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The Role of Strategy in a Compensation Plan

Written by Greg Wolf

March 14, 2019

The Role of Strategy in a Compensation Plan Hero

If you are looking for compensation strategy examples, you've come to the right place. The following is the first in a three-part series on compensation planning, focusing on the role that compensation strategy plays in your planning process.

Whether an organization is just starting out or has been established for decades, the development of a formal compensation plan is key to helping it attract, retain, and motivate employees.

In the article, the follow questions will be answered:

  • How do you create a compensation strategy?
  • What are the critical components of a compensation strategy?
  • How do you establish a pay philosophy?
  • What is a compensation strategy?

How Do You Develop a Compensation Strategy?

In many areas of business, organizations start compensation planning by developing a strategy. But even before developing a compensation strategy, you should lay the groundwork by ensuring you have a compensation philosophy in place for your organization.

Your compensation philosophy should describe how total rewards programs support the organization’s business goals and objectives. It also should outline how your compensation programs align with company culture and values. Using your philosophy as a compass will drive consistency in the decisions your organization makes around compensation.

Once you have a formal compensation philosophy in place, you can develop your compensation strategy. While a philosophy documents the “why” behind how your organization approaches compensation, your compensation strategy shares “how” you will bring your philosophy to life. Your organization’s strategy may include tactics, programs, tools, and communications that can shift over time, even if your philosophy does not. These elements will help you shape an effective compensation system for your organization, working the critical components of a compensation strategy into real-world compensation practices.

The Critical Components of a Compensation Strategy

A comprehensive compensation strategy provides guiding principles for administering your organization’s total rewards programs. The strategy defines and outlines the purpose and objective behind each program. Questions you need to answer can include:

  • Base pay: how will you pay your employees relative to competitors? What market percentile should you target?
  • Incentive pay: what incentive programs will you offer? What will the mix between base and incentive pay look like? How will employees earn incentives?
  • Benefits: what is the purpose of each of your benefits programs, and how will your offerings compare with others?
  • Paid time off: what is your organization’s approach to work-life balance and how does your paid time off (PTO) program support that approach?

Compensation Strategy Example

For the base pay component above, a compensation strategy example might read:

“When employees are fully proficient in their position and are meeting expectations in some areas and exceeding expectations in others, their compensation should be consistent with the 75th percentile of the defined competitive market.”

A total rewards strategy example should be viewed in context with the plan it supports. Your pay, benefits, career growth, and talent development strategies should work together to form a strategic total rewards approach that supports your business goals.

View all articles in this series:


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about the author
Greg Wolf is the Managing Director of the Consulting Practice at Salary.com. When the consulting team isn’t partnering with clients on improving their compensation and benefit programs, he’s usually outdoors with family and friends involved in fun activities.
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