[Blog 45] How do you set up a robust Compensation Strategy?
An effective compensation strategy is a clear articulated document that serves as a guide to the organisation on how to manage employee compensation.
An effective compensation strategy motivates current employees and is used as a tool to attract new talents. Compensation is not just about salary. It is the total cost of employee compensation which includes all the employee benefits as well.
Employee benefits will include the cost of health benefits, training & development benefit, bonuses or any other non-salary benefit that is considered part of a total compensation package.
So how do we set up an effective Compensation Strategy:
1. Allocate a Budget
Budget allocation will determine what percentage of the total compensation will be spent on salary and what percentage will be spent on benefits and other incentives.
For example, for a budget of $4000 for compensation, if 90% is salary and 10% is benefits, determine how the remaining 10% is spent, perhaps 9% on health benefits and 1% on training and development benefit. Allocating specific budget helps to control employment, health care, and other benefit costs.
2. Develop a competitive salary range
This ensure employee pay is competitive with other organisations. To be competitive, it is important to benchmark similar jobs within the same industry and create a pay structure. You can do internal research or use websites that provide information on average salaries. Either way, it is important to make sure all jobs have a clear and concise job descriptions so the salary established is justifiable.
3. Salary Audits
It is important to perform routine salary audits to ensure salary ranges reflect current compensation trends in your industry. When a salary audit is performed, HR team should keep in mind the ultimate objective, which is to make sure the jobs are still relevant and in demand and if compensation is attractive as per the industry demand. It is important to pay attention to the market and industry trends as it helps to retain good employees.
4. Benefit Package
Build a competitive benefits package.
Many organizations use benefit packages, in addition to salary, to attract and retain employees. Ultimate goal is to be competitive in the job market as these factors can be the deciding factor for a job candidate to accept a position with the organisation, or for an employee who is considering to leave.
5. Performance Management System
It is important to have a structured performance management system to ensure employees are meeting corporate objectives and are assessed on a regular basis. This system should include the development of annual goals, competencies assessment, annual performance appraisals and a structured process for coaching and mentoring the employees.
Compensation strategies can positively influence employee engagement and improve employee productivity.
6. Legal Compliance
A well-defined compensation strategy will incorporate legal requirements to ensure the organization is in compliance with the law.
7. Structured Administration
Develop an annual review process, salary audit, salary increase process timeline and make sure HR team is on top of all areas.
A comprehensive compensation strategy can be the foundation for creating an organisation that recognises and rewards employee performance which helps to establish a strong employee engagement culture in the long run.
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