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5 STEPS TO A COMPETITIVE

COMPENSATION PLAN

For most organizations, their biggest expense and greatest differentiator is talent. And while it sounds clich,
how and what you pay your employees does have a big impact on the engagement, productivity and overall
retention of your workforce.
With disengaged employees at an all-time high, voluntary quits steadily rising and increasingly competitive job
markets for many industries, organizations are looking for new ways to attract, engage and retain their talent.
But you probably already know that. So what does any of this have to do with compensation planning?
Everything.
Compensation planning is no longer just about making sure everyone is paid correctly (although thats still
important). It is a strategic tool that can be used to help solve some of these key issues for employers. Yep, thats
right, compensation can be your secret weapon in the battle for better talent, productivity and business results.
To do this, now more than ever, organizations have to be smart and strategic in how they use their compensation
budget. Building a comprehensive and competitive compensation plan is one of the fastest and most effective
ways to maximize the investment made in the workforce.
This paper guide offers five quick and easy ways you can improve the competitiveness of your compensation plan
using many of the systems and resources you already have in place.
1. How to Define Your Compensation Strategy
2. How to Identify Your Critical Talent
3. The Process to Build a Pay for Performance Model
4. What is Needed to Pay Competitively and Accurately
5. The Creation of a Compensation Communication Plan

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1. Define Your Compensation Strategy


What is a Well-Defined Compensation Plan?
A well-defined compensation plan begins with a core compensation philosophy. It is built upon extensive research
into company values, market data, economic conditions and industry best practices. Ultimately a solid
compensation plan aligns organizational goals with your comp planning strategy.
Building a Compensation Philosophy Statement:
A compensation philosophy statement summarizes an organizations comp strategy, guidelines and goals. It
answers a number of fundamental questions such as:
What are the enterprise goals?
What are the actions and behaviors that will lead to the attainment of the goals? (and thus should be
compensated)
How should performers who drive these actions be paid?
What should be the company stance on competitiveness (What are the strategies and techniques that
might be leveraged to gain an understanding of how the salary structure is positioned with respect to the rest
of the market?)
How should the compensation dollars be allocated to achieve the maximum impact? (Example: If 80% of
the comp budget goes into base pay, how can the rest of the money be used to offer attractive perks and
rewards to the employees?)

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Organizations that answer these questions can develop a clear compensation statement that aligns them with
recruitment, performance, market positioning, employer branding and ultimately the enterprise goals. With this
information, they can build a robust pay philosophy that does the following:
- It embodies the beliefscore values and stance of the company and its C-Suite executives
- It takes into consideration the fact that a company needs to maintain profits yet be internally equitable and
externally competitive and thus focuses on the economic conditions within the industry to be feasible and
viable
- It respects industry best practices and laws such as FSLA, thus being legally compliant
- It dictates recruitment decisions so that new talent is always give a starting package that is reflective of the
scope of development within the company and the company valuesthe companys focus and strategy
Aligning Compensation with the Enterprise Goals:
The best compensation structure is one that is well aligned with the enterprise goals. For example, if an
organization has decided to focus on improving customer service, then the behaviors and actions that can lead to
the realization of this goal include responsiveness, going above and beyond the call of duty and high Net Promoter
Scores. It is the duty of the organization to identify the employees who display these traits and then reward them
accordingly.
A softer goal, more inward focused goal may be to create a culture of pay for performance. Under such
circumstances the process of identifying star contributors needs to be refined and defined and compensation
calculation will be directly linked to the result of performance review, manager input and productivity.

TALENT TAKEAWAY
Invest the time to create a succinct pay philosophy that will guide your compensation strategy.

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2. Identify Your Critical Talent


According to Dr. John Sullivan, top performers:
- Achieve 10 times more than an average worker yet require less than two times the pay
- Drive the face of innovation within the company
- Are great role models and mentors and have a positive effect on the productivity of average employees
And according to a study by Monster, high performers on an average may contribute $60,000 more to the
company annually than their counterparts. So when building a more competitive comp plan, its not just about
attracting these high performers, it is about identifying the ones you have and retaining them.
There are a number of factors to consider when identifying top performers:

Who are our most critical talent on an ongoing basis?


Who possess unique skills that are hard to come by?
Who takes the most initiative on independent projects?
Who consistently completes deliverables on time and on budget?
Who has the most impressive performance review scores?
Who amongst the star employees are at-risk for turnover?

After the answers to these questions have been taken into account, the next step is to look into how they are paid
and the reasons behind the existing pay structure. This deeper dive:
- Exposes the top performers you should be focusing on
- Exposes any gaps in your compensation strategy so that you can revise your approach

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Some Concrete Ways to Spot High Performing Staff:


Hiring & Line Managers Hiring and line managers offer probably the most well-informed opinions when it
comes to identifying top talent. Because of their day-to-day interaction, they are well aware of the strengths,
weaknesses and intrinsic value of the employees on their team (or who were recently recruited in the case of a
hiring manager). Their insights are invaluable and can help you better allocate compensation resources where they
can produce the best results.
Performance Management (PM) Performance management is another avenue that yields reliable data to
identify key employees. You likely have some sort of performance review process in place that you can leverage as
a valuable resource. True performance management is a continued process through which objectives are
established, progress is assessed, and feedback with ongoing coaching is provided to make sure the employees
are meeting their career goals and objectives. An effective PM program will help organizations clearly and
consistently identify critical talent aligned with its goals.
Succession Planning Ted Bauer says that only 37% of companies have some sort of succession plan in place?
Is your organization one? Succession planning is directly tied to both core and leadership skills. Since it is a
roadmap to nurture talent that can take on expanded roles, it is a great tool to spot performers who outpace the
rest and have been tagged as future influencers.
Stay Interviews Although a relatively new concept, the underlying premise is as old as management itself. Stay
interviews are structured conversations between a leader and their direct reports designed to uncover actionable
items to increase retention. Stay interviews not only can help identify your top performers but also those that are at
risk of turnover.

TALENT TAKEAWAY
Identify the best tools that for your company to identify top talent.

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3. Build A Pay-for-Performance Model


Pay-for-performance models move away from entitlements and signal a more mature and fair approach to
compensation. They are one of the best tools to drive both employee engagement as well as top talent retention.
Despite being highly effective, not many organizations have a feasible model in place. Some are simply not sure
where to start while others are concerned about the unintended consequences of a poorly implemented program.
While pay-for-performance may seem like a challenging model to implement for some organizations, there are a
number of ways to do it. Employee performance for most organizations fall into one of two categories
1. Qualitative Performance - activities directly related to customer experience and outcomes such as sales,
customer satisfaction, customer retention, employee engagement/productivity, etc. Most of your sales, HR
and support personnel would fall into this category.
2. Quantitative Performance activities related to the operations side of the organization such as
programming, accounting, administrative, etc.

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Once performance is quantified, it can be linked to rewards to create a fair and flexible Pay-for-Performance
Model. Some best practices of this process are:
Identify the triggers for top performersing what can truly drive motivation with the top performers. Not all
employees view higher base pay or even cash bonuses as the ultimate form of reward. It is important for
management to recognize what drives engagement and productivity for these employees so that some of the
comp dollars can be allocated to these triggers appropriately.
Identify clear cut objectives for employees. Pay-for-Performance demands that the what of performance
be very clearly articulated so employees know what they are working towards.
The following is a summarized checklist of what is needed to set up Pay-for-Performance that works:






Clearly outlined performance category segmentation


Clearly defined job descriptions and goals
Clearly defined department and organizational goals (aligned with the employee goals)
Performance management system for tracking manager feedback/evaluations
Transparent goal tracking system for employees (view current results vs. goals)

Popular Short-Term Pay-for-Performance Plans:

Merit Pay
Lump-sum Bonuses
Individual Spot Awards
Individual Incentives

Some compensation components that you may experiment with when structuring Pay-for-Performance models:

Base compensation
Merit Pay
Equity
Special Recognition
Paid Time Off (PTO)
Opportunity Income (tuition, paid development)

TALENT TAKEAWAY
Structure your Pay-for-Performance plan to reward the employees contributing to your
organization and department goals.

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4. Pay Competitively. Pay Appropriately.


A recent study revealed that 89% of all managers believe most employees voluntarily leave their jobs due to
compensation. The problem is compounded if you hail from an industry that also has to contend with positions
that require highly specialized knowledge and skill-sets in conjunction with highly competitive talent markets.
The key is balancing the fine line between paying competitively to attract and retain the employees you want and
paying appropriately (so that you are not squandering your compensation budget).
Pay Competitively
External research from multiple sources is the key to paying competitively. It is important to gather data from your
recruitment department as well as public repositories like www.salary.com to get an accurate estimation of how
the skills you value in your company are compensated by your competitors. Once you can accurately and
efficiently compare your in-house salary structure with current market data you can assess your position and
adjust your competitive pay strategy as needed.
Pay Appropriately
As much as you dont want to lose good talent by underpaying employees, you also dont want to overpay. A
good compensation planning strategy allows you to avoid going to extremes by relying on established
benchmarks, budget modeling, market data and your compensation philosophy statement. Employees may have a
very different idea on what competitive market pay should be (more or less) based on previous jobs, locations, etc.
Ask the right questions, dont be afraid to be creative and leverage your compensation budget so its put to use
keeping the best talent.

TALENT TAKEAWAY
Competitive compensation means paying the right compensation for the job, not necessarily the
most.

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5. Create a Compensation Communication Plan


This is the final step of building your competitive compensation strategy.
In todays competitive job markets, just paying them is no longer enough we have to educate them. Yes, that
means literally educating them on all the various components of their pay package rather than assuming they
understand their offer letter or pay stub.
Compensation is a powerful tool for attracting and retaining top talent. Most employees assume their
compensation is comprised of their base pay plus any additional bonus they may or may not receive. They often
forget or perhaps arent told that almost 30 to 50 percent of their entire compensation is from other areas,
such as:

Prot sharing or 401k


Retirement/pension plans
Stock or equity
Benefits
Bonuses and incentives
Rewards and recognition
Personal time off and vacation
Opportunity income, such as professional development programs, tuition reimbursement, etc.

So part of your compensation strategy is to sell the employee on their total compensation package. Its OK if
you dont want to look at it as selling, think of it more as communicating. Either way, if organizations are not
clearly articulating, communicating, and explaining the total value of employment to their employees they are
losing valuable talent they dont have to!
Here are some simple ways you can integrate a compensation communication process into your strategy:
1. Compensation Management Have a system in place that provides a clear and transparent process so
managers can easily extract compensation data for their staff. Quick and easy compensation answers means
more engaged and happy employees.
2. Total Rewards Communication Create a total rewards statement that summarizes the total net value of
employment. This can outline the direct or indirect value of many of the items shown in our list above
providing a more tangible value to their employment. Even better, implement a total rewards portal that
allows employees real-time online access to this data 24/7. This is particularly helpful for those using a
pay-for-performance model or for retaining employees with stock.
3. Walk Away Value Create a tool (we call ours the WAVE calculator Walk Away Value Estimator) that
can show the potential lost value of employment if an employee leaves. This can include loss of future wage
increases, bonuses, stock options, benefits and more.

TALENT TAKEAWAY
Implement a platform as a way to communicate the total value of compensation to your employees

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Summary
While recruiting, engagement and retention get all the headlines, you can see how compensation plays a vital role
in each of them. With a competitive compensation plan in place, you will better allocate available budgets to right
people and places within your organization.
In this guide, we discussed five ways you can build a more competitive compensation plan including:
1. Define Your Compensation Strategy Creating a clear compensation philosophy statement that
identifies your budgeting model, market positioning and organizational alignment.
2. Identify Your Critical Talent Utilize your hiring and line managers, performance management,
succession planning, and stay interviews to identify your key and at-risk talent.
3. Build a Pay for Performance Model Quantify employee performance and outline a clear model for
linking rewards to key productivity drivers.
4. Pay Competitively. Pay Appropriately. Know your data and know your market before you make
important compensation decisions.
5. Create a Compensation Communication Plan Utilize total rewards statements and/or WAVE
calculators to show employees the full value of employment.
Most importantly, compensation planning should no longer be considered just an administrative task. It is a
critical and strategic tool that can maximize not only the productivity of your talent but your investment in them.

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Resources
COMPview | Compensation Planning
Software
Automate, Align & Simplify Complex Compensation
Planning
Not sure where to start? We would love to help. Contact us for a
wide variety of additional resources and learn more about our
best-of-breed compensation planning software, COMPview.
Click here to learn more & watch a short demo.

High Impact Talent Management

About HRsoft
High Impact Talent Management

HRsoft is an award-winning talent management software company


that specializes in cloud-based HR solutions built to improve manager
effectiveness and business results. We offer a complete suite of
congurable HR SaaS software that integrates with any HRIS.
Learn more at https://hrsoft.com

About the Author


Brian Sharp Chief Marketing Ofcer, HRsoft
Brian is responsible for all product marketing at HRsoft, a leading
talent management software company. Brian brings to HRsoft 20
years of entrepreneurial experience that includes helping companies
in all stages of growth develop and execute successful go-to-market
strategies.
He is an award-winning keynote speaker and frequent presenter on
topics including HR SaaS technology, business strategy and
marketing. Brian resides in Northern California with his wife and three
children.
Connect on LinkedIn

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