What is the purpose of a compensation strategy?
Making decisions about salaries and benefits in your business is much easier when you have a clear compensation strategy. You may make your company more competitive in the talent acquisition and retention markets by establishing transparent compensation guidelines.
But having a pay strategy isn’t enough; it must to be in sync with the culture of your company. In this way, you can make sure that your workers are happy, motivated, and appreciated. Motivate them to behave and perform in a way that promotes the organization’s objectives.
This article will define compensation strategy and explore its relationship to company culture. After that, we’ll show you three ways to design a compensation strategy that takes culture into account. Alright, let’s get to it!
Compensation strategy: a definition
A compensation strategy describes how your company plans to compensate its workers. Consider the following: the state of the economy, the amount of money on hand, the organization’s primary bonus principles, regulations regarding base compensation, and employee benefits. Executive management is always the rightful owner of a company’s pay strategy since it has such a significant impact on the budget. The HRand/or Compensation & Benefits teams offer suggestions and contribute to shaping the plan.
The purpose of developing a compensation strategy is to lay out the ground rules for your compensation plan and to prioritize the various components of your pay package.
The compensation strategy also has to be in sync with the company’s and HR’s overall goals and objectives. This is due to the fact that for a business to successfully recruit and retain top talent, a solid compensation plan is essential. Pay scales are a reflection of the expectations of upper management regarding employee conduct, output, and results.
What makes a compensation strategy necessary for your company?
If you want your organization to succeed, you need to have a solid compensation strategy. You may think of this in terms of how a compensation plan affects different parts of the business. Here are some examples.
1. Hiring top talent
Effective recruitment is impossible without a sound compensation strategy. Attracting the people your business requires ultimately comes down to offering overall rewards packages that are competitive, in line with corporate policies and budget, even with great recruiting marketing methods.
Candidates who are a good fit with your compensation strategy might be found more quickly if you are upfront about it during the hiring process. Ultimately, this will help you reduce both the time it takes to hire and the money you need to spend on recruiting.
You can learn more about how to differentiate yourself as an employer of choice by developing a compensation strategy. Put simply, it will aid in the development of your employer brand. In light of the Great Reshuffle, which saw more than 4.5 million employees in the US alone abandon their positions by November 2021, this is particularly crucial.
2. Staff retention
In addition to attracting top personnel, a solid compensation strategy will help you hold on to the employees you’ve invested in. With the correct plan, you can keep your staff happy and engaged, which will lead to increased productivity and less turnover.
You won’t have to keep investing in staffing needs, which saves time, money, and effort.
3. Financial planning
Pay ranges, wage differentials, and other compensation measures can be more accurately calculated and tracked if a defined compensation strategy is in place. Furthermore, it guarantees openness and uniformity in compensation and benefit decisions.
You may keep to your planned budget and keep internal pay equity in place with the help of a compensation strategy.
The connection between organizational culture and compensation strategies
Compensation is a system that pays workers based on how well they do their jobs and how well they behave in relation to the organization’s expectations. Workers anticipate a corresponding level of compensation if they consistently demonstrate behavior consistent with the organization’s culture, which includes its values and beliefs. Employee dissatisfaction and disillusionment can set in when the company’s compensation system is at odds with its culture.
The way you pay your staff has a significant impact on the trajectory of your company. If you want innovation to be your fundamental value, for instance, your pay plan should reflect that. What this means in practice is that you can’t treat people equally in terms of pay raises and perks, regardless of their ability to generate novel ideas. This will stop people from coming up with new ideas, not help them.
The opposite is true; it shows that uniformity and order are your priorities. There will be no motivation for your staff to go above and beyond in their innovation efforts. This will undermine your efforts to foster a culture of innovation in the long term.
Methods for developing a compensation strategy that takes company values into account
Now that we know that compensation strategy and culture go hand in hand, we can examine the three stages you must take to align your compensation plan with the culture of your company.
- Get to know the company’s ethos
Knowing your company’s culture inside and out is the first step in bringing pay equity into line with company values.
One great instrument for determining the present and ideal company culture is the Organizational Culture Assessment Instrument (OCAI), which is based on the Competing Values Framework. Kim Cameron and Robert Quin of the University of Michigan developed this framework, which is the most well-known way to categorize different kinds of organizational culture.
Using this model, you can identify internal factors that encourage or discourage specific actions. When you do, you’ll have a firm grasp on the cultural factors that shape the efficiency and output of any given business.
Two criteria form the basis of the Competing Value Framework’s categorization of cultures:
- Focus: While some businesses thrive when they aim their attention inward, others do better when they move their emphasis outward.
- Stability: While some businesses function best with a great deal of leeway to maneuver, others do better with strict regulations and a lot of red tape.
To classify a company’s culture, one must consider how open it is to change compared to how rigid it is, as well as how much emphasis it places on internal matters as opposed to external ones.
All four types of cultures are found in most businesses. You’re more likely to have multiple cultures in a larger organization. What matters most is the level of representation of each kind and how you can achieve a healthy balance between them so that your business thrives.
- Determine the steps that will foster the culture you aim to achieve.
As explained in the Competing Values Framework, your culture is connected to how you pay your employees. This means that different kinds of rewards will encourage different types of cultures.
Therefore, you need to decide what kinds of behaviors you want to encourage utilizing your compensation strategy in order to develop and sustain the ideal culture of your firm. You will use these actions as a foundation for your compensation strategy.
To achieve the Clan Culture in the workplace, one must pay employees in a way that encourages them to rely on one another and work together. In your ideal world, your company would function much like a tight-knit family or a collection of individuals who share deep and lasting interests.
You can’t have a Market Culture without a system that recognizes and rewards excellence in both output and performance. Three principles should serve as the basis for your compensation strategy:
- To retain brilliant workers from looking elsewhere, pay must be competitive with or even greater than the market rate.
- Incentives for good performance should be based on compensation, which should be well-publicized and visible.
- The compensation plan should make it clear that poor performance will result in termination.
An Adhocracy Culture calls for a strategy that inspires risk-taking and creative problem-solving. Paying great performers a fair wage is important, but you also need to find a way to motivate low performers. Furthermore, it should encourage teamwork. In addition, you should highlight the importance of employees’ adaptability, imagination, and originality in their compensation packages.
If you want to create a Hierarchy Culture, you must adopt an approach that promotes consistency and excellence. Consequently, your pay should:
- Stress the need of being consistent and accurate at all times
- Be very regimented and mechanical, with potential perks that increase with seniority
- Always act in a consistent, predictable, and long-term focused manner.
- Find out what goes into your direct and indirect pay.
After you’ve decided on the actions you want to motivate with rewards, the next step is to create your incentives.
Clan culture
Direct compensation
- Small variations in pay raises for various levels of performance
Indirect compensation
- Community-wide incentives, like yearly celebrations and outings
- Perks like employee share schemes, long-term incentives, and plenty of learning and development opportunities to foster teamwork and camaraderie
- Wellness programs, paid parental leave, and child care subsidies are all ways that employers may show their appreciation for their employees and foster a caring culture.
Market culture
Direct compensation
- A substantial gap in pay (raise) between low- and high-achievers
- Large, regular bonuses tied to performance
Indirect compensation
- Minimal or nonexistent health insurance, wellness initiatives, and retirement benefits
- An attractive total compensation plan that gives workers a say in the benefits they get
- L&D opportunities that are exclusive to high achievers and are centered on prestige, such as earning an MBA from a renowned business school
Adhocracy culture
Direct compensation
- People who do a great job will get a higher salary.
- Employees who come up with innovative ideas for products or services are eligible for bonuses.
Indirect compensation
- Chances to go to conferences, join groups, write down what they’ve learned, share their thoughts, and take part in events that are the best in the world.
Hierarchy culture
Direct compensation
- Minimal wage disparities between exceptional performers
- Personnel whose performance ratings fall short of “successful” will see significantly smaller raises in pay.
- Annual salary increases are determined using the same formula.
- Time-based bonus payments
Indirect compensation
- Some benefits are level-dependent; for instance, managers may be eligible for a pool of long-term incentives, whereas regular employees may receive a bonus that is valid for 13 months.
- Schemes for formally acknowledging and rewarding workers who exhibit desirable traits on a regular basis
In conclusion
Achieving your organization’s goals and successfully attracting and retaining personnel requires a compensation strategy that is built on culture.
On the one hand, the way you pay your workers can make it clear what behaviors and work you want to see more of. This will then make (or break) the culture of your company.
However, how you decide on things like pay raises, learning and development opportunities, and even specialized non-monetary rewards will depend on the culture you wish to foster in your company.
