Recruiting, hiring, and talent strategies exist to help fulfill your business strategy. Yet in that gap lies another strategy that is rarely formalized. Is equally important to the health of your business and the desires of your talent: a written compensation strategy.
Why this written strategy matters
Businesses are experiencing rapid changes around the motivations and expectations of employees. It is fueled in part by a tight market for talent and the pandemic’s shift on where and how people want to work. Even if your business had a compensation plan in 2019, it’s likely outdated and in need of an overhaul to address current realities.
Formalizing a compensation strategy will help your business achieve three important things:
- Save valuable time in a hunt for right-fit talent in a fast and competitive market.
- Establish necessary guardrails by providing a full view of what compensation looks like at your company.
- Offer a roadmap for employees to understand their full compensation and earning potential
Why companies regularly operate without a compensation plan
My observation is that most recruiting efforts look to find the unicorn or the exceptional rather than follow a disciplined process. The search for the exceptional, or the belief one has been found, can quickly lead to negotiating terms outside the guardrails of a written compensation strategy. When you operate without this strategy both at and beyond the new hire stage, you can encounter a series of individually negotiated terms when they should be standardized within your established guardrails. To be clear, if you don’t follow a formalized written strategy, then there is no strategy.
Three questions your compensation plan must answer
Most employees are not asking for things they know are unreasonable regarding their understanding of their role and skills. What they do want is a clear roadmap. Answering these questions provides clarity:
- How do I earn more?
Employees wants to what know warrants a pay increase long before their performance review. They want to understand their earning potential based on the current role and what it takes to achieve the next role. This knowledge can motivate employees to higher levels of performance that unlock compensation beyond an annual cost-of-living increase.
They also want to know what is fixed (salary, tiered raise structure) and what is variable (incentive pay, bonuses), and if variable compensation is dependent on individual, team, or company results.
For example, if an executive’s flat salary is $350K with no incentives, it doesn’t motivate going above and beyond. But that same compensation, divided into a fixed salary of $250K with $100K in variable incentives can help drive performance. Smart and healthy businesses apply this compensation model to help minimize risk yet fully fund the maximized effort.
Compensation strategies need to be thoughtful and clear about how employees can increase their earnings, and the terms that accompany any variables.
- What is total money vs. total rewards?
Helping employees understand their total value goes beyond salary to include items such as healthcare coverage, retirement benefits, and PTO – all of which add up to a total investment in each person.
But not all rewards are monetary, and not every associate is motivated purely by their paycheck. Rewards and incentives; remote and hybrid work flexibility; public acknowledgement of the work; and working within a culture that energizes rather than depletes the team are some of the non-monetary elements that matter to today’s employees.
In today’s world, the right compensation package that also includes non-monetary motivators is the necessary ante to compete for an employee’s full discretionary effort.
- How do we make (and lose) money?
It’s likely that some employees are unaware how their role impacts the business and its bottom line. Knowing what creates value. Realizing what their contribution means to the company allows them to see how the company chooses to compensate for specific roles and performance.
Consider this business analogy that uses shower fixtures to illustrate the point.
A showerhead produces and distributes water in a desired manner. From a business perspective, it represents roles generating revenue and affording the business to operate. A shower drain, while necessary, is not a generator. It represents fixed business expenses that do not generate revenue. Both are important, but parsing the difference is crucial. Employees can quickly grasp if their role is revenue-producing or a fixed cost of doing business, and why compensation differs across these functions.
This also helps employees map their desired trajectory within the company – am I content with my role? What experience do I need to be a generator versus a fixed expense? Is my fixed expense role at risk of being automated in the future that could lower business costs?
By leaning into difficult conversations, including those around compensation and how the business generates revenue, leaders provide clarity and motivation that employees want and need. And it can fuel their full discretionary effort and spark ongoing professional growth.
However, if you want to get those conversations right, it requires a strategy. Write it down, follow it consistently, and watch it help the business achieve its goals as you attract, grow and retain talent.