Creating an Effective Compensation Strategy

Monetary incentives have a huge influence on an employee’s decision to take a job or not. Managers who are concerned with retention, employee satisfaction, and long-term career development need to strategically manage their employee salaries and bonus structure. But developing a fair and effective compensation strategy for your team is no small feat. 

Why Does Compensation Matter So Much? 

The rising workforce is more mission-driven and passionate about working for firms that do good. Managers- particularly those who work with young professionals- may have witnessed this passion first hand. So if mission-driven companies are so important for employees, then how can managers balance the need for purpose and the need for competitive compensation?

Managers looking to hire competitively should prioritize both mission and competitive compensation. In fact, bringing together the mission of a company must also align with an effective compensation strategy. For example, if a company claims as part of its mission statement to empower its employee, it must “practice what they preach” by effectively compensating its employees. Not doing so can risk disillusioning employees.  

A Few Compensation Strategies to Consider

HR researchers and professionals have developed strategies for increasing employee retention through effective compensation. Each team may require different strategies to optimize performance within the organization as a whole. Let’s review a few strategies and how they can be used with your team. 

Total Rewards Model for Effective Compensation 

“Total Rewards encompasses the elements – compensation, well-being, benefits, recognition, and development — that, in concert, lead to optimal organizational performance.”

Understanding how to implement the total rewards model within your team means also understanding that internal and external influences must be considered when dealing with an employee’s compensation, well-being, benefits, recognition, and development. 

Important internal factors to consider include:

• The strategy of your company. Whatever your team’s goal is “operational excellence, product/ service leadership, or customer engagement – rewards programs help communicate expectations, align efforts, and motivate the behaviors required to deliver results.” 
• The culture you’re trying to develop. Using rewards to motivate a cultural shift can be extremely effective in making changes. 
• The efforts of your leadership team. Rewards without leadership are ineffective. 

Vitamin Model 

The vitamin model reflects the need to nourish every part of an employee’s workplace health. We all need different kinds of nourishment and employees also need a customized “nourishing” approach to be productive in their roles. 

As identified in the mode, employees need a mix of: 

• Control
• Skill
• Goals
• Variety
• Clarify
• People
• Money
• Physical security
• Significance
• Supervision
• Career 
• Fairness

The purpose of the Vitamin model is to show that all of these traits need to be present and balanced to help achieve optimal organizational performance. You’ll notice that money is simply on the list of “vitamins” necessary for employees to thrive. 

This ultimately means that financial compensation can be used to help bring into balance the other necessary parts of employee performance. 

As a manager, aligning compensation with these employee necessities is important. 

In Practice 

Strategic Design: Effective compensation strategies begin with managers. Armed with the knowledge of different strategies and each team member’s different strengths and situations, the manager can determine what compensation strategy will be most impactful in their workplace. 

Execution: Working with the HR department, managers can set up measurement cycles and necessary training to implement the new compensation strategy. 

And, an important last step is to evaluate the effectiveness of the plan. Does the compensation strategy produce optimal workplace performance? As with any new plan, implementation is best followed by evaluation. 

The Bottom Line

Creating an effective compensation strategy is one important part of unlocking optimal performance. Compensating your employees can motivate them to come to work and stay with your firm. When employees are motivated to deliver each day to the best of their abilities, managers can optimize the human potential on their teams.