What is a compensation strategy?

When looking to attract and retain qualified workers, you need to evaluate how your organization approaches its total compensation package and employee benefits. With a competitive labor market and changing demands from job seekers, you may need to adjust your employee compensation strategy if you’re seeing increasing turnover.

In this article, we'll go over common compensation strategies, why they're important, and how you can design one to fit your organization's needs.

In this blog post, you'll learn:

• How your compensation strategy can impact your organization's recruitment and retention efforts.
• How employee compensation strategies, such as straight salary, salary and commission, and commission only, compare.
• How compensation strategies affect the employee experience.

What is a compensation strategy?

A compensation strategy is how your organization offers pay and benefits to employees. This includes setting salary ranges, determining how raises and bonuses are calculated, and identifying which employee benefits you want to offer.

An effective compensation strategy should reflect your organization's needs, the culture you want to create, and trends in the external market.

Why is a compensation strategy important?

Your employee compensation policy can be the difference between potential employees applying to work for your organization or your competitors. It helps you compete for top talent, reduce turnover rates, boost employee satisfaction, and more.

Let's look at a few of the perks of having an effective compensation strategy.

Attract qualified job seekers

You'll attract more highly skilled workers when you offer a competitive salary range and fringe benefits. PeopleKeep by Remodel Health's 2024 Employee Benefits Survey found that 81% of employees believe an employer’s benefits package is an important factor in whether they accept a job. When you have a standout compensation program, job candidates will view you as an employer of choice.

Boost employee satisfaction and performance

When employees receive the perks and salaries they want, they feel valued and appreciated. According to Great Place To Work¹, employees who feel cared for are 1.7 times more likely to put in extra effort at work. This increase in employee engagement and productivity can help your organization meet its business goals.

Reduce turnover

When your employees are satisfied with their pay and the perks you provide, they're more likely to stay with your organization instead of searching for new opportunities with your competitors. This reduces turnover and saves you time and money on hiring and recruitment efforts and training to replace employees.

What are the different types of compensation strategies?

While every compensation plan looks different, you need to be aware of a few popular types of compensation.

Common compensation strategies include:

• Straight salary: Paying workers a base salary or hourly wage based on their role and job title.
• Salary and commission: With this pay mix, you offer workers a base salary and add commission.
• Commission only: Generally used for independent salespeople, this involves only paying workers commissions for the sales they make.
• Team commissions: Similar to regular commission structures, salespeople earn commissions based on their sales. However, commissions and bonuses are based on how well the team performs as a whole.
• Equity compensation: This is a form of indirect compensation. It's a non-cash payment strategy in which companies offer employees ownership stakes, typically through stock options, to align their interests with the company's success.
• Profit margin or revenue-based: Employers pay workers entirely with the profits the organization generates. Profit margin compensation is common with startups.
• Residual commission: Employers pay workers a commission based on sales and continue to earn revenue from their accounts, even after they leave the company. This is the least common compensation method, but some organizations may offer it to top-performing workers.

With each of these strategies, there are different approaches organizations can take. For example, with leading compensation, you set your pay and benefits above current market conditions. This makes it easier to attract and retain talented workers.

You can also navigate the competitive market by offering similar salary levels and benefits to your competitors. This is the most common way for organizations to operate. But, your employees may still leave for competitors that offer more.

There's also a lagging strategy where your organization sets salaries and benefits below market trends. This is usually done as a cost-saving measure for small businesses and nonprofit organizations. However, a lagging strategy can make recruiting top talent and retaining your employees more challenging.

Each strategy is further nuanced by employee benefits and perks.

What are the different factors involved in creating a compensation and benefits strategy?

You'll want to consider many factors as you develop your compensation strategy.

This includes:

• Your compensation philosophy
• Your budget
• The current job market
• Base salaries
• Raise structures
• Performance-based incentives
• Perks
• Any federal, state, or local pay or benefits requirements

We'll review these components in the sections below.

Compensation philosophy and current strategy

The first step to creating a new strategy is identifying how your current structure is performing and what you want your new system to achieve. If your current strategy is attracting the right talent and keeping them long-term, there might not be a reason to change.

If your current plan isn't working, consider what you want to get out of it. Is it an organizational goal to keep your current employees long-term or to hire an influx of new talent?

Next, consider your budget. How much is available to pay employees' salaries? What about employee benefits? Knowing how much you can safely spend is key to shaping a successful compensation strategy.

Selecting a base pay structure

Choosing the right base pay structure for your organization is crucial to the success of your strategy. Will you differ salaries by roles, titles, departments, or skills and experience? Or do you want to offer a blanket salary regardless of skill or title?

The different employee pay rates include:

• Individual pay: Every employee has a different hourly rate or salary based on various factors such as their role, experience, and skills.
• Broadbanding: Using a set number of different pay groups rather than specific titles. For example, you could create one group for all administrative jobs.
• Market-based compensation: The current market dictates salaries and pay grades.
• Job families: Offering the same pay ranges to similar jobs or departments regardless of specific tasks.

Once you've selected a structure or a hybrid structure for your organization, you can determine your salary ranges. This helps you determine the minimum and maximum base salary you will offer employees based on their roles or experience.

Determining raises

With a base salary strategy in place, you can now determine your organization's raise structure. You'll want to decide how often you'll provide raises and the criteria. Will raises be automatic for cost-of-living adjustments, or will they be tied to annual reviews?

Step pay is a type of compensation where certain jobs or departments receive salary increases based on time with your organization and performance. For example, employees could earn a pay increase every year they work with the organization, up to the maximum salary allocated.

Many organizations also use competitive rates to determine raises. This is when you adjust your pay rates to remain competitive in the job market.

You can also base pay progression on individual performance or your overall organization's performance. This encourages workers to excel at their jobs and reach the organization's goals.

Finally, you can give additional compensation to employees who take on professional development opportunities. If an employee learns new skills to advance in their career and take on new responsibilities, you can offer a raise to reflect their value.

Offering performance incentives

In addition to regular pay, you'll want to consider any other incentives you can provide. For example, you could offer bonuses to all your employees or specific departments for reaching certain goals. If you have custom service representatives, you might offer a bonus for reducing response times or achieving high scores from customers. You can also offer commissions to salespeople, among other monetary rewards.

Creating a benefits package

Finally, no compensation package is complete without quality employee benefits. Benefits are any perks provided to your staff in addition to their salaries and other incentives. This could include health insurance, paid time off (PTO), retirement plans, and fringe benefits.

According to our report, health coverage is the most valued employee benefit, with 92% rating it as important. But many small to medium-sized businesses can't afford it due to rising traditional group health insurance rates.

Health reimbursement arrangements (HRAs) are an affordable alternative to group health insurance plans. With an HRA, you can reimburse your employees tax-free for qualifying medical expenses, including their individual health insurance premiums. This gives you increased cost control over your health benefits while giving employees more freedom to choose the coverage that's best for them.

Two of the most popular stand-alone HRAs are:

• The individual coverage HRA (ICHRA): The ICHRA is for employers of all sizes. You can vary allowances and benefit eligibility using 11 employee classes. You can also differ allowances by employee age and family size. There's no annual limit on employer contributions either, so you can offer as much as you'd like. To participate in the ICHRA, your employees need their own individual health insurance policies.
• The qualified small employer HRA (QSEHRA): The QSEHRA is only for small employers with fewer than 50 full-time equivalent employees (FTEs). You can vary allowances by employee age and family size. The IRS sets annual limits on employer contributions with the QSEHRA. However, more of your employees may be able to participate in the QSEHRA since they only need plans that provide minimum essential coverage (MEC), not individual plans. This means they can have coverage through a spouse's or parent's group health plan and still use the QSEHRA for out-of-pocket expenses.

Adhering to local laws

No matter how you design your compensation strategy, you must ensure it follows all applicable employment laws in your area. For example, you may have minimum wage requirements for your employees that differ based on where they physically work (including where they live, if remote). There are also federal requirements to be aware of. For instance, all organizations with at least 50 FTEs must offer health insurance (or an ICHRA) to at least 95% of their full-time employees and dependents.

Conclusion

A strong compensation strategy is essential for attracting and retaining top talent. When your pay, benefits, and company culture are aligned, you'll be better equipped to fill vacancies with the workers your organization needs to thrive. By following the tips in this article, you can create a framework for compensation that your employees will love.

If you want to offer a competitive employee benefits package, PeopleKeep by Remodel Health can help. Our personalized benefits administration software makes it easy to set up and manage HRAs in minutes each month.

This blog post was originally published on October 26, 2022. It was last updated on September 3, 2025.

1. Great Places To Work