Implementing a Compensation Strategy
A compensation primer for curious, action-oriented leaders
What’s in this knowledge article?
Why Create a Compensation Strategy
When & How to Implement a Compensation Strategy
How Can I Improve My Alotten Score
Further Reading and Discovery
What is a Compensation Strategy
A compensation strategy outlines your company's philosophy on how you pay your employees, defined as their salaries, other monetary incentives (bonus, commissions, etc.), and/or equity. A well-structured compensation strategy reinforces your talent strategy - ensuring you attract, retain, and motivate great talent.
The Total Rewards Ecosystem
Compensation is part of total rewards. Total rewards encompasses all the ways in which a company acknowledges and rewards its employees, both financially and non-financially to motivate, retain, and reward employees.
Total rewards are rooted in your compensation philosophy. To form a compensation philosophy, executives answer the following questions with support from finance and HR:
How do I incentivize the right behaviors to progress my mission and business objectives? Example: growth vs. maximize profit
How do my total rewards reflect my employee value proposition?
Example: pay above market for proven, high performing talent vs. at-market for high potential talent
Why Create a Compensation Strategy?
Mitigate legal risk. If employees with the same job are paid differently and those differences can’t be justified by differences in performance, tenure, skillset, or other legitimate means, the resulting pay disparities can lead to discrimination and legal suits.
Retain employees. The estimated cost of replacing an employee is between 30% to 500% of their annual salary. If employees feel underpaid, they are more likely to leave - which may spur others to leave, too!
Bolster corporate reputation & talent pipelines. When employees feel undervalued, they can discuss these feelings with others. Poor reviews on sites like Glassdoor or Blind can harm your employer brand, making it harder to attract quality talent. Internally, negative feelings may spread across teams through emotional contagion.
Time & money well spent. Without market-based compensation, you may frequently be pressured to fend off counteroffers and attrition when employees are underpaid. Conversely, you may overpay for average talent or struggle with pay negotiations everytime you hire.
When and How to Implement a Compensation Strategy
When to implement a compensation strategy
Every company needs a strategy, and it needs to suit their maturity and industry.
What you need to implement a compensation strategy
A commitment to fair standardization from your leadership team.
A compensation philosophy from executives (created with HR and Finance).
A job architecture containing pay targets from a compensation survey.
An understanding of your company’s culture, business objectives, and budget.
An understanding of pay equity. There are valid reasons pay may vary. Compensation strategies do not aim to pay everyone the same. Rather, they allow companies to vary pay consistently to ensure pay is legally defensible.
How to implement a compensation strategy
The graphic below illustrates how the focus of a company’s compensation strategy efforts differ by maturity phase.
Compensation Strategy: Step-by-step
1. Determine your “mix” of salary, equity, and incentives. Consider the volatility of the market, your compensation philosophy, the behaviors you wish to incentivize, and the type of roles you’ll employ.
2. Set target market percentiles for salary, equity, and incentives for your roles.
Before you pull actual numbers, ask yourself if you want to be above or below market.
The “going rate” is the 50th percentile (i.e., the midpoint) of your market data, but you may pay above or below the midpoint given budget or other strategic considerations.
Determine which roles have unique pay targets. For example, you may pay the most mission-critical roles at the 75th percentile while all other roles are paid at the midpoint.
| Startups | Have less liquid assets and little data to make reliable market predictions. Compensation: Higher equity; Lower salary or incentives. |
| Growth, Mature |
Increasing revenue and market data allow for higher salaries & incentives. Compensation: Equity decreases; Salary and incentives increase. |
| Mature |
Pay the market average, but strategically over index on a few rewards. Compensation: Selectively competitive |
3. Use your target market pay points and job architecture to set actual salary, incentive, and equity targets for each role at every job level. Find the salary or on-target-earnings equivalent to your target market pay point for each role at each level. Pay ranges (as opposed to a single target) provide a “minimum” and “maximum” guardrails. A common practice is to aim to pay all employees within 80% to 120% of the market target percentile.
Startups: Build ranges for all levels of a role (even unoccupied levels) to facilitate a high rate of growth.
4. Integrate these pay targets into your operations. Don’t forget to train managers and other relevant personnel on how to use your ranges.
5. Conduct pay analsyes with existing employees to determine how their pay compares to the market. Use your pay targets (or the midpoint of your pay range, if you opted for ranges) to find each employee’s comparatio. This information allows you to determine how an employee’s pay compares to the market. Because a comparatio quantifies pay based on a standardized set of skills, it also allows you to make fair comparisons across employees.
6. Integrate your compensation strategy into your organizational processes. For example, use comparatios to analyze and distribute pay at merit.
7. Build out the rest of your total rewards ecosystem. Consider what your employee population values most. Medical insurance (and in some states, things like disability insurance) are absolute must-haves. Retirement, other types of insurance, paid time off, and leave are often also table stakes. Exit stage companies begin to strategically align these and other miscellaneous perks to their values, culture, and employee population.
How to improve my Alotten Score
Did your Alotten Score suggest you focus on your job architecture? Are you trying to pin down your compensation philosophy or wrangle market data into ranges? We can help!
Contact us at support@alotten.com.
Resources
Pay Disparities
HBR How to Identify - and Fix - Pay Inequality at Your Company
Emotional Contagion
Workstars Why Managers Need to Understand Contagious Emotions
Estimating Turnover
SHRM Essential Elements of Employee Retention
Predictive Index How to Calculate Employee Turnover Cost
Ripple Effects of Attrition
Academy of Management (via Quartz) A New Study of 1 Million Employees Shows What Happens When Colleagues Leave
Compensation Survey
Astron Solutions Compensation Surveys: What They Are and How to Use Them
