7 Keys to an Effective Compensation Strategy

compensation strategy concept. Group of people and dollar money bag on scale.

For a variety of reasons, 2022 was a disruptive year for pay practices.  Driven by inflation, many companies have been adjusting their compensation strategy by raising pay, changing pay models, and benchmarking salaries at an accelerated rate.  And there is a growing number of regulations calling for pay transparency; California, New York, and Colorado, for example, all now mandate that pay ranges be published in job openings.

HR and business leaders can expect this wage pressure to continue in 2023.  But the issue goes beyond simply the amount of pay an employee may receive.  Research by the Bersin Institute finds that workers are six times more impacted by pay equity than they are by level of pay.  It is crucial to take a systemic approach to revisiting compensation practices to ensure that disparities in pay equity are addressed; just giving all employees a raise, without addressing underlying pay equity issues, does little but exacerbate the inequities between groups of employees.

While there is no single solution for pay, research from the Bersin Institute shows that companies tend to evolve through four levels of maturity when it comes to pay.  First, there is a focus on basic transactional pay, often evident in smaller or newly established companies.  As the business matures, companies focus next on total rewards, then move on to performance-based pay.  Ultimately, however, high-performing companies see pay as an organization-wide strategy and evolve to a systemic pay and rewards system. So, then, what to do?  Savvy organizations will consider the following guidelines as they address pay practices in the coming months:

  1. Alignment with Business Goals – An effective compensation strategy should be aligned with the overall business strategy and goals of the organization and support the mission and vision of the firm. While competitive benchmarking is important, every company’s pay program must be uniquely situated to reward performance that aligns with the company’s needs.


  1. Competitive and Fair Pay – The compensation strategy should ensure that pay is competitive, fair, and equitable within the industry and all relevant job markets in which the company competes for talent. But that’s only the external view – the pay strategy must also be fair and equitable within the company itself, taking into account the value of each position, the skills and experience required, and the level of responsibility and performance for each role.


  1. Flexibility and Customization – While adhering to an overarching pay philosophy, allowing for flexibility and the ability to customize to meet the individual needs and preferences of employees is important. This may include, for example, variable pay, such as bonuses and incentives, or different options for benefits packages to address specific employee needs.  With customization comes the risk that changes in pay practices for one group of employees may create inequities with other employee groups, and HR and Compensation leaders will need to guard against this.


  1. Performance-based Incentives – Incentivizing and rewarding employees for their performance and contributions can be a win-win for employees and the company. The company benefits at a broad level from the overall contributions of all employees, while the incentives serve to motivate and enhance retention for individual employees.


  1. Communication and Transparency – The pay strategy needs to be communicated clearly and transparently to all employees, so they understand the value of their compensation, how it is derived, and how it aligns with the organization’s goals. These are key tenets of a pay system that will improve employee morale, engagement, and retention.


  1. Ongoing Evaluation and Adjustment – An effective compensation strategy should be regularly evaluated and adjusted to ensure it continues to meet the changing needs and objectives of the company Conducting competitive market analyses, soliciting feedback from employees, implementing routine and recurring salary and total rewards reviews, and completing pay equity audits are just a few examples of the fundamentals of effective pay system management that all firms should practice.


  1. Compliance with Laws and Regulations – Certainly complying with all applicable laws and regulations related to compensation – such as minimum wage laws, equal pay requirements, FLSA standards, etc. – is a necessity, as failure to comply with these regulations can result in legal and financial liabilities for the company. However, businesses today are operating in an environment in which pay transparency is increasingly being demanded by employees and regulatory authorities, which only highlights the importance of this often-under-valued activity.


While all the above steps are key to an effective pay strategy, a reminder to HR and business leaders about the importance of communication and transparency.  Today, as employees worry about inflation, they want to know what the organization’s pay strategies are to adapt to an inflationary environment that hasn’t been witnessed for 40+ years.  If companies keep them in the dark, employees may fill the information void with gossip or grapevine feedback, they may think more about leaving for another organization, or they may discuss pay with a union representative.  Companies will be well-served to create and maintain open channels of dialogue with staff to ensure your employees are receiving timely, factual, and relevant information about their pay.


When you think about it, people are the only appreciating asset on a company’s balance sheet.  Pay is an investment in this appreciating asset.  HR and business leaders are advised to act accordingly.


Rob Croner
Senior Consulting Advisor
CCI Consulting