionally, this approach helps organizations remain compliant with applicable labor laws and regulations by ensuring that they are not underpaying their employees.
However, organizations should be aware that a meet-the-market compensation strategy may not always be an advantageous business strategy as it can limit their ability to stay competitive in an increasingly global labor market.
Lead-the-market strategy
A lead-the-market compensation strategy is a remuneration plan in which organizations pay their employees higher salaries than the market median for the role or region.
This type of compensation strategy enables companies to attract and retain top talent by offering them more competitive salaries. For example, by paying a higher salary, employers can create an incentive structure that rewards hard work and productivity, gives employees a greater sense of job security, and helps to reduce turnover.
Additionally, this strategy can provide organizations with an edge in the recruitment process. For example, a potential employee may be more likely to decide on accepting a position with a higher salary offered than that offered by industry competitors.
However, companies should be aware that paying higher wages could result in a certain amount of increased labor costs and other expenses. Therefore, organizations should carefully consider the benefits versus drawbacks of this strategy before deciding to implement it.
In conclusion, there are several approaches to setting an employee compensation strategy. Each of them has its advantages and disadvantages in things like employee morale and an organization’s performance. Organizations should take the time to carefully research and understand each approach before making a decision on which strategy will best suit their needs.
Consider your company culture
When developing a compensation strategy, it is important to consider the culture of the organization. Company culture reflects the values and practices that guide how people behave and interact with one another in the workplace. As such, any compensation strategy must align with the company’s overall culture.
For example, if an organization values collaboration and teamwork, it may choose to offer a merit-based pay structure that rewards employees based on their performance as well as the team’s collective success. On the other hand, if an organization values individual achievement, then more emphasis may be placed on bonuses or incentive pay for top performers.
Regardless of the type of compensation strategy chosen, it is essential to ensure that the plan is in line with the overall company culture. This will help to foster an environment where employees feel valued and appreciated for their contributions.
Too many candidates?
If your company’s reputation is attracting more candidates than you need, it is important to be mindful of the selection process that you use. You should consider creating a rigorous recruitment process that involves multiple stages, such as an initial review of resumes, telephone interviews, and in-person interviews. This will help ensure that you are selecting the most suitable candidate for the position.
