Crafting an Effective Employee Compensation Strategy - for Maximized Talent Acquisition and Retention

This week in HR, we are discussing company culture, changing work environments due to M&A activity (at least three of our customers are in heavy acquisition mode), and benefits, and it's clear that employee compensation remains THE pivotal factor in attracting and retaining top talent in and through change. While initiatives that support team members as individuals contribute to a positive environment, a robust compensation package is the key to capturing the attention of quality candidates and fostering loyalty among high-performing employees.

Some key data that might give you a sense of worker sentiment following 2023 in the USA:

  • Two in five salaried workers haven't received a salary increase in the past 12 months.
  • The average increase for those who did get a raise was 4.6%, lower than the 6.2% average in 2022.
  • 21% of salaried workers changed employers in the last year, compared to 34% in 2022.
  • 29% of employees don't expect a salary increase or promotion in the next 12 months.
  • 27% of women expressed frustration with their compensation, up from 16% in 2022, compared to 15% of men, up from 11% in 2022.
  • 44% of employees would stick with a job they disliked if the salary was high enough.
  • 24% of workers say they’d be willing to take a salary cut if it meant job security for the next year.
  • 28% of employees would take a salary cut for a more flexible working location.
  • 73% of employees admitted they would consider leaving their current job for a higher paycheck.

Employee compensation can get complicated; I like to write about things that are difficult to understand and simplify concepts for my own edification, and hopefully yours, too. Here’s a primer on some basic compensation concepts:

Understanding Employee Compensation

Employee compensation is far more than just the base salary. Total compensation encompasses various benefits and perks, such as health insurance, life insurance, 401k matching, stock options, and more. These components collectively form a comprehensive compensation strategy that goes beyond monetary considerations.

Direct and Indirect Compensation

There are two main types of compensation: direct and indirect. A well-balanced mix of both creates an attractive compensation package for both employees and organizations.

Direct Compensation:

  • Salary/base pay
  • Hourly pay
  • Commission
  • Bonuses

Indirect Compensation:

  • Healthcare
  • Life insurance
  • Paid time off
  • Family leave
  • Retirement plan contributions
  • Company car
  • Technology allowance
  • Remote or hybrid work options
  • Four-day work week or flex days
  • Tuition reimbursement
  • Wellness programs
  • Team outings or retreats
  • Childcare
  • Other perks

Indirect compensation not only provides financial benefits but also enhances engagement, improves employee satisfaction, and reflects company culture—can typically provide some motivation for ‘extra-curricular’ activities and projects that strategic value to the organization.

The Importance of Competitive Employee Compensation

While a positive work environment and company values are significant, an individual's financial stability often takes precedence in the hierarchy of needs as the highest impact feature of talent management. Regardless of how appealing a product or mission statement may be, the ability to positively impact someone's bottom line plays a crucial role in recruiting and retention efforts.

According to a recent workplace survey by a large HCM service provider, compensation emerged as the top motivator for over 62.2% in the US. And it ranked as the top reason for employees leaving organizations in 2023. It also appears to be in the air, as ever, for 2024 as something that employees are open to, as a recent Gartner study indicated.—It’s not something employers can afford to ignore. Employee turnover is costly, and a generous compensation package builds loyalty, reducing vulnerability to competitor offers.

“Employees will go where the money is. And where they’re treated respectfully and valued. But, mostly, it’s the money”.

This does raise a question around when in the hiring process you can start discussing salary. There’s a growing consensus on including salaries in job descriptions from the get-go – here’s why you can and should consider this in your own recruitment process.


Building a Competitive Employee Compensation Plan

As you craft your employee compensation strategy, consider the following:

  1. Pay Structures: Establish transparent and equitable pay structures that outline career growth and higher pay paths for employees. Consider pay grades or bands that connect to revenue or other definite values at the organization.
  2. Salary History: Avoid basing compensation on prior salary history to prevent perpetuating pay disparities and legal issues. Know the market value by conducting your benchmarking study first, so you don’t have to worry whether what you’re offering is fair and competitive.
  3. Arbitrary Figures: Be cautious with offering arbitrary figures, especially for urgent or difficult-to-fill positions, to maintain internal equity. Often employers rush to offer whatever it takes to get the talent they think they need, and wind up upside down on the position. It’s important to understand the budget, but more important to understand the justification for the numbers in rational, consistent terms.

Structure and Strategy are Key

To create a pay structure, conduct a job analysis to define each position and its relative value within the company. Utilize benchmarking or pay grades to align salaries with market trends and company objectives. Enhance your strategy by incorporating indirect compensation offerings that align with company culture.

A competitive employee compensation package, combined with a positive organizational culture, yields long-term benefits that extend beyond the initial costs.


Director, HR Services

Philip began his 12-year Human Resource career in HR Project Management and Recruiting in the legal tech sector, working for startups that were listed among Forbes Fastest Growing Companies. Philip has managed human capital operations in almost all 50 states and in parts of Europe. His experience ranges from compliance to leadership coaching. After achieving his MBA from Tulane University in 2019, Philip transitioned from in-house Director to consulting, where he focuses on helping leaders understand, document, and improve productivity and visibility through Performance Management, Mission Vision and Values integration, and Professional Development. Compliance remains a cornerstone of his strategic assistance to companies that want to scale carefully and smartly.

Philip believes that every employer can methodically create an attractive and inspiring Employer Brand and Human Capital strategy. “Every challenge can become the building block of a breakthrough opportunity through a dynamic HR strategy.