Developing a Total Compensation Strategy: Four Steps

compensation strategies

Planning and implementing an effective total compensation strategy decides the fate of the organization by determining the kind of workforce that we want to drive our organization. If organizations want a competent and skilled workforce, they need to compensate smartly based on market-competitive salaries. On the contrary, if a company doesn’t care about the well-being of employees by not paying good salaries to employees, it will not be able to attract a competent workforce.

The process of setting a total compensation strategy requires a deep understanding of economics, finance, and HR because all these factors highly influence employee attraction and turnover rates.

The need for developing a total compensation strategy

Deciding the essentials of a total compensation strategy is one of the basic activities when any organization starts working. Before the hiring process starts, all the pre-requisites for hiring must be in place. A well-defined total compensation strategy is indeed one of them. So, compensation strategies come first when we are planning to hire the people and decide the kind of workforce we need for our survival. If we require highly technical or experienced human capital, we must compensate them according to their skills. Highly technical or experienced employees get paid higher than non-technical jobs. Hence, our total compensation planning depends upon the type of business we are in, and the skills and experience of the people that we need to run it. Let’s see the ideal process of developing a total compensation strategy.

What is total compensation?

We define compensation as: “the reward or payment that an employee receives for the work performed in an organization”.

Components of Compensation

Compensation consists of both financial and non-financial components.

Compensation: Financial Payout + Non-financial Payout

Process of planning the total compensation strategy

The ideal process of planning the total compensation strategy is as follows:

1) Organize the job descriptions

Job description or JD is a “written document of responsibilities an employee is liable to perform on his job”. The nature of each job lays down the foundation for the job descriptions. Two organizations, operating in the same industry might have the same JDs for a particular job but under different job designations. One organization might call a job title “level two officer” performing the same job responsibilities as the other organization calling a job title “level three officer”. Therefore, the nature of jobs decides their JDs, not the designations. This is because the tasks and activities required to perform any job define its job description. This leads to compensating people on the basis of what they perform at their jobs. Thus, this approach to devising the total compensation strategies aims to compensate employees on the basis of their competencies and their job tasks.

Identify the KSAs

This process starts by categorizing different jobs under job grades/ titles within the organization. For this purpose, assess the KSAs for every job. KSAs are the knowledge, skills, and abilities required for a specific job.

  • Knowledge is what an employee knows about his field/ job.
  • Skill is the expertise he acquires over time.
  • Ability is his natural, innate talent.

HR assesses each job separately on the basis of these KSAs. It figures out the KSAs for every job, the relevant qualifications, experience, and the tasks and activities relevant for performing this job. This is called Job Analysis.

Our other blog explains how to conduct a job analysis in detail.

Ultimately, HR records all the essential and non-essential requirements for a particular job. This document is called Job Description. Hence, organizing the job description is the primary phase of total compensation strategy planning.

It is important to note that if we categorize jobs well and realize the value that comes with this exercise, the result is never less than a masterpiece of employee motivation with smart compensation.

2) Setting Salary Benchmarks – Conducting market compensation survey

After laying down the JDs, we conduct a market or industrial analysis to compare similar jobs. For this, it is important to take a sample of 3-5 organizations. These organizations must be within the same geographical area (location); have the same business (same industry). For example, if we want to conduct a market compensation survey for the job of a Business Development Manager in a bank, we will conduct research on how other banks in the same area are paying their Business Development Managers, based on the job description elements. It is quite possible that other banks call an employee with the job title “Relationship Manager” and we call an employee performing the same job in our organization “Business Development Manager”.

Hence, the market survey is based on the comparison between the same job descriptions, if the job titles differ. The main focus is on Job Descriptions as any two people performing the same job duties deserve to get the same salaries. This is called setting up a “Market Competitive Salary”.

Benefits of market-competitive salaries

Market-competitive salaries are preferable for a variety of reasons. Firstly, we get a benchmark salary for all kinds of jobs so every company has to consider this before hiring. This helps in establishing itself as an employer of choice to attract a competent workforce. Secondly, if a company does not pay market competitive salaries, it eventually starts losing good employees. For hiring and retaining competent employees, market competitive compensation is a very important factor. And this is such an attractive one; it could get you the best workforce with a soaring market reputation.

developing a total compensation strategy

3) Setting pay scales

The next step is to find out the median pay for every job using statistical techniques and then define a lower and higher point for every grade. So, if we want to set the pay scale of cashiers in a bank, we can divide them into 3 grades; Officer grade 1, officer grade 2, and officer grade 3 with the former one being senior to the latter grade. Officer grade 1 can have employees who have less technical skills to more technical skills, less qualification to more qualification, less managerial skills to more managerial skills, and less experience to more experience. Based on these scales, salaries of all officers in Officer Grade 1 will fluctuate within this pre-defined scale.

So, a pay grade might contain 5 such levels and when a person promotes to a higher level, his salary increases to the benchmark set for that level in the same pay grade.

4) Considering labor supply & demand

Labor supply and demand factors have a significant effect on total compensation strategy planning. If labor supply is greater than its demand then, there are more people and fewer jobs. Hence, organizations usually take advantage of the high unemployment rate and pay less.

Wise compensation planning is a win-win

Wisely constructed total compensation strategies alone have a huge impact on employee attraction and retention rates. Good salaries lead to increased job engagement and high employee performance thus, leading to high organizational profits. So, developing a compensation strategy based on employee skills and care is always a win-win result.

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