How to create a compensation strategy: A guide for employers
Learn how to develop a compelling compensation strategy to attract and retain talent, boost engagement, and ensure financial stability in 2025 and beyond.
An attractive compensation package is the most important factor for 72% of workers when choosing a job, according to our research. Compensation also plays an important role in building a loyal and engaged workforce, in addition to ensuring both legal compliance and long-term financial stability.
In this article, we’re taking a deep dive into compensation strategies, including actionable advice on how you can develop an approach that helps you attract and retain top talent.
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What is a compensation strategy?
A compensation strategy is the framework that brings together all the ways an employer compensates its employees whilst remaining financially sustainable. Given the importance of compensation within an organisation’s budget, ownership will typically lie with senior management, with input from HR teams.
Any good compensation strategy should be aligned with an organisation’s wider ethos, culture, and HR strategies, thereby working to attract new talent and ensure existing employees feel valued and engaged.
What should be included in a compensation strategy?
39% of workers plan to look for a new job in the next year in pursuit of a higher salary, while 66% are prepared to forgo a pay rise to get their most desired benefit. As a result, it’s vital for employers to tailor their compensation and benefits strategy to the priorities and expectations of employees and jobseekers.
Let’s take a quick look at what this can include.
Base pay
Setting base pay is a balancing act. Offering significantly more than competitors can be wasteful, while too little in compensation can result in valued candidates and employees looking elsewhere.
Some employers classify positions and set pay ranges based on job classification. Others set a fixed pay rate for positions that increases with years of service. The important factor is that the salary strategy is clear, with 85% of workers viewing employers who offer pay transparency more positively.
Additional pay
Compensation strategies should address any performance-related compensation employers offer employees, such as bonuses based on individual performance or those related to the overall performance of the organisation.
The strategy should clearly outline how financial incentives are structured, what an employee receives, who is entitled to them, and when.
Benefits package
A comprehensive compensation strategy will include benefits package available to employees and the relevant eligibility criteria.
This can include both monetary benefits, such as bonuses, and non-monetary incentives, like subsided gym memberships or perks designed to improve employees work-life balance.
The top five most attractive benefits to candidates according to our findings are:
- Flexible hours (41%)
- Sick pay above what’s legally required (26%)
- Pension contributions (25%)
- Hybrid and remote working options (24%)
- Learning, training, and skills development (22%)
Employee benefits have become increasingly important for organisations looking to attract and retain talent. Discover how to create a benefits package that stands out in a competitive landscape with the help of our latest research.
Why are compensation strategies important?
At a most basic level, a compensation strategy is crucial to formalise workforce remuneration processes. Beyond that, a robust approach to compensation can be a game changer when it comes to recruitment, forming part of an attractive employee value proposition.
Appeal to talent
A competitive compensation offer can position you as an employer of choice for jobseekers.
Our research found that over half of recruiters say they often and very often see candidates drop out of the recruitment process because the salary wasn’t high enough, something which can be avoided by prioritising a competitive approach to compensation.
A well-crafted compensation strategy can also help to plug skills gaps. Simply put, talented and experienced candidates will want to work for you rather than your competitors if the compensation package you can offer is more appealing.
Enhance employee motivation
With the rising cost of living and high inflation observable in recent times, many workers are struggling financially. We found that 1 in 5 candidates are living pay check to pay check, with 3 in 5 concerned about their financial situation.
Easing these financial worries with a strong compensation offer can be a sound commercial decision, helping to improve workforce:
- Performance
- Productivity
- Motivation
- Loyalty
Reduce turnover costs
Employees who feel valued and happy want to stay with their current employer, reducing the turnover of staff and therefore the costs associated with recruiting, onboarding, and training new hires. One way to ensure employees feel this way is to include regular salary reviews as part of your approach to compensation.
Employee benefits, another key component of compensation strategies, can also help boost employee engagement and retention. Offering excellent benefits gives you an edge over your competitors and works to prevent employees leaving for a better offer elsewhere.
Boost employer branding
A reputation for offering fair compensation packages can enhance your employer brand. This can help when it comes to appealing to and hiring top candidates who want to be fairly compensated for the work they do.
Creating an employee value proposition by demonstrating a commitment to fair employee compensation alongside other ethical and responsible practices can also have value beyond onboarding talent. For example, other stakeholders, such as potential customers or investors, could be attracted and impressed by this approach.
Ensure pay equity
Employers have a responsibility to implement equal pay, so a transparent compensation strategy reassures employees that compensation is determined fairly and objectively.
This helps keep morale and performance levels high while complying with regulations and procedures.
Improve budget management
Having a clear and refined strategy in place works to simplify the process of budgeting for compensation, ensuring employers can compensate their workforce as promised.
Putting the overall plan in place can help with financial stability, as it clearly outlines the overall budget for salary, additional pay and benefits.
Creating an effective compensation strategy
Building an effective compensation strategy requires planning and attention to detail. While it can seem like a lengthy task, it provides an overall framework you can also use to set goals, boost employee engagement, and create budgets.
Below we’ve outlined some of the steps you can take to start implementing comprehensive compensation plans.
1. Define organisational goals
A compensation strategy should align with the wider goals of an organisational, such as:
- Attracting talent
- Retaining existing employees
- Boosting performance
Once these organisational goals have been identified and understood, you can start to craft an approach to compensation that works towards them.
2. Assess internal factors
Any effective compensation strategy needs to be financially sustainable. While our research highlights how much of a focus salary is for candidates and employees, it’s not always viable for employers to give everyone a significant salary hike on a regular basis.
A compensation strategy therefore needs to be realistic and sustainable. As a result, it’s crucial to work within budget constraints, ensure equal pay, and create alignment with the wider organisational culture.
3. Review existing roles and descriptions
Reviewing existing roles and job descriptions across the workforce is vital in crafting a successful approach to compensation.
Once this has been completed, you can create a framework for organisational compensation which can be adjusted when necessary and clearly shows the targets to be achieved for salary increases and performance-related bonuses.
4. Conduct market research
As employers look to recruit top talent amid skills shortages, an attractive and competitive compensation offer can make all the difference.
However, before you raise salaries too high (or drop them too low) to appeal to candidates, it’s crucial to research and examine market data and conduct salary benchmarking within the sector.
This can be done by analysing surveys, reports, and competitor compensation to understand market trends.
Discover how to use salary benchmarking to attract, retain, and motivate talent with the help of our analysis of over 17 million job ads across 23 industries.
5. Gather employee input
Research shows that 41% of people in the UK feel that they are paid less than they should be.
Therefore, collecting employee feedback on compensation can help address any gaps between what they’re paid and their expectations, and encourage active participation in organisational goals and plans.
This can also fit into your employee voice strategy, which helps employees feel listened to and valued.
6. Define compensation principles
To ensure the compensation your organisation offers employees can effectively boost wellbeing and create a positive culture, it’s important to determine the principles beyond the overarching strategy.
This might include, for example:
- Pay for performance
- Internal equity
- External competitiveness
7. Design a compensation structure
The next stage is to decide on the components of your compensation package.
This includes the basics set out above, including base salary bands, pay structures, bonuses, incentives, and benefits. To attract talent and retain top performers, it makes sense to establish salary ranges based on industry benchmarks, and to ensure that equal pay is given to roles of equal value in the organisation.
8. Link performance to compensation
By aligning employee goals with organisational objectives using an effective performance management system, employers can tie compensation offerings to performance.
This then works to create a reward system that effectively incentivises employees, thereby helping to boost productivity and improve outputs.
9. Communicate policies
A successful compensation strategy is one that’s clearly communicated.
Being open and transparent about how compensation decisions are made (including the criteria used) can help improve employee satisfaction levels and boost both productivity and performance, as employees understand what they need to achieve to earn a salary increase.
10. Monitor and evaluate
After its implementation, a compensation strategy needs to be reviewed and evaluated to make sure it’s working well. Performance metrics that can help identify what’s working (and what’s not) include:
- Feedback from employees at every level
- Turnover rates in the workforce
Monitoring and evaluating the strategy means you can make adjustments whenever needed to ensure you stay competitive and meet, or even exceed, employee expectations.
11. Stay compliant
Putting together a compensation strategy is a great opportunity to gather information (from internal employee feedback to industry salary benchmarks) and ensure compliance with employment laws, including equal pay.
Keeping up to speed with changed or new employment law legislation is the responsibility of an employer, so having compliance as an integral part of the organisation-wide compensation strategy makes sense.
Discover how to balance salary and benefits in your approach to compensation