Get In Touch


How to Develop a Strategic Compensation Strategy for Today’s Market

Human resources leader developing compensation strategy

As organizations continue to emerge from the pandemic fog, many are finding several unanticipated challenges. In 2021, more Americans left their job in April than in any other month on record, according to the Bureau of Labor Statistics. Even more employees quit in July, setting another new record. That new record was broken yet again in August and September.

At the same time, prices seem to be skyrocketing with no end in sight. The annual rate of inflation in the U.S. hit 6.2 percent in October 2021, the highest in more than three decades, as measured by the Consumer Price Index (CPI).  Gas prices are up by as much as 50 percent.  Natural gas prices are up 28 percent. Furniture is up 11 percent. The list goes on.

The pandemic has not gone away as quickly as everyone had hoped.  While vaccination rates are rising, COVID variants are still emerging, and many organizations continue to wrestle with how to deal with remote workforces and return-to-office planning.  And because of the pandemic’s economic impact, some companies had to make mid-course changes to their performance-based compensation strategy to reflect adjusted company goals.

With this backdrop, some organizations may now find themselves in the unenviable position of creating a meaningful, strategic approach to compensation – not only to manage their employee total rewards program, but to increase employee engagement, and attract and retain top talent. While the last 20 months were incredibly disruptive, they also provided an opportunity for organizations to examine their existing programs and to increase their creativity, agility, and transparency when it comes to employee compensation.

Here are a few things HR professionals should keep in mind when developing an effective compensation strategy.

Understand your budget. This may seem very basic, but any effective compensation strategy needs to consider the organization’s approach to allocating dollars toward compensation and benefits. More specifically, allocating certain percentages for salary, variable compensation, health benefits, and retirement savings. Distributing specific budget dollars to compensation and benefits can help control labor, health care, and other miscellaneous benefits costs and provide a realistic approach to the development of a strategy.

Set your compensation philosophy. A compensation philosophy can be based on several factors, including the company’s financial position, its business objectives, competitive data, and the level of difficulty in finding qualified talent. Essentially, it is a formal statement documenting the company’s position on how it plans to reward its employees competitively. For example, many organizations have a stated philosophy to compensate its employees at the 50th percentile (market). Ultimately, the philosophy will set the tone for how the company will approach compensation for its employees.

Select the right rewards. Organizations must consider the competitive hiring environment so the compensation strategy is positioned to attract the desired talent and choose the best combination of rewards.  Compensation packages may be the same across the organization, or may differ based on a specific department need, talent management, seniority, or other factors. Companies need to consider how to use a combination of the available total compensation tools and mechanisms to better engage employees, increase performance, and increase retention. Organizations that are nimble and have flexibility in their compensation programs are in a better position to address unanticipated business changes that may impact employee pay.

Market Price. Organizations need to periodically benchmark their position’s base and variable compensation against reliable industry and competitive salary data to remain viable in the industry and in the locations where they do business. Understanding the specific industry and geographic pay differences will provide insight into designing an attractive compensation package. It may also allow an opportunity for creativity to develop other lower-cost options that can be included as part of the total rewards package. This process essentially establishes a value for each position in the organization.

A compensation analysis will be required to determine whether the employee salary rates are currently above, below, or comparable to the rates of the market and competitors. The organization’s compensation philosophy will help guide any actions that need to be taken to ensure the competitive posture is in the best interest of the company.

Ultimately this information can be used to develop salary ranges to keep pay competitive while staying within any budget requirements.

Develop a structure. Once values are established, organizations can develop a simple framework by which to develop and assign pay grades based on the compensation, job position, and responsibilities. Positions in lower pay grades are appropriate for entry-level roles; higher pay grades will apply to roles with great responsibility. Each grade will have a compensation range and the employee’s position in the range will have an influence on any potential increases in compensation. Having this framework allows an organization to objectively define the amount of pay available based on the job’s requirements and level. It also provides guidance for managers on appropriate increases and sets expectations for employees with a range of what they can expect to earn for any given role.

Keep things transparent. Many organizations have increased the level of transparency around their compensation decisions. The continued focus on pay equity has only made this issue more urgent. In fact, the vast majority of CCI’s compensation work with clients includes specific plans for communicating any new changes in compensation programs and structures to employees. The pandemic created an environment where organizations sought to provide timely and transparent communication regarding wage freezes, temporary adjustments, and reductions.

It’s in the organization’s best interest to continue to provide employees with insight into its compensation programs. This does not mean sharing confidential salary-related information with others. Rather, providing an understanding how employee compensation (base and bonus) is determined and managed.

Measure your results. Unfortunately, too many organizations overlook this critical practice. Many organizations do not measure their return on compensation dollars, much less determine whether the return is acceptable. To measure compensation ROI, organizations need to decide which performance factors to evaluate, such as productivity, bottom-line results, employee retention, key talent management measures, and employee engagement.

Organizations must identify the measures that come from the overall business strategy, then define and track them to see whether the return on your compensation matches its expectations.

Having a well-defined, transparent compensation strategy will not only help create a strong culture but will help attract and retain talent as well as increase employee engagement, job satisfaction and productivity.

Paul Jeffers
Vice President & Practice Leader, HR Consulting
CCI Consulting

Get our latest insights and best practices on the most definitive workforce

topics affecting HR leaders and organizations today.