How to Manage Rewards and Compensation

Jan 25, 2023

By FutureSense 

A business is only as strong as its employees. When they grow dissatisfied and aren’t delivering their best work (or are leaving to join other companies), the organization starts to falter and will soon find itself running on borrowed time. By leveraging effective rewards and compensation packages, businesses can keep their employees happy and engaged. 

The relationship between employee and employer is transactional: an employee works and in return for that labor receives compensation in the form of a salary. Rewards, on the other hand, lie outside the usual compensation package. Normally given to employees who have performed exceptionally well, rewards can also be used to encourage hard work and loyalty among workers. For a reward to become an effective performance motivator, it should be based on the employee’s worth to the business (with the business’s current financial standing also a determining factor, of course).

A compensation strategy is a company’s system to pay and provide employee benefits. An organization needs an effective compensation strategy in order to attract the best talent in the industry (though creating one can be more challenging for small businesses). An effective compensation strategy helps a company achieve several key staffing goals: 

  • Hiring the best talent available 
  • Retaining top-performing employees more easily 
  • Minimizing employee turnover

Ensuring that all money spent on rewards and compensation also improves a company’s ability to attain its overall goals. 

The company’s strategic goals should determine how much it pays and rewards its employees. Most compensation management plans follow one of three approaches.

  • Leading compensation. Under this strategy, a company offers higher compensation than the going market rates. This makes it easy for it to attract the best people and retain top employees and also helps it build a good reputation. The obvious downside to this approach is that it can be costly: only a company in good financial standing can offer this type of compensation. Also, an organization that experiences a financial downturn may have to reverse this strategy, wiping out all the gains made from it. 
  • Lagging compensation. With this strategy (the opposite of the leading compensation approach), a company offers compensation below the market rate. The types of organizations that use this strategy are financially unstable companies, nonprofits, and startups. Although this approach can benefit a company’s finances, it does not help with employee retention and can make it harder to attract top talent. 
  • Meeting the market. The most commonly used compensation strategy today, this involves paying within the current market-rate range for salaries and rewards. This strategy ensures that employees get compensated properly and continue to perform in their jobs. 

Although organizations need strong reward and compensation strategies, they also must be flexible with them. Not all recruits and employees are the same, and rewards and compensation offers should be adjusted to take into account each individual case. For example, the top-performing employees deserve more compensation, and experienced employees will expect it. A prospective recruit’s current wage is also a factor: a company usually must offer higher compensation to entice someone to move there. 

There is no one-size-fits-all strategy for managing rewards and compensation. What works for one employee (or company) might not work for another employee (or company). Each organization needs to evaluate its needs and assets, then figure out how to factor them into rewards and compensation strategies that will help it reach its goals. 

FutureSense provides people-focused HR, compensation, and organizational development strategies that improve business performance.

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