How to Create a Compensation Strategy: A Complete Guide

By Decusoft
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What is Executive Compensation? 

Executive compensation programs are influenced by a variety of factors today. As a compensation manager, your primary concern should be the alignment of pay and performance. Standard wage arrangements for hourly workers or salaried administrators and clinicians vary greatly from executive pay packages. The incentives for real performance and results are heavily weighted in executive pay. When a company underperforms, though, the executives’ salaries are normally slashed to a percentage of their potential income or compensation targets. In comparison, if a company meets or beats its annual expectations as the stock price increases over time, the executives will be greatly compensated. This Decusoft guide will show you how to design an effective compensation strategy for your organization to succeed in 2021. Your organization’s compensation strategy and compensation decisions will impact every aspect of your organization. 

Total rewards

A total rewards plan is a management strategy that rewards workers for achieving particular business goals with monetary, non-monetary rewards in benefits, and developmental rewards. Compensation and incentives are combined with opportunities for professional development within a motivated job climate in this approach.

Merit Increases

Merit pay, also known as pay-for-performance in some organizations, is an increase in base pay or base salary based on the employer’s set of requirements. This normally entails the chief executive holding an annual meeting with the employee to discuss his or her job results over a period of time. Merit increases are based on employee performance or individual performance. The amount of merit increase an employee receives should be based on metrics set by the organization and be in line with market rates for incentives. Performance management is an important part of pay strategy when it comes to merit increases

Compensation Strategy Allocation 

Allocation is the all-important question of how to allocate compensation and other benefits for employees. This is the budget allocation for specific costs related to compensation like benefits, salary, 401k, and bonuses. Employee compensation is the largest component of an organization’s total labor costs. By determining a specific allocation budget your organization can help control costs for common business expenses like healthcare, labor costs, bonuses, and other common expenses. 

Employee benefits can account for as much as 70% of an organization’s overall costs, according to Deloitte analysis. Compensation administration has an effect on an enterprise, which includes business leaders and administrators, stakeholders, and employee engagement. Human resource experts should be mindful of the role compensation planning plays in the overall business strategy, company culture, and talent management for top performers. You will be more successful in choosing the right compensation management system for your company if you understand how compensation management affects your business overall.

Compensation Strategy: Salary Ranges

It is important to determine an employee pay structure that aligns with your organization and goals. You must examine competitors’ salary ranges in conjunction with their benefits and incentive strategy to develop a complete picture of compensation strategies across your industry. To create a competitive compensation strategy benchmark positions in your organization with similar positions in your competitors’ organizations. Be sure to look at different geographic locations and what salary ranges succeed in what region. In large organizations, you should engage a compensation department to manage the creation and development of salary compensation packages

Ask these questions when determining salary ranges: 

  1. What is the pay rate for this geographic area? 
  2. What is the seniority of the position?
  3. How competitive is the market for this position?
  4. What does success look like in this position?
  5. What is the retention rate for this position? 
  6. What do current market conditions dictate for compensation?
  7. How often will pay increases be offered? 
  8. What competitive advantage does your company have over competitors? 

Pay grades 

Create pay scales and grades for the positions in your organization. Determine what “grade” each job belongs to; for example, a Grade A job will be at the VP level, a Grade B job would be at the Director level, and so on. Within that set, what would be at the smallest and largest salary figure? Develop pay scales and ranges all the way down to the entry/assistant level. As workers “graduate” from one grade to the next, this will add discipline to the recruitment activities and make raising percentages easier. Look at compensation data for other companies in your industry to determine appropriate benchmarks for pay grades. 

Install, Monitor, and Refine Your Compensation Strategy 

Since markets shift, it’s essential to conduct frequent wage audits to ensure that salary ranges reflect current compensation patterns in a given industry. Collect information from supervisors and staff about what can be improved. Employees should have access to HR portals so that they can self-serve certain tasks when necessary. Your compensation policy isn’t something you’ll worry about once and then forget about. It will still need revisions and upgrades as time goes on and your organization scales.

Salary Audits for Compensation Strategy

We all know how quickly markets shifted in 2020. Successful businesses must be nimble and adapt to changing market conditions to survive and thrive in coming years. Examine your company’s pay scale to see how many people are on the high end, low end, or in the middle of the curve. Adjustment and review protocols should be developed. Ask when are salary adjustments implemented and review processes completed? Look at compensation trends for your industry when conducting salary audits as well. 

Bonuses and cost-of-living changes will all play a part in the compensation package. Managers and staff should be aware. Present the software to the managers after the board has approved it. Request feedback and consider all suggestions. Create a roadmap for managers to explain the structure to their staff. Establish effective implementation protocols, develop appropriate data input formats, and produce effective reports for senior managers in partnership with HR information management personnel. 

Compensation Strategy: Benefits 

Your total compensation strategy will also contain a benefits package for employees. Benefits and perquisites make up a smaller and smaller percentage of overall compensation for executives today. The level of shareholder discontent is much greater than the value of the benefits/perks offered, and the emphasis has turned to “irritants.” Executives’ wellbeing and efficiency are typically supported by the remaining perks today. SERPs that offer extra benefits to senior executives, such as retirement programs customized to senior executives, are under fire. Excess/Restoration Plans are still allowed. In view of pay-for-non-performance issues, severance and change-of-control incentives are being reconsidered. Severance multiples have decreased, and excise tax gross-ups have been eliminated.

This can include: 

  1. Flexible time off 
  2. Flexible working hours
  3. Stock options/equity
  4. Fully covered healthcare
  5. Matching 401k
  6. Other retirement plans
  7. Maternity and paternity leave
  8. Transit reimbursement
  9. Work from home
  10. Unlimited PTO
  11. Child care reimbursement
  12. Learning seminars
  13. Wellness benefits 
  14. Student loan reimbursement
  15. Education reimbursement 
  16. Profit-sharing
  17. Other employee benefits 

Legal Compliance in Your Compensation Strategy

When designing a compensation plan, it’s necessary to keep legal enforcement in mind. Do you know what the local and national payroll codes are? When you build your compensation package, your HR department will advise you on any legal considerations. By avoiding expensive penalties, more funds would stay in the payout pool and out of the hands of governing bodies.

Final Thoughts On Compensation Strategy 

Executive compensation can be a tricky subject to master. When designing a robust executive compensation plan, there are hundreds of factors to consider and various performance metrics to weigh. Your business will recruit top talent and incentivize them with a well-designed strategy. Executive pay may mean the difference between a company’s long-term success and a series of disappointments and underperformance.