Every day, companies make intentional decisions about their business: should they expand their products or services, is the time right to open new locations, are they ready to add jobs and headcount? One intentional decision that too many companies aren’t making: establishing their compensation strategy. PayScale’s 2017 Compensation Best Practices Report (CBPR) found that just 37 percent of all organizations have a comp strategy. The good news, though, is that another 34 percent are in the process of developing one.
What is a compensation strategy?
It’s the sum of all the choices you make about how to spend your compensation dollars, including the market where you compete for talent and how competitively you plan to pay in that market. Your comp strategy will determine the cut of comp data you use to price your jobs as well as your target percentile. Here’s an example: The Smith Company will use 10,000-employee sized companies in the Software Development industry in our local markets for competitive benchmarking. We will use the 50th percentile as the target for employee pay.
Read on for four reasons to develop a comp strategy now:
1. Alignment
Payroll is often an employer’s biggest expense so it makes sense to be strategic about it. Your comp strategy should create alignment between your business or mission objectives and your pay practices; it should support what you’re trying to accomplish as an organization by helping you attract and retain the right people to do so. If you’re operating in a competitive labor market and planning to ramp up hiring to achieve aggressive business goals, let’s be honest: a strategy to target pay below the market median probably won’t help you get there.
2. External Competition
It’s critical to think about your jobs and figure out whether there’s a market-driven reason to develop separate comp strategies by function or level. Consider a small non-profit health clinic; perhaps their strategy is to price to similar organizations for most jobs but price to large hospital systems for provider jobs where the market is tighter. This approach can serve as a bulwark against those larger orgs poaching their key medical talent. The 2017 CBPR found that 51 percent of all organizations compensate differently for more competitive jobs; the number jumps to 56 percent of top-performing organizations. This idea of developing separate comp strategies for different segments of their workforce is more prevalent in technology companies, where 63 percent said they pay differently for more competitive jobs, compared to 35 percent of education orgs and 42 percent of non-profit orgs.
3. Fairness
A comp strategy can promote internal equity. It’s a lot harder to ensure you’re paying fairly across the company when there’s no roadmap to guide pay decisions. Defining your comp strategy will help ensure that leaders are on the same page about the organization’s approach to pay. “Random” should never be a word used to describe your comp plan!
4. Employee Goodwill
The days of comp as a mysterious black box are long gone; if you don’t share something with your employees about what’s driving your pay practices, they’ll go searching for their own information—and what they find might not be right. PayScale research shows that employee satisfaction is positively impacted by employer transparency, yet just 31 percent of organizations surveyed for the 2017 CBPR said they have a transparent pay process. Get ahead of this now by developing and sharing your comp strategy. If that sounds scary, remember that it’s not all or nothing; there’s a transparency spectrum and you can choose the level that’s best for your company. PayScale senior vice president Tim Low echoes this sentiment, saying, “It’s not just what a company pays, it’s how they pay and how they communicate about it that has a major impact on culture, attitude and morale, engagement and performance.”
Next: Part 2 with the steps you can take to define your company’s compensation strategy.
Tell Us What You Think
Does your organization have a compensation strategy? Tell us about it in the comments.
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