Why do you need a compensation strategy?

Why do you need a compensation strategy?

Your organization doesn’t necessarily need to be a ‘high payer’, but you should know where you are positioned in the market and if your compensation practices align with your organizational strategy. For example, do you know:

  • The current salary ranges for positions in your company?
  • How your organization’s pay practices compare to those companies competing for the same pool of applicants (referred to as external pay equity)?
  • How salary ranges for positions within your company compare to and are associated with each other (referred to as internal pay equity)?
  • How your salary ranges impact your ability to attract and retain top talent and what, if any, you need to do to complement your salary offering?
  • When employees are eligible for pay increases and how those pay increases will be determined?

Forecasting and budgeting

Having an established compensation strategy contributes to your ability to predict costs for increasing head count and providing salary increases. It also helps avoid situations where pay decisions may be inconsistently applied or it may be tempting to pay a candidate beyond a defined salary range—which is likely to erode internal equity and, as a result, contributes to pay dissatisfaction with existing employees.

Attracting new talent

Strong applicants are discerning, but not all looking for the same things. So, it is worthwhile to define your company’s unique Employer Value Proposition. In other words, take time to consider and define why applicants choose to work for your company and why employees choose to stay with your organization. Ultimately, your best candidates are those that are both qualified and value the compensation and ‘soft benefits’ that your organization extends to its employees.

Retaining top talent

One of the biggest frustrations for employees is when they feel that they are underpaid in comparison to others in their organization. While external equity is an important consideration for the recruiting process, internal equity is a key consideration for employee retention.  Salary increases, job transfers and new hires are good times to verify internal equity has been maintained—ensuring your top talent isn’t abandoning ship due to poorly executed pay practices.

Fair pay practices

While it may occur unintentionally, it is easy for salaries to become imbalanced. Adhering to established salary ranges and pay increase policies avoids situations where employees in the same or similar role are paid considerably different. When left unaddressed, employee dissatisfaction can lead to costly consequences such as disengaged employees, union organization, and legal action.

Creating clarity around your compensation strategy provides a decision framework for setting employee salaries and determining salary changes. It also removes the ambiguity and frustration associated with subjective and unsupported compensation decisions.