How to Build a Compensation Strategy

Jul 5, 2023

Organizations seeking new ways to attract and retain employees while staying financially stable in a volatile economy need look no further than their compensation strategies. Competition for talent is driving 70 percent of large employers to plan to enhance their benefits and compensation strategies this year.[1] Putting together a compensation strategy that’s sure to impress involves more than just offering high salaries, though. It needs to be a comprehensive, thoughtful plan that defines all the forms of compensation and why each component matters to the organization and its employees. A well-constructed compensation strategy can be a deciding factor for why employees choose a company and how it reaches its growth goals.


Prioritize Salary

The most important component of a compensation strategy, salary, makes up the bulk of total compensation (with benefits, bonuses, and perks making up the rest of the package). Salary considerations include base pay (whether it’s an hourly rate or an annual salary), frequency of pay, and (if applicable) timetable of scheduled pay raises.


Base Pay: Fairness Is the Ultimate Goal

When determining base pay, the safest bet is to use reliable market data to find the minimum, median, and maximum pay for comparable roles. This helps an organization set a pay range for each role that’s fair and representative of the industry. Of course, a company can choose to pay below, at, or above market rates, but that decision will depend on the company’s overall compensation budget and how competitive the candidate market is for that particular industry.

Without market data, it’s too easy to rely on bias or on subjective, inequitable standards (such as using the employee filling the role to set the pay range for it) when setting pay ranges. This kind of approach puts a company at risk in a number of ways:

  • It could offer wages that aren’t competitive and therefore lose talented employees.
  • With out-of-date wages, it could struggle to attract good candidates.
  • It could overpay for certain positions.
  • It could be liable for pay discrimination.

Market-based pay ranges help ensure pay equity (and reduce bias) across salary decisions and help an organization stand out as an employer that cares about fair and equitable pay. With this approach, a company will be more conscientious and consistent in how it approaches wages. Also, management will be better equipped to help employees understand how and why they’re compensated the way they are. By using data-backed fair pay as the foundation of its compensation strategy, an organization will also be better prepared to navigate difficult decisions, such as adjusting salaries in response to inflation.


Frequency of Pay: Support Employees through Scheduling

If a company has already set fair pay ranges, that doesn’t mean there’s no more wiggle room or ways for it to improve this part of its compensation strategy to better appeal to prospective and current employees. It can change the frequency of pay, for example, by distributing paychecks weekly (instead of monthly or biweekly), which can help employees feel more financially secure. In industries that have high turnover and difficulty attracting workers, some employers are even adopting a strategy of paying employees daily.


Pay Raises: Why It’s Important to Be Upfront About Pay

It’s critical for a company to clearly communicate its compensation strategies with employees and candidates and, most importantly, to tell them how they specifically fit into the whole picture. Before starting a job, a new hire expects an employer to provide key information about their wages, including what their base pay will be, how often they’ll get paid, and how and when they can earn or receive a raise. Even after someone is already hired or has been with a company for a while, giving them that information will help them be more engaged with their work rather than worry about their pay. Particularly with raises and promotions, people will want to know that they can grow in an organization and that it will invest in their future.


Use Bonuses and Incentives to Build in Flexibility

Bonuses and incentives make up another part of the total compensation package. They can be commission-based or given as additional compensation outside of employees’ job tasks. Some common examples of indirect compensation include:

  • Performance bonuses
  • Overtime pay
  • Stock options
  • Commissions
  • Referral bonuses
  • Company performance bonuses

Employees deserve to be fairly compensated for their work, and most will expect some kind of raise or additional pay for their loyalty and performance. That doesn’t mean an organization must give higher raises than it can sustain or must pay employees above market rate. Instead, a company can build a sustainable and flexible compensation plan by including different forms of indirect compensation. Bonuses and incentives can motivate employees without committing the company to pay higher than market wages.

When financial uncertainty looms on the horizon (whether due to high inflation or a global recession), financial support becomes increasingly important to employees. Bonuses and incentives can be a great way for companies to help mitigate financial uncertainty for their workers while continuing to be flexible in a shifting market.


Offer Benefits that Matter to Employees

Over three quarters of American workers “say benefits are a necessity for companies to offer employees,” with 84 percent of workers putting health insurance at the head of their list of “top benefits when considering employment.”[2] As healthcare costs continue to rise, organizations can’t afford to skip this type of compensation as a component of their compensation strategy.

Employers can tailor benefits as part of their total compensation packages in two main areas: how much they contribute toward employee premiums and which benefits they offer. Types of benefits include:

  • Because most employees see health insurance as a necessity, company offerings can vary on factors such as which provider networks are included, whether or not employees can add family members, and the cost of premiums.
  • Dental and vision.
  • Health savings account (HSA). Offering a matching contribution can encourage employees to budget better for medical expenses.
  • Life insurance.
  • Retirement account. As with an HSA, a matching contribution can encourage employee participation and promote financial planning.
  • Short-term and long-term disability.
  • Mental health services. Adding an employee assistance program to benefits can help employees access free, short-term support quickly.
  • Legal and financial services. These can include access to free or low-cost legal and financial advisors.
  • Childcare and family benefits.


Treat Time Off as a Key Component

In one recent survey on mental health in the workplace, “84 percent of respondents reported at least one workplace factor that negatively impacted their mental health in the past year—the most common being emotionally draining work (37 percent) and challenges with work-life balance (32 percent).”[3] Because the time employees spend working unavoidably affects their mental health and well-being, work schedules should factor into any compensation strategy.

A company’s time-off policies play a significant role in whether or not employees feel sufficiently compensated and appreciated for their efforts, and those policies are therefore instrumental in ensuring employees have the energy and ability to continue their work. Such policies should address paid and unpaid time off, paid and unpaid sick time off, and parental leave. When considering how to include time off in its compensation strategy, a company must answer three crucial concerns:

  • Whether to compensate employees for time off
  • How much time off to offer
  • What types of time off to offer

Whatever form the time-off policy takes, its overall goal should be to support employees in their work-life balance, well-being, and effectiveness in their roles.


Tailor Perks to Employees

A one-size-fits-all compensation strategy won’t meet the needs of every person in an organization. By offering perks, a company can customize compensation to its unique population and tie its compensation strategy to areas both the company and employees value. Perks can also help an organization’s company culture stand out.

Benefits have a wage-base value, whereas perks are offered on top of wages and can cover something employees would have likely had to pay for themselves. An organization should think about its employees’ specific needs when choosing what to offer. For example, if total health and wellness are important to its employees, a company can provide discounted or free gym memberships and regularly catered healthy lunches. If a company has a lot of employees with young families, providing discounts or memberships to local children’s attractions could make an impact. Other ideas for perks include:

  • Commuter benefits
  • Company-wide events
  • Cell phone allowance
  • Home office allowance
  • Company vehicle or gas card
  • Vacation funds
  • Employee resource groups
  • Pet-related benefits
  • Tuition and continuing education support


The Value of a Total Compensation Package

To develop a competitive compensation strategy that will guide it both now and well into the future, a company must be sure that it fulfills the five functions outlined above. By focusing on what matters to its employees and communicating clearly about how their compensation packages benefit them, an organization can position its compensation as a key element in its recruitment and retention efforts.

[1] Mercer. 2022. “Health and Benefit Strategies for 2023.” Mercer website,

[2] BambooHR. 2022. “Rethinking the Great Resignation: Understanding What Workers Want from Employers.” BambooHR website, April,

[3] Mind Share Partners. 2021. “2021 Mental Health at Work Report.” Mind Share Partners website,

Written by: Marie-Reine Pugh

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