Developing a Compensation Strategy: It’s All about Answering Questions

At some point, most business owners and business decision-makers find themselves asking questions about compensation, such as: “How can we attract the people we need?” Or, “What do we need to pay them in order to keep them, and still keep my business successful?” 

These are relevant questions, regardless of the state of the economy. A business needs a compensation strategy to guide it during any economic cycle. 

The question then becomes: How should a business go about developing this important strategic roadmap? 

First of all, you will want to take the time to analyze: What are your anticipated outcomes? What are you trying to achieve by having a compensation strategy? You may not have these questions and answers written down on paper, but you may have a strategy in your mind. 

So while your compensation strategy doesn’t have to be formalized on a piece of paper or hung up on the wall, you should be able to answer those questions and others. Why? The short answer is: Because you will want to align your compensation system with your business and environmental conditions. 

There are more relevant questions you will want to answer. For instance, you will want to look at where you are within your business by analyzing answers to such questions as: 

1. Are you planning to grow your business?
2. Are you planning to stabilize or possibly decline?
3. Where are you in the business cycle?
4. What environmental or external components are affecting your business?
5. Do you want to match the market, lead in the market or just be in the market? 

So you will need to analyze where you are and where you plan to go with your business. The ultimate purpose or objective for developing a compensation strategy is determining the so-called, “So what?” of it all. After you determine this information, then your goal for having a compensation strategy is to remain competitive. 

And, yet while it’s also obvious, it’s very important to remember: Employees are the ones who help you achieve your bottom line. Without employees, a business cannot be successful. 

An Example

Speaking of employees, I’ll share an example of how a compensation strategy can affect a business both in the short and long term. I’ve experienced a business that was acquiring another firm. During the due diligence process, this business failed to study the acquiring company’s current pay practices.  As a result, the business faced some surprises; for one, the acquiring business had an illegal pay practice.    

The short term objective was to correct any pay issues to minimize the employer exposure.  In the long term, the business needed to ensure that all employees are paid fairly. 

If during the due diligence, unusual compensation practices are found, often times the acquiring company will require the other firm to make the necessary changes prior to the acquisition. When making changes to pay structures or current practices, as an employer, you need to take into consideration the impact (positive or negative) to employees. Take extra time and care to develop a communication strategy.    

Be upfront and communicate. In these situations, you will need to deliver a message stating your consideration of options, the ultimate decision that was made and the reason(s) behind the decision.  

Finally, as you work toward developing your compensation strategy, you will also want to look at your “total rewards” package, meaning benefits, base pay, bonuses, time off, etc., and how you will position those rewards in order to attract the people you need to make your business successful.

A business needs a compensation strategy to guide it during any economic cycle.