In this 5-part blog series, we’ll discuss how to build a compensation strategy for your company that balances company goals and industry shifts, supports business strategy, and ensures pay transparency.
Fair Pay for Employee Contributions
Oftentimes when managers discuss pay with their employees, they encounter questions for which they may not have an answer. Employees want to know they are receiving fair pay for their contributions, and may wonder...
- How is their pay linked to performance?
- How does it compare to other salaries within the company?
- What about to similar positions in other companies?
Answering these questions is important to retaining talent, which is why all organizations should be equipped with a compensation design that balances company goals and industry shifts. Establishing a clear and standardized compensation philosophy enforces transparency across the organization and eliminates guesswork when employees seek to find out why they are being paid the way they are. Moreover, a well-developed compensation strategy helps to support the execution of the business strategy while maintaining competitiveness.
Tactics for navigating compensation challenges
Designing a compensation strategy that balances internal and external factors requires consideration of many complex variables, including:
- How to link business and compensation strategies
- Key compensation principles to consider
- How to develop your company’s compensation philosophy and goals
- Example methodology for designing a compensation strategy
- How to maintain a competitive pay philosophy
Linking business and compensation strategies
For a company’s compensation strategy to be effective, it must be linked to overall business strategy. Because compensation accounts for 30-60% of business costs, it is essential for organizations to identify the drivers behind pay. For this reason, the foundational step of creating any solid compensation strategy is linking it to the business strategy.
The business strategy informs the organization’s direction relative to its overall environment. It comprises both short and long-range goals and objectives, and can encompass its SMART goals, pay for performance objectives, or any other goal setting methodology the company utilizes.
The jump from business strategy to compensation strategy is often made without considering a crucial middle part: the human resources strategy. This entails the organization’s overall plan for attraction, retention, and motivation of employees, and should not be overlooked when developing a compensation strategy.
McDermott Associates and HRSoft have published
a new compensation design whitepaper on this topic
The compensation strategy should include principles to guide design, implementation, and administration of the overall compensation program (including pay and benefits). To choose the right compensation approach, be sure to select a rewards system that supports and reinforces the business strategy, goals, and objectives. The strategy must also respond to external pressures, using pay as an opportunity to create a competitive market advantage. Additionally, a business’s strategy is only as good as the employees’ ability to execute it, therefore pay strategy should ultimately recognize and reward performance that drives results.
In our next blog post, we’ll cover key compensation principles that enable effective pay strategies.