4 Practices for Developing an Effective Compensation Strategy

November 30, 2020
March 8, 2024
Andy Przystanski
Lattice Team

Make no mistake: Today’s employees want more than just a paycheck. But while benefits like fulfilling work and work-life balance are valuable, surveys of employees and job seekers alike show that compensation remains their top motivator.

That’s why People teams need to take a structured approach to “comp.” Your company’s compensation strategy defines how it approaches decisions about employees’ pay and benefits. With a strategy, employees feel rewarded for their performance — and challenged to contribute even more. Without one, pay decisions can feel arbitrary or worse, subject to bias.

If you’re looking to develop or revisit your compensation strategy, consider these best practices.

1. Keep criteria specific and measurable.

It’s intuitive enough: When making decisions about numbers, it pays to stick with what you can measure. Unfortunately, data shows that over a third of employees believe their salaries reflect what managers “feel” they deserve, not their actual performance or market rates.

“The key to an effective compensation strategy is to make it based on specific, objective, and verifiable information,” said Lori B. Rassas SPHR, an HR consultant and author. While it’s up to your organization to decide which legal factors to consider — education, experience, and geography are just a few — they should all be quantifiable. Instead of vague criteria like “seniority,” opt for more tangible measures like job level or tier. Levels, when combined with competencies in a matrix, don’t just add structure to compensation decisions, they help facilitate employee development.

Within each role, you’ll then be able to set up ranges or pay bands that take into account variables like individual performance and skills. If you’re just getting started with this process, Rassas recommends working with third-party compensation consultants or recruiters to identify what the top and bottom of those ranges should be. 

2. Be clear about the role of performance.

Performance-based compensation models are popular, particularly for sales or quota-driven roles. But when HR teams and managers aren’t transparent about what it takes to earn a promotion or raise, that can frustrate employees and drive top performers away. If you’re going to adopt a pay-for-performance model, be clear about your rationale.

“Clearly defined employee performance should always play a role, because buy-in, growth, and development demand that you create a carved-out framework of expectation so you can support employees and course-correct when necessary,” said Brian Haney, Vice President at The Haney Company, a benefits and compensation consultancy. “When you do this poorly or not at all, employees will check out because they don’t have clearly defined expectations.”

Consider limiting merit increases to specific quarters — ideally, ones not overlapping with your performance reviews. That way, those conversations don’t become sidetracked. Separating the two will also give employees and managers time to process how they’ve performed against job competencies. Managers will need that context when deciding whether to approve a higher or lower increase, as illustrated below. 

Have a senior member of the HR team outline the company’s approach to merit increases at an all-hands meeting. Given the personal nature of compensation, invite anonymous questions before and after the session and follow-up via email with clarifying points.  

3. Leverage total rewards statements. 

Compensation is about more than a biweekly paycheck — it includes bonuses, 401(k) matches, stock options, and other benefits. Even employer-sponsored healthcare represents part of the total rewards pie. According to the Kaiser Family Foundation, employers spent an average of $7,188 to insure just one employee last year — and $20,576 to insure those with dependents. For companies that cover most or all of their employees’ premiums, the costs are even higher.

While most companies interpret these offerings as part of compensation, their employees might not. And the less your employees know about your benefits, the less inclined they’ll be to see them as competitive.

That’s where total rewards statements come in. These itemized one-pagers highlight all the ways you’re compensating individual employees — in dollars. Provide employees with total rewards statements at least once a year. Recruiters can also use forward-looking versions to win over candidates. In either case, total rewards statements typically include: 

  • Salary
  • Supplemental wages (bonuses)
  • Commission
  • 401(k) employer matches
  • Stock options
  • Paid time off
  • Profit-sharing
  • Employer-paid premiums for health, vision, and dental insurance 
  • Stipends
  • Disability and life insurance
  • Employer-paid Social Security and Medicare taxes

When thinking through your total rewards, consider the ways you’re adding value to employees’ lives. In some cases, the exercise might even inspire you to think of new benefits. “Remember, pay includes benefits, perks, and anything that your employees will gain regardless of performance,” said Ian Kelly, VP of Operations at NuLeaf Naturals. “Incentives can look like commissions, bonuses, company-funded trips — anything that is an extra that helps motivate employees to accomplish your company's goals.” 

4. Stay receptive to change. 

Setting a compensation strategy isn’t something you do once. As your company scales and market expectations change, your HR team needs to revisit its approach to comp.

“This isn’t a static process. You don’t just create a comp strategy once and forget about it for years to come. The key is to be open to dynamic changes in the workplace and continuously look for solutions to address employees’ needs,” said Susan Norton, Senior Director of Human Resources at LiveCareer. In 2020, HR professionals got a crash course into just how “dynamic” those changes could be.

“We see it now with all the new remote work benefits. We had to act fast to make sure that our people were well-equipped and could stay motivated,” Norton said. The coronavirus pandemic led companies to tack on new total rewards like home-office stipends and even meditation-app subscriptions. Relocation requests from employees forced many HR teams to decide whether compensation should be affected and how. 

Bottom line? Stay flexible. While your HR and leadership teams are responsible for making the final call, it’s essential to listen to employee feedback. Incorporate Likert-scale prompts into your existing employee survey rotation, including:

  • I believe that I am compensated fairly for my work.
  • My compensation is competitive relative to my local market.
  • I understand how merit increases work at this company.
  • Compensation at this company is fair and reflects performance. 

Allow employees to add comments to their survey responses. For HR leaders like Norton, that’s where the most telling insights are. “Be ready for adjustments to your original plan and listen to others...By doing so, I know that we are going in the right direction,” Norton said. 

Compensation represents just a part of your overall strategy for keeping your team motivated and performing at their best. It takes a holistic investment in engagement, development, and performance management to build an award-winning “best place to work” where employees thrive.

We’ll take care of that second part. Lattice’s people management platform transforms how companies approach people strategy by connecting performance, engagement, and career growth in one unified solution. To see our solution in action, watch this video tour or schedule a demo today.