Developing a Competitive Compensation Strategy

August 5, 2010

Smart HR leaders regularly ask themselves a key question when planning a human resources compensation strategy, “Have we positioned ourselves well relative to the market?” In order to answer this question, you must first know how competitive you want and need your compensation plan to be. Then, you can build pay ranges in alignment with your competitive compensation strategy.

Strategic Compensation and Your Position in the Market

There is no rule that says that you need to pay everyone in the fiftieth percentile. And, more importantly than that, there is nothing that says that you have to pay everybody at the same target. In fact, that doesn’t make any sense. How competitive you want to be is a function of what you need to be doing in order to be the very best, most competitive company that you can be.

Not All Jobs Are Created Equal

If you talk about targeting your positions in a certain way, you have to think about how important those positions are to your organization. I agree that all positions are important and all positions contribute to the success of the company. That said, some positions provide more value to your organization and there is a very strong business case for rewarding those positions differently.

Where should you be spending your labor dollars? What matters to your company? What is your competitive advantage? To help you understand how to answer these questions, I’ll use the example of Walmart versus Nordstrom. I’ve had the opportunity to work for Nordstrom. I did not work in compensation so this is not an example from my actual experience. But, let’s talk for a moment about what everyone knows about these two retailers and what their competitive compensation strategies are.

Walmart is a price leader. They are competing on price. Nordstrom will never pretend to be competing on price. They differentiate themselves on their service, having the latest fashions and having a good relationship with the fashion industry. These two stores have completely different strategies.

Guess what? Their compensation strategies for rewarding their employees, even though they are both retailers and are large, are also different. Walmart wants to make sure that their employees are helping to hold costs down because the only way to offer low costs is to hold costs down. So, they are not going to be leading the market with their pay practices. I guarantee that. You may agree with that approach or not, but you cannot argue that it is aligned with their business priorities and what they want to achieve.

Nordstrom, on the other hand, has a very successful compensation program based upon rewarding their sales representatives. Part of it is commission-based. Other retailers have tried to copy it and have not always been successful at it because it is hard to do well.

How does this comparison apply to your company? It helps you see how you need to think about who you are as an organization and where you want to be relative to the competition.

Which Positions Have the Biggest Impact on Your Company’s Bottom Line?

As you plan your competitive compensation strategy, it can be helpful to review the positions in your company and understand their role in reaching your long-term goals. Some positions may deserve more rewards than others.

Here is a made-up example but I think it’s reasonable. Within the Google company structure, is their Adwords sales person or their data miner more valuable? I’m going to argue that it is their data miner. This is because Google Adwords are sold by Google so if you want Google Adwords, which a lot of people do, then you’ve got to go to Google. So, they have this ready market that their sales team can sell to. You still want a sales incentive plan that is designed well. But the strategy is fairly simple for the Adwords sales team compensation.

In contrast, the data miner is someone who everybody needs and wants. Data mining is a key role that tech companies are looking to fill. And, the really good ones (there are not a ton of them) are even more valuable. These workers skills are highly specialized and unique and you have to have a competitive compensation strategy that mirrors that.

These tough-to-fill positions can often be an indicator of how your strategies, in terms of compensation, may need to be varied. If you’re having a really hard time filling a position, it’s probably because there aren’t very many of those folks out there. You have to make sure that you are designing a competitive pay plan that supports you attracting those folks and not losing them.

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