Modern Compensation Strategy Best Practices

No matter how large or small your business is or what industry you work in, chances are, you’ve thought about how best to determine compensation for your employees—especially if you are a company or HR leader. After all, compensation can be a major determining factor in attracting and retaining top employees, which directly affects your organization’s bottom line. 

However, the working world has evolved. The job market is the hottest it’s been in half a century, with a high demand for labor, a scarce workforce, and the Great Resignation still looming. According to Greg Iacurci’s recent article in CNBC:

For the most part, workers are shifting to better jobs, lured by factors like higher pay, according to economists. Wages saw the biggest annual increase in more than 25 years.

Increasing wages to draw in talented new staff is one thing. Maintaining a competitive yet equitable and transparent compensation process to keep your existing employees is another—and might be even more critical. 

If you haven’t revisited your compensation procedures in a while, or if your current approach is how you’ve always done things it might be time to dig out and dust off those “how to determine compensation” files. They may need some updating to align with the compensation best practices below. 

Guiding principles for compensation practices

1. Compensation isn’t the only thing that makes people happy.

For some companies, a “lead-the-market,” “match-the-market,” or “lag-the-market” compensation strategy may be best.

In general, compensation should be fair and aligned with the local job market. If possible, you should aim for your benchmark or average total compensation (including salary, equity, benefits, and perks) to be “above market”— meaning at or greater than the 50th percentile of compensation for jobs and levels at similar companies in similar locations.

According to Molly Graham who helped design the compensation process at Facebook,

Compensation is never going to be the thing that makes people join or stay at a startup long-term (or any company), nor should it be. Compensation is not a healthy version of retention.

It’s also important to keep in mind that while being underpaid can decrease an employee’s job satisfaction, getting paid more than the market rate will not increase their job satisfaction significantly over time. According to research by Glassdoor that encompassed over 220,000 of their user employer reviews and salary data:

...a 10% pay bump will bring you just a one-point increase in job satisfaction if that's measured on a scale of 1-100. So bump a worker with a 75% job satisfaction rating from $50,000 to $55,000, and their satisfaction would only rise to 76%.

There will always be a job or company out there that pays more. Your goal should not be to try to dramatically outbid the market. According to Eddy.com’s HR Encylopedia, a “lead-the-market” compensation strategy can put substantial pressure on staff to perform at high levels, make the business vulnerable in volatile markets, and require company finances and employee performance to be closely monitored.

2. Your employees will eventually find out what everyone else is making.

You should create a compensation plan that can be easily justified and explained to new and existing employees. Are there some areas where you’d be concerned if one employee found out what another employee’s salary is? That’s a signal that you may need to work on your compensation plan. 

3. Compensation should not be revisited more than once or twice per year.

This creates predictability for both employees and management and makes it easier to implement a standardized, data-driven approach to compensation. It also helps to reduce bias and inequitable compensation decisions.

4. On a scale of formulaic (objective) and discretionary (subjective) compensation, you should be as formulaic as you can.

When you take as much subjectivity as possible out of compensation decisions and use a more systematic process, it promotes a fair and equitable work environment. A methodical approach is also easier to explain to employees compared to random or unpredictable methods. 

Total compensation guidelines

Below are our philosophy and guidelines to determine total compensation at Bonusly. Our mission is to help people connect with their work and each other in meaningful ways through our leading employee recognition and rewards platform. Our organization has been named in Outside Magazine's Best Places to Work, Inc. Magazine’s Best Workplaces, and the Inc. 5000 list for multiple years in a row. We like to think that our total compensation has something to do with that and we hope you can learn from our example!

Salary

Base salary should reflect the market’s current value for a given role and level of seniority. Because salary negotiations are susceptible to bias and lead to pay inequities, we publish our compensation both externally (on job postings) and internally (as salary bands). This allows us to avoid costly negotiations that can lead to unequal outcomes.

However, only 12.6% of companies today are embracing transparency in the workplace by publishing their salary ranges for each job posting. 

Despite this fact, the research is overwhelming in terms of how important it is for job-seekers to see salary information listed on job postings. 

In a 2018 LinkedIn survey… the overwhelming majority of respondents (61%) said compensation was the most important part of the job description.

Additionally, 

A Glassdoor study showed similar results, with salary (67%) being the top factor jobseekers look for in ads.

We also publish and update job descriptions for each role and level on at least an annual basis, so employees are aware of expectations for their current position and future levels. This promotes equity by providing all employees with access to the same information and helps guide discussions around career development and performance management.

We define multiple salary bands and map those to a job ladder rubric organized by team and career track (either individual contributor or manager). Each salary band ranges from roughly the 30th to 75th percentile of market compensation.

To determine market compensation, we use tools like Pave (who recently acquired Option Impact), Carta, and Salary.com. Radford Global Compensation Database is also a common resource.

Generally, each salary band is divided into three segments that reflect competency and responsibility levels within a role. As employees progress in their functional role, they progress through segments in their current band, and then into the next band. The segments within a band are:

Lower segment

A sustained expert-level performance at a majority (not all) of the competencies and responsibilities for a given level. Typically this correlates with the 30th-45th percentile of the market.

Middle segment 

A sustained expert-level performance at all of the competencies and responsibilities for a level. Typically this correlates with the 45th-60th percentile of the market.

Upper segment 

A sustained expert-level performance at all of the competencies and responsibilities for a level, and some of the competencies and responsibilities for the next level. Typically this correlates with the 60th-75th percentile of the market.

Equity

Equity can be a great benefit in motivating employees to achieve by tying a financial reward to the success of a business. 

The goals of granting equity to employees include:

• Acknowledging the inherent risk employees take when betting on an early-stage company and rewarding them accordingly. 
• Retaining employees by rewarding those who maintain longevity with the company.
• Encouraging employees to think about the company’s holistic success.

Similar to our salary bands, we define multiple equity bands and map those to a career progression rubric. Each equity band ranges from roughly the 30th to 75th percentile of market compensation.

Benefits

Our benefits package includes the following: dental, health, and vision insurance, 401(k) matching, short- and long-term disability insurance, life insurance, and Flexible Spending Accounts. The specifics of these benefits (coverage levels, cost paid by employer, cost paid by employee, matching contributions, etc.) are based on industry benchmarks and surveys.

Resources like the Sequoia Benchmarking Program and benefits broker Bennie can help you determine the competitiveness of your benefit plans.

Perks

Providing perks that improve the quality of life for your employees is essential for a positive employee experience and can be a key competitive differentiator for employers in crowded industries.

At Bonusly, our goal is to offer perks that are:

• data-driven.
• aligned with our core values.
• sustainable over the long term. 

Perks we offer include using our own employee recognition program—Bonusly, weekly GrubHub or Doordash credits, transportation reimbursement, a wellness stipend, and annual professional development budgets. We also offer a one-time work-from-home stipend to help cover the cost of home office setup, flexible paid time off, paid parental leave, monthly virtual team-building events, and company-wide IRL events (in real life).

Our perks package is developed based on three inputs including employee feedback, industry standards, and company budget.

Reviewing compensation and equity bands, benefits, and perks

We review salary and equity bands at least once a year. Benefits and perks packages are also reviewed at least once per year, usually before the start of open enrollment. 

Should I provide an inflation raise to my employees?

In the midst of rising inflation due to economic uncertainty or a recession, it can be challenging to know if you should provide raises to match inflation rates. Ultimately, if you have a long-term compensation strategy (which often accounts for shifts in the market) that includes the best practices above, you don't need to provide sweeping raises in a panic. Inflation matching is a short-term win but it may come at the expense of a long-term total compensation approach.

For a more in-depth look at this topic, Willis Towers Watson provides more detailed answers and historical context on the relationship between inflation and compensation. 

Ultimately during economic uncertainty, employee retention and morale should be top of mind. While compensation is part of that, it's only one spoke of the greater wheel in terms of factors that influence turnover and retention.

The takeaway

In a competitive labor market, using modern total compensation best practices can make all the difference in the success of your business and in attracting and retaining high-performing employees. Equitable practices, salary transparency, ensuring that your compensation matches the market, and offering competitive perks and benefits are key. 

While you're here, check out our other Best Practice resources! ⬇️

Top 5 Essential Best Practices for Employee Offboarding

DEI at Work: 5 Best Practices and 3 Common Mistakes to Avoid

4 Influential Performance Management Best Practices

Bonusly is the leader in employee recognition and engagement. Ready to learn more about adding Bonusly to your list of competitive benefits? Learn more today at bonus.ly.