Compensation strategies: A guide for employers
Learn how to develop a compelling compensation strategy to attract and retain talent, boost engagement and ensure financial stability.
An attractive compensation package is likely to be the deciding factor for candidates looking to join your organisation, and it’s a major reason why they’ll stay.
In a labour market impacted by skills gaps and rising living costs, employers that offer the best salaries and benefits are most likely to attract the top talent. A well-designed compensation strategy allows employers to scoop up the best candidates at the same time as boosting employee engagement and ensuring legal compliance and 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 translates into a competitive advantage.
What is a compensation strategy?
In a nutshell, 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?
According to previous research from Totaljobs, 40% of UK workers are considering changing jobs in the next two years, 73% of which cite salary as the biggest factor in applying for a new role. Given these findings, it’s vital for employers to understand what they should look to include in a competitive compensation strategy that helps them attract and retain top talent. According to previous research from Totaljobs, 40% of UK workers are considering changing jobs in the next two years, 73% of which cite salary as the biggest factor in applying for a new role. Given these findings, it’s vital for employers to understand what they should look to include in a competitive compensation strategy that helps them attract and retain top talent.
Base pay
Setting base pay is a balancing act. Offering significantly more than competitors can be wasteful, while too little can result in valued candidates looking elsewhere. Some employers classify positions and set pay bands based on job classification, while others set a fixed pay rate for positions that increases with years of service. The important factor is that there’s a pay strategy that’s clear and transparent, so everyone knows the deal.
Additional pay
Compensation strategies should address any performance-related compensation employers offer employees, such as individual bonuses for high-performers or those related to the overall performance of the organisational. The strategy should clearly outline how these additional payments are structured, who is entitled to them, and when.
Benefits
A compensation strategy includes benefits packages and eligibility criteria. These include everything from gym memberships to car allowances and flexible hours, and can be a key factor in employee engagement.
In fact, our research says that over two-fifths of UK workers would be happy to skip a pay rise to get their most desired benefit. The top five most attractive benefits to candidates are:
- Flexible hours (35%)
- Pension contributions above what’s legally required (27%)
- Bonuses, and paid holiday allowance over what’s legally required (both 26%)
- Private health insurance (24%)
Why are compensation strategies important?
At the 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.
Let’s take a look at the specific benefits employers can leverage with a well-thought-out compensation strategy.
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 the skills gap. Talented candidates will want to work for you rather than your competitors if the compensation package you can offer is more appealing, simplifying the process of recruiting top talent.
Enhance employee motivation
With the rising cost of living and high inflation observable in recent times, many are struggling financially, often impacting their overall wellbeing. Easing the financial strain for employees 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 keep employees engaged. While our research found that 72% of UK workers are satisfied with the benefits their employer offers, just 17% are very satisfied. 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 brand as an employer. This can help when it comes to appealing to and hiring top candidates who want to be fairly compensated for the work they do.
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
A clear strategy simplifies 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 a comprehensive 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 plan 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
A compensation strategy has to be financially sustainable. While our research shows that only 12% of UK workers say they are very satisfied with their current salary, 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. This means it needs to work with budget constraints, ensure equal pay and fit with the culture of the organisation.
3. Review existing roles and descriptions
Reviewing existing roles and job descriptions across the workforce is vital. Once this has been achieved, 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 benchmarks within the sector. This can be done by analysing surveys, reports and competitor compensation to understand market trends.
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 gap between what they’re paid and their expectations, and encourage active participation in the company goals and plans. This can also fit into your employee voice strategy, which helps employees feel listened to and valued.
6. Define compensation principles
According to our findings, the two main reasons UK workers are unhappy with their current pay is that they feel their salary doesn’t reflect the time and effort they put into work (41%) and that it’s not enough to live on comfortably (37%).
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, 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 system that rewards productivity and improved output.
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. The performance metrics, which will help you identify what’s working (and what’s not) include:
- Using feedback from employees at every level
- Evaluating the 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 the perfect way to gather information (from internal employee feedback to industry salary benchmarks) and ensure compliance with employment laws, including equal pay.
Staying informed to changes to new employment law legislation is the responsibility of the business. Therefore, having compliance as an integral part of the organisation-wide compensation strategy makes sense.