Compensation strategy is the overarching policies that detail how an organization offers its pay and benefits. A compensation strategy can help pull the right people into your company by offering them something they want, like unlimited PTO or a salary that aligns with market rates.
When determining the types of compensation strategies you’ll use, it’s important to consider the roles and employees in your organization and what they need and prioritize. With this employee-facing approach, you can ensure that you give workers what they expect while retaining and attracting the best talent for your company.
In addition to the typical salary and wages paid to employees, the following compensation strategy examples include the top components and calculations you might use in your compensation strategy.
1. Variable Pay
Variable pay is a type of performance-based pay that isn’t always the same amount or paid on a set frequency, hence why it’s variable.
For example, a company might pay an employee a 10% residual commission on every new account they help establish. Or, a team might receive a bonus when they achieve a goal, like having a proposal accepted by executives.
Several types of variable pay exist, with the following among the most widely known and used:
- Pay for Performance: Pay for performance can work for almost any organization’s size and business model. This variable pay rewards employees and teams for reaching goals or performing well, like a cash bonus for the employee of the month or a team bonus for reaching a revenue-generating goal.
- Commission: Commission structures pay employees according to what they sell or the amount of revenue they generate, making them work best for sales-focused workers.
- Differential Pay: Differential pay is given to employees who work outside of their usual hours or responsibilities. Overtime pay and shift differentials are good examples. These are usually given to hourly employees, but salaried workers may also qualify for some differential pay, such as extra pay for taking on additional shifts while another employee is on leave.
- Referral Bonus: Referral bonuses are paid to employees who refer qualified candidates to an organization. These are usually given by companies looking to reduce turnover rates and hire full-time, long-term workers.
- Long-Term Incentive Plan: LTIPs are incentives designed to retain employees while also rewarding them, like a retirement plan in which an employer also contributes. These are best used in companies with several managers and executives whose expertise is highly valuable to the organization.
Variable pay can help companies retain the workers they have by incentivizing them with cash and other benefits. However, organizations without clear guidelines for employees to earn these bonuses could promote pay inequalities that cause distrust among workers.
2. PTO Accrual
Paid time off is one of the most important and desired benefits an organization can provide employees. PTO allows parents time off with their children, families time to vacation together, and workers time to take breaks and recharge.
A crucial element of a thorough PTO policy is an explanation of how PTO is given to employees. In other words, does it accrue throughout the year, or is it given in a lump sum at the beginning of the year or soon after the employee starts working?
PTO accrual and lump sums both work. However, PTO accrual lets employees gain PTO as they work, sort of like a reward for their hard work rather than being handed over a bunch of PTO they haven’t necessarily worked for (lump sum).
For instance, say Joe just started working at Z Company in June 2023. According to your PTO policy, you award a lump sum of 80 hours 60 days after an employee works for you. In August, Joe gets all 80 hours added to his bank, and he can begin using his hours immediately.
This might tempt Joe to take one or two weeks off immediately, even though he’s only worked with you for two months.
Meanwhile, an accrual system allows PTO hours to steadily increase as an employee works, encouraging them to continue doing what they do best to keep earning PTO. If you do use the PTO accrual method, be sure to set an accrual cap, or a maximum number of hours an employee can earn, per year.
PTO shouldn’t be an option for most companies; it should be seen as a necessity. PTO is one of the most wanted benefits for multiple reasons, including mental health and productivity. As you craft your PTO policy, check the PTO laws for your state to ensure compliance.
Broadbanding is the process of grouping employees together based on specific skills or credentials with the purpose of paying each group according to those skills or credentials. This compensation strategy creates salary bands, or ranges of pay that a person can move through as they gain experience.
Some companies choose to use a job family strategy rather than broadbands. With job families, they’d group roles within departments of the company together, like accounting roles in one job family and tech support roles in another, creating salary bands for each job family.
The problem with job families is that they don’t account for specific credentials employees have. A tech support manager, for example, may have several certifications plus skills in project management and data analysis that tech specialists on their team haven’t mastered yet. Still, both positions are grouped into one salary band.
With broadbanding, the salary bands are usually more widespread, allowing for more salary growth for the employees within them. A company using broadbanding might offer a raise with each new relevant skill or certification earned.
As such, smaller companies with only a few management positions or less than 50 employees might use broadbanding, as it rewards workers for professional development rather than earning a new title.
On the other hand, broadbanding can make promotions few and far between, instead increasing pay based on skill rather than a new job title. Additionally, the broad salary ranges created by broadbanding can make it difficult to identify what each role earns, which, consequently, can interfere with determining midpoints and other data points for salary comparisons.
4. Unlimited PTO
Unlimited paid time off, or PTO, gives employees the time they need to take breaks during the year, spend time with family, or take days off due to an illness or personal obligation. Netflix famously adopted an unlimited PTO policy, as did GrubHub for salaried employees and Buffer for its team of 100% remote workers.
As amazing as it sounds, unlimited PTO doesn’t always work. In theory, an employee with unlimited PTO should be able to take all the time off they want. That could mean two months off, come back to work for two weeks, and take another two months off. Obviously, this doesn’t work for an employer.
Therefore, unlimited PTO still needs to be capped somehow, making it not truly unlimited. At this point, it’s probably better to have set boundaries around your PTO so that everyone has clear expectations and is on the same page.
Another potential pitfall is that unlimited PTO can be a nightmare for the company to manage. Management must consistently make adjustments for breaks, and defining rules and gray areas can be extremely complicated.
Now, some companies can absolutely manage unlimited PTO well. These are usually smaller companies with a really strong and steadfast workplace culture where everyone has their set roles and an unyielding commitment to their teams. Unfortunately, this description doesn’t fit every company, making it impossible for unlimited PTO to be a one-size-fits-all solution.
5. Market Analysis
Market analysis is the process of using salary market data to inform a company’s salaries. When used as a compensation strategy, market analysis can signal to prospective employees that a company wants to, at the very least, align itself with average salaries to provide fair pay.
Even better is when a company decides it wants to use market data to lead the market in compensation. This means that it wants to offer pay above and beyond what data averages show, positioning itself as a company prioritizing competitive pay.
Using market analysis as a strategy may backfire when a company doesn’t use updated data or doesn’t review its salary offerings at least annually. In these cases, the organization might believe it’s leading the market when, in reality, it’s lagging, which may not bode well for attracting new talent.
6. Compensation Governance
Compensation governance oversees, manages, and regulates the procedure and policies involved in compensation.
Many organizations use compensation governance strategies specifically for executive compensation to ensure that their policies are clear, transparent, fair, and competitive. Compensation governance can help establish a board of directors, how compensation reviews should take place, and an executive compensation budget, for example.
Enacting compensation governance is a must for organizations with several executive positions. However, companies with multiple shareholders can also benefit, as compensation governance can lead to improved investor relations by reducing risk.
7. Total Rewards Strategy
A total rewards strategy includes everything you offer employees, from their base salary to commissions, performance-based bonuses, paid time off, and retirement plans. This strategy offers 100% transparency to current and prospective employees, letting them know exactly what to expect from your company.
You can probably see why using a total rewards strategy would work well when creating job postings. Applicants want to know what perks you offer that other companies don’t, making their choice between similar companies easier.
On the other hand, companies using this strategy as a recruitment tool may need to continuously find ways to attract talent by offering unique benefits. The benefits people want evolve over time, and it’s your company’s responsibility to review compensation packages regularly to provide benefits that fit modern needs.
Creating a Well-Designed Compensation Strategy
Your overarching compensation strategy should incorporate all the types of pay and benefits you offer employees.
The individual strategies mentioned above are separate elements that, when combined, create a comprehensive compensation strategy. On their own, they can be used to market your job listings to your ideal candidates based on the types of pay and benefits they value most.
When creating or redesigning your compensation strategy, include your employees’ voices. Learn what they need to feel confident and secure in their positions and what they want to encourage them to stick around. Use that feedback to build a bridge between company and employee needs.
Most importantly, remember that compensation strategy should be dynamic. Revisit your policies and compensation each year to update them, determine what is and isn’t working, and make adjustments as needed.