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How to create a compensation strategy to attract and retain your ideal employee

December 1st, 2022 | 4 min. read

By Greg Henderson

Let’s be clear from the beginning: your compensation strategy may attract your ideal employee only if you are transparent, and it probably won’t help with retention unless you include a hard and fast system for growth. This article will explain why your compensation strategy needs to be published and smart. Your strategy should be published and shared with your team so they can see that there IS a consistent method to your madness.  

Before we dive into building a compensation plan, let's define what a compensation strategy actually is for a small business. After all, most people believe this concept is a corporate word—which could not be further from the truth. 

What is a compensation strategy?

A compensation strategy is your plan and system to explain to the entire organization the different types of elements offered (base pay, benefits, commissions, etc.) to employees. The strategy’s most significant task is to explain the “why” behind the numbers and dollars. This a perfect opportunity to solidify transparency to your workforce. Remember, a strategy helps you formulate a plan. The plan is then the process of how you choose to implement the strategy. The strategy is critical because it’s the method, the calculation, and the essentials to the final numeration for employee compensation. 

If you search the internet for compensation plans/strategies, you will most likely find websites dedicated to helping you determine the right package. The “how” you should pay your employees and what other things can you offer to include in the overall compensation bottom line. This is actually not that important. Your business model will already help you determine the “how” and “what”, but a true compensation strategy will help you determine the “why”. 

A Tip That Whirks: Ask yourself these questions first: 

  1. What is the starting pay for a new hire with no experience? 
  1. What is the starting pay for a new hire with experience? 
  1. What is the difference in pay and why? 
  1. How do we objectify the pay raise process? 
  1. How can we reward our employees for increasing their knowledge, skill, and abilities in helping the organization achieve its goals? 

If you had a difficult time answering those questions, then keep reading—this article is for you. The ultimate goal of a compensation strategy is to make the business better each year. You can do this by creating a compensation strategy around rewarding your employees with either a bump in pay/title changes or both for achieving a certain level that you put in place. 

Make your promotion system objective

Your compensation strategy should be built to revolve around objective metrics, so the employees in your organization don’t get rewarded based on how much you like them but rather based on measurable skills and achievements they bring to the team. The employee with X amount of experience receives X bump in starting pay. The employee that passed the skill test for the next level in their career path is in line for a promotion. This employee is now the subject matter expert in a value-added system, which might entail a merit increase.

All of these situations happen regularly in your business, but take the time to add an honest strategy behind the scenes, publish it, and your employees will understand their clear path to success. This positions you as a competent and caring employer and will ultimately be the best way for your compensation strategy to retain your ideal employees.    

As you start to craft your compensation strategy, be sure to take time to understand the skills you need in each department and each role and determine which ones are mission-critical to your organization. Then, make sure everyone involved in making pay decisions knows what you intend to reward. Determine if your pay structure makes sense. Annotate what your mid-level manager is making—does it make sense? 

A Tip That Whirks- Do wages keep up with professional growth? 

Here are questions to ask yourself when it comes to understanding pay grades.

  1. If I backed out my mid-level manager's pay—does it reflect a growth increase that makes sense? 
  1. How many pay increases would my new hire require to make the same pay?  
  1. Why did I increase their pay? What was the objectifiable rule/concept that I used to justify a pay increase? 
  1. Was I being fair? 

Pay structure is an easy way to find yourself in trouble if it was discovered and proved that you were making pay decisions based on faulty or illegal considerations. Creating a compensation strategy removes the sense of impropriety because across the board, all of your employees understand how much they are getting paid based on their skill level, role, and/or years of service AND they know exactly what is required of them if they want to make more money. The pay decisions are open and honest, and no one can claim that they were passed over because they did not fit into the category of people who were promoted or given a raise.  

Creating a compensation strategy 

  1. Crunch the Numbers- Your strategy must be tied to budget considerations. 
  1. Define the Ideal- What type of talent warrants a pay increase? 
  1. Method- Determine what objectifiable rules you will use. 

Example of Office Clerk Compensation Strategy 

  • Job: Office Clerk (T) is a new hire or (T) for trainee 
  • Each new promotion requires a new title change 
  • Base Rate: Starting pay-per-hour for each job title 
  • Years Exp.: Number of years of experience needed for the next-level consideration 
  • Hours: Number of hours required to work each week 
  • Rule (Advancement Test): The objectifiable rule to use for promotion to the next level 
  • The compensation strategy uses a skills level rule to show career path progression   
  • The employee can only move to the next level if they pass the test 

The result: attract and retain more employees aligned with your values

If you have successfully created a strategy around rewarding your employees for doing exactly what you need them to do, then you have started the practice of using your compensation strategy as a recruiting and retention tool.  

Pay gets an employee in the door, but it does not keep them 

Instilling a compensation strategy into your organization will bring clarity, comfort, and confidence into a confusing, unclear, and fluid situation. The compensation strategy allows you to be confident in your pay decisions by putting in place a repeatable process that removes bias from the conversation. You now know that what you did for Joe this week is the exact same thing you did for Sally last week. We all know that good employees leave bad teams and the easiest approach to ensure you keep your good employees is rewarding the good and disciplining the bad. A solid compensation strategy not only affords you the opportunity to retain your talent, but it also forces your potential new talent to take notice.  

The standard job description reads something about having a very competitive salary, but rarely do you see a number attached to that statement. With your newfound strategy, you can set yourself apart by showing prospective employees exactly what their starting pay will be and what they need to do to make more.  

Compensation strategy is not for the corporate world anymore. Take the time to write a solid compensation strategy that rewards the right people, at the right time, and with the right rule. Your compensation strategy will seriously benefit your organization, especially if it can answer the question, “Why did they get promoted over me?” You owe your employees a strategy that is fair, simple, and effective—because when we do that, we all win. 

Looking for other ways to set your small business apart? Having a clearly defined mission, vision, and value set can do wonders for your company culture and hiring strategy. Check out our article on how to create your “umbrella” to learn more.  Ready to skip that and just talk implementation? So are we.