Employee compensation is one of the biggest challenges for every employer, from small businesses to major multinationals. Consider these statistics:
- Compensation can be equal to as much as 70% of a company’s revenue
- Labor costs are a major concern for 32% of mid-sized businesses
- Employee expectations still aren’t being met—63% cite low pay as the reason for leaving their last job
- Preventable staff turnover is costing US employers over $1 billion per year
Compensation can become a spiral of negativity, where employees feel they’re not paid enough, while employers feel their people expect too much. Ultimately, this can lead to serious problems for the business and threaten your long-term success.
In this blog, we’ll look at ways to create a positive Total Rewards strategy that supports your business goals. But first, let’s look at some tell-tale signs that the compensation structure is misaligned.
The hidden costs of compensation misalignment
Compensation strategy problems can lead to one major problem: your wage bill is unsustainable.
However, this is not the only issue that can arise. You might also see problems such as:
- Missed targets: Compensation strategy can help make employees more effective. The right rewards will incentivize people to focus on priority tasks and give extra effort when required. When teams consistently fail to hit business-critical targets, it could be a sign that the compensation strategy isn’t properly aligned.
- Pay compression: Pay compression happens when there’s little difference between junior and senior roles. It’s often the result of high starting salaries for new hires and limited pay increases for tenured staff.
- Inconsistent compensation decisions: You may see variations across teams in how bonuses are allocated or who is nominated for a raise. This can damage team morale, as employees feel that they’re not being treated equally. It also makes it harder to plan for compensation expenditure.
- Unintended employee behaviors: Compensation drives behavior. For example, if employees can earn a sales bonus, they will spend more time selling and less on non-sales activities. Without a clear strategy, there’s a chance that incentives will motivate employees in ways that don’t align with business objectives.
- Reduced employee engagement: Sense of purpose is one of the strongest drivers of engagement, and employees have a stronger sense of purpose when they understand how their job fits into the broader strategy. If this strategy isn’t clear and supported by the right compensation structure, people won’t understand why it’s important to complete specific tasks.
- Higher staff turnover: Around 30% of workers say they plan to quit their current job, with low pay cited as the most common motivating factor. Often, the problem isn’t that their compensation is below market average, but that they feel their work isn’t being adequately rewarded. Better strategy and communication could help retain some of these people.
Common problems such as these often suggest a disconnect between compensation and business strategies. The good news is that these issues can be fixed without increasing your compensation budget.
How to align compensation with business goals
Compensation strategy alignment is a company-wide effort, requiring buy-in from senior leaders and extensive HR support. Here is how to put that plan into action:
1. Review your compensation philosophy
Your compensation philosophy is a high-level document outlining the logic behind your strategy. It should describe things like:
- What employee characteristics do we value? (e.g., innovation, growth, reliability)
- How do we intend to reward our best people? (e.g., individual bonuses, tiered salary structure)
- How do we review our compensation strategy? (with details such as process owners and review periods)
A compensation philosophy doesn’t need to offer specific details about total rewards. Instead, it should outline how the organization will approach compensation decisions, which helps ensure a consistent approach across the organization and over time. A consistent approach will help boost employee morale, leading to higher performance and loyalty.
2. Normalize your salary structure
When employees say they feel underpaid, they often mean in relation to other people. This could mean their salary is below the market average or they’re not receiving the same compensation as their colleagues. Some solutions here include:
- Identify pay compression issues: Appropriate pay increases should be available for employees who move into more senior roles. Identify any areas where this isn’t the case, and look at ways to resolve them.
- Perform regular benchmarking: Comparing salaries against the industry average is an essential part of salary planning. Use a reputable salary survey to benchmark your compensation structure against situationally similar competitors.
- Be mindful of compliance: Changes to compensation can create regulatory issues, so it’s crucial that compliance experts oversee any major changes.
Altering your salary structure could be a long-term project, but identifying issues is an important first step.
3. Build rewards around specific business targets
Rewards are a signal to employees. If you offer a bonus for completing a specific task, then that task must be extremely important. That’s why it’s important to step back and look at what kind of employee behaviors are required for each business goal.
- Short-term goals: Small projects and initiatives work best when supported by one-off rewards, such as a bonus or perk.
- Mid-term goals: Goals on a longer timeline might require larger incentives, such as tying the annual bonus to hitting specified milestones.
- Long-term goals: Long-term commitments require low staff turnover. Rewards should encourage loyalty, such as offering opportunities for professional development.
In all cases, it’s a good idea to start with the business goal and then think about how to incentivize employees so they support that goal.
4. Map out individual, team and organizational rewards
Business strategy is all about teamwork, and compensation strategy should reflect this. However, it can require some planning to find the right balance between individual rewards and incentives for larger teams. There are pros and cons in every approach:
- Individual rewards hugely motivate employees but can lead to competition and attempts to game the system.
- Team rewards can drive collaboration but may cause teams to become siloed.
- Company-wide rewards help everyone feel part of the business strategy but don’t address individual performance issues.
The best compensation strategy combines all three, with rewards for collaboration and opportunities to earn individual recognition.
5. Keep gathering feedback
Business strategies have to adapt when circumstances change. The same is true for compensation strategy, so gathering feedback and responding to any changes is important.
- Employee feedback: Use pulse surveys to monitor the team mood and gauge their satisfaction levels.
- Leadership feedback: Talk to leaders and find out if the compensation structure helps motivate their teams.
- Strategy alignment meetings: Leadership should meet regularly to talk about strategy and study compensation metrics.
Compensation strategy is an ongoing process. If there are any engagement, retention, or employee performance issues, it might be time for another compensation review.
Building a compensation strategy that works
When your rewards structure supports your business goals, you'll see improvements in employee engagement, performance, and retention without necessarily increasing your overall compensation budget.
At Helios HR, we help organizations design compensation strategies that drive business results while supporting employee satisfaction. Our comprehensive approach includes:
- Total Rewards planning and compensation benchmarking
- Pay equity analysis to identify and address compensation gaps
- Employee engagement to help align roles and expectations
Book a call with a Helios HR consultant to discover how you can align your compensation strategy with your business goals and create a more engaged, high-performing workforce.
