Balancing Pay:
Pay balance can be a particularly challenging element for a business which has undergone a ‘scale up’ or growth, especially if this has taken place quickly. From an organisation which has moved from 5 to 30 employees, through to a previous SME experiencing global expansion, growth at this rate can cause imbalance when it comes to pay. A number of elements can be at play when it comes to tipping the scales over – previous organisations moving into your business with different contracts and pay expectations, older employees expecting ‘loyalty pay’, through to inflated salaries due to the need to fill positions quickly to keep your business performing.
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Compensation strategies:
A compensation strategy is an organization’s formal plan for managing employee pay, incentives, and benefits. It outlines how the company compensates its workforce in a way that aligns with business goals, promotes performance, and ensures market competitiveness.
Compensation strategy examples: 6 different ways to approach pay
Businesses adopt diverse strategies to align pay structures with their top-level goals, organizational culture, and the competitive market environment. These strategies not only aim to attract and retain talent but also motivate employees towards higher performance.
Let’s explore six compensation strategy examples, each offering a different approach to structuring pay and benefits to meet the specific needs of both the organization and its workforce.
Market-based compensation
A market-based compensation strategy sets salaries based on what other businesses are paying for similar roles in the same industry and geographic area. This approach ensures competitiveness and fairness, attracting skilled professionals by offering compensation that reflects the rates available elsewhere.
Some employers take it a step further. Paying employees above their market value is a deliberate choice many companies make to attract high-quality talent. For instance, a tech company might regularly analyse salary surveys and industry reports to adjust its pay scales. Company leaders decide to pay employees at the 75th percentile compared to other firms in the region, making it an attractive employer for skilled professionals.
“Some companies pay above market rate as a retention and attraction strategy,” says Caitlin Collins, program strategy director at BetterWorks. “Pay is one part of total compensation and companies should consider other perks that would incentivize and meet the diverse needs of employees, such as company stock, generous or unlimited paid time off, generous insurance benefits and 401k matching, and flexible working.”
Pay for performance
A pay-for-performance strategy ties employee compensation directly to performance levels, often through bonuses, commissions, or other financial incentives. This model motivates employees to excel in their roles, as their financial rewards are directly linked to their contributions to the company’s success.
In many cases, pay for performance is role-based, and requires employees in those roles to achieve a high level of performance to offset a low base salary. For example, a sales organization may offer commissions or bonuses to salespeople who exceed their quarterly sales targets, directly linking compensation to individual output and success.
Organizations need to be clear on what they base their decision on,” Caitlin explains. ” What key performance indicators (KPIs) are being measured? Do the top 10% receive these? The system has to be seen as fair and just by employees.”
Skill-based compensation
Skill-based pay rewards employees for the range and depth of their skills and competencies, rather than their job title or position. A skill-based performance strategy encourages ongoing learning and development, as employees are incentivized to acquire new skills that can lead to higher pay.
For instance, a software development firm might increase the salary of developers as they achieve certifications in new programming languages or technologies, incentivizing continuous learning and adaptation to emerging trends.
“With skills as the new currency of work, it’s critical that organizations move beyond the identification and evaluation of skills to embedding skills development into performance plans and empowering managers to coach their employees, “ Caitlin says. “This is where modern performance management systems offer a distinct advantage. Managers and employees work together to identify the skills most useful to the business in the employee’s role, make the development of those skills an integral part of a performance plan, and then provide a framework for ensuring that the skills are properly developed and leveraged by the employee.”