Which job would you choose: one with a sizable pay bump but requires a move cross-country, or one that offers a lower base salary but more vacation days and better health benefits?
While both options are vastly different – and target particular priorities – they have one thing in common: a strong compensation strategy.
With millions of job openings to choose from, people are seizing the opportunity to switch roles. In order to attract exceptional talent to fill these open positions, companies must regularly assess their hiring processes and determine what will draw strong candidates.
One way to attract top talent to your organization is through your compensation package. By creating or reassessing your company’s compensation strategy, you will be able to stay competitive in today’s rapidly evolving hiring landscape.
What is a Compensation Strategy?
A compensation strategy encompasses a company’s methods and objectives around its employees’ overall compensation packages, which goes beyond just salary and bonuses. It also includes health insurance, life insurance, retirement benefits, stock options, office stipends and reimbursements, professional development opportunities, and other perks that help your organization attract, develop, and retain the best talent.
Compensation strategies are created by using a mix of employee feedback, market data for job roles, allocated budget, and insights on position compensation.
Two Aspects to Consider When Creating Your Total Compensation Strategy
People are leaving their jobs for a variety of reasons, including seeking positions that offer additional flexibility, an inclusive culture, a higher salary, or a more meaningful job, or they may be transitioning to a new field altogether.
With so many variables and different priorities for people, developing a compensation plan can be challenging. But ultimately, if you develop a plan that’s considerate and aligned with your company goals, it will help bring candidates in the door and keep them for years to come.
When forming your strategy, there are two main components to consider: pay and benefits. Importantly, benefits should extend beyond traditional elements like healthcare to encompass both tangible perks (e.g. home office, professional development, and wellness stipends) and intangible ones too (e.g. company culture and flexible work options)
Your Pay Strategy
Pay is naturally going to be relative to the broader market and there are arguments for paying at, above, or below market rate. As you think through each of these approaches, it’s important to keep both your budget and your plans for headcount growth top of mind, since you’ll need to be consistent with your strategy across the board as your team scales. Remember: especially if your scaling fast, it’s always easier to increase your pay relative to market rates than it is to decrease.
1. Market Rate
The market rate is the prevailing salary or compensation range for a position in a particular industry and location. Here, compensation matches what’s obtainable from the competition and the market in general.
2. Above Market Rate
If you decide to compensate employees above market rate, you’re offering more than others are for the same role at the same level.
This strategy helps you attract and retain talent at your organization. This may also signal to prospects they’re joining a stable organization whose finances are in order, that’s projecting growth, or is making strong headcount planning moves.
When choosing this strategy, you must ensure you have the resources to sustain such compensation long term. You don’t want to attract the best talent only to realize you can’t pay them whenever there’s a drop in revenue.
3. Below Market Rate
Some companies pay employees below the market rate. This is often the case for smaller organizations or startups that may not be able to afford higher compensation offers.
While lower pay can be a deterrent for some candidates, don’t fear; many potential employees now look beyond salary. Base pay may have been a driving force in the past, and while it’s still powerful today, it isn’t the only aspect candidates consider.
Who would want to be paid below market rate? Companies that offer lower salaries may attract talent in the early stage of their careers, people that are passionate about the company mission, those who’ve switched career paths, or those who prioritize other elements of compensation like benefits or, in particular, equity. The equity piece is extremely important, as it’s something many startup employees value significantly as part of their total compensation. Your company can help reinforce the potential value of equity by helping employees visualize equity as part of their compensation alongside their base salary and by communicating details about value often following key growth milestones.
Overall, if you consider why people are leaving their jobs – needed flexibility, better parental leave, stronger mental health benefits – it makes sense that many candidates are shifting their compensation priorities.
Your Benefits Strategy
Even if your budget doesn’t allow you to increase your compensation plan, you can use non-financial incentives to attract talent. Or, if you want to be very competitive, you can offer both above market salary and a strong benefits package.
Check out the list below of attractive benefits; the first three are ones employees request most often.
- Paid time off
- Flexible schedule or remote working options
- Paid family leave
- Employee equity
- Multiple health care plan options
- Health Savings Accounts (HSA) or Flexible Spending Account (FSA)
- 401k with or without a match
- Quarterly or annual bonuses tied to performance
- Home office stipend
- Professional development opportunities
In short, even if your base pay is lower than market rate, you can stay competitive by incorporating benefits that are valuable outside of salary compensation.
5 Steps to Creating a Superior Total Compensation Strategy
Thinking about creating a compensation strategy or refreshing your current model? Below are five steps to guide a successful planning process.
Step 1: Use Data to Determine Your Existing Compensation Strategy
Before determining your budget for new hires, you’ll want to consider your biggest asset: your current employees. Are their salaries and benefits competitive to the ones you’ll be offering candidates for open positions?
To analyze your current compensation strategy for existing employees, you’ll need to look at metrics. By standardizing data-based decision-making, your People team can accurately measure and reward your employees based on performance. Additionally, without data driving your decisions, your employees may be subject to unconscious bias or pay inequity, or they may be passed up on a promotion due to favoritism.
Step 2: Establish Your Approach to Salary Transparency
After solidifying your plan, establish how transparent you’d like to be with your employees regarding salaries and communicate any changes to your strategy accordingly.
Some options include:
- Publishing everyone’s salary. Whether it’s for internal use only or all the world to see, this strategy is the boldest of the salary transparency approaches. Buffer chose to be incredibly transparent and publish every employee’s salary to build a culture of trust and hold themselves accountable.
- Making pay bands visible internally. By making pay bands visible internally, companies like ChartHop empower their employees with the knowledge and skill sets needed to move up in the organization.
- Providing pay ranges and employee benefits on job descriptions. This practice is becoming more common and provides benefits to both your company and candidates. While some companies may provide the salary range and basic list of benefits, others like Ford include additional information like retirement plans and company-paid holidays.
Whatever you choose, being transparent about your approach will help retain your people and set clear total compensation expectations moving forward. Doing so will signal that you not only care about creating a fair and inclusive culture, but also that you prioritize and value your people.
Step 3: Research Market Rates and the Competition
Market rates are generally averages calculated based on anonymous contributions or the average pay based on compensation collated across different listings. You can find the average market rate compensation for positions in your company or those you’re hiring for by using job sites like Glassdoor, PayScale, Salary.com, and Indeed.
Researching the competition involves more work.
Manually check the profiles of your biggest competitors on job sites or visit the “Careers” pages on their websites to learn the compensation ranges for open positions. You’ll find that while many companies disclose compensation on their job descriptions, others do not, so you’ll need to do more digging.
But don’t just look at salaries. Investigate common benefits your competitors are offering, such as stock options, flexible time off, or even free gym memberships. Candidates apply to multiple openings at the same time, so if they’re all offering similar pay and other conditions are equal, a candidate may choose the company with superior benefits.
Some job sites will show you the most common benefits companies are giving for different roles. Note the benefits not listed, and use them for consideration as a part of your benefits and overall total compensation package.
It’s also helpful to speak to your employees and prospective candidates to ask what they value most in a total compensation plan. This exercise will give you insight into what employees prefer and what other companies might be offering.
Step 4: Evaluate Your Company’s Budget
This step is where you’ll begin comparing your allotted budget with market and competitor compensation rates to determine if you will offer salaries at, above, or below market value.
It’s always helpful to create ranges for your pay bands, such as $55,000 to $70,000, $120,000 to $145,000, and so on. Always include a flexible upper limit, then ask for executive buy-in, and be sure that budgets can accommodate the necessary flexibility.
This flexible upper limit will allow you to pay a little more for exceptional talent and also raise the salary of your current employees as it makes sense. Critically, ensure that your company can sustainably pay the budgeted amount for salaries long-term to avoid financial troubles.
This is also the proper time to develop a clear, detailed benefits list. Whether you publish these on your company website, house them in an easily-accessible database for employees, and/or share them on job descriptions, you are providing another layer of transparency so your employees can see the full picture.
Step 5: Decide How Many Employees You Can Hire or Promote
At this stage, you know the market rate, what competitors are paying, and how much you can stretch your budget to attract the best talent. Now you need to decide your next steps.
It can be any or all of the following:
- Hiring new talent
- Promoting existing talent
- Improving compensation across your organization
Hire new talent when you realize no one in your company has the required skills or experience for the open position, especially if it’s a position you must fill immediately.
Otherwise, promote an employee who’s willing to upskill for the role if you’re not looking to fill the position immediately. By promoting internally, you’re providing the employee with a growth opportunity and increasing the chances they’ll stay longer at your organization.
After Rollout: Staying Flexible with Your Compensation Strategy
Remember, your compensation strategy isn’t set in stone. Continually revisit your strategy and be willing to adjust it to account for any changes in the hiring landscape, your industry, local laws, and even the economy. By refreshing your compensation plan to meet candidates’ needs, you’ll be setting your company, headcount planning, and talent acquisition team up for success.
Ready to Create a Superior Compensation Strategy?