4 Components of an Effective Global Compensation Strategy (Plus Tips)
Clarke Ricks School of Business,
Liberty University
BUSI 690: Policy and Strategy in Global Competition
Dr. Hicks
May 7, 2022
4 Components of an Effective Global Compensation Strategy (Plus Tips)
An effective compensation strategy can help a company's hiring process become more
efficient. These strategies typically combine a company's hiring budget with a compensation
package in an attempt to recruit the right candidates. Understanding the components of a
compensation strategy and how to create one can help you implement a package that benefits
the needs of the business and its employees. In this article, we discuss the definition of a
compensation strategy, explain its purpose, explore some key components and show you how
to create one.
What is a compensation strategy?
A compensation strategy is a plan that discusses how much, and when, to pay employees in
an organization. However, it may change over time as the needs of the business shift. Although
a major part of the plan focuses on staff financial compensation associated with their roles,
skills and education, it also includes benefits and perks. It also supports a company's plan and
its overall business goals by helping companies recruit and maintain efficient team members.
What is the purpose of a compensation strategy?
Human resources teams often use compensation strategies to locate and onboard
employees who can provide the company value. The purpose of a compensation strategy is to:
Hire qualified employees: Compensation strategy evaluates how much compensation is
necessary to reach qualified employees who can meet the goals and objectives of the business.
Reward employees for good work: The strategy outlines the rewards an employee
receives for meeting certain objectives.
Outline the definition of a company's values: It also outlines how a company values
compensation, which can provide consistency in creating compensation packages.
Improve company morale: Offering a transparent salary with incentive options can help
improve company morale, which can then reduce turnover rates.
What are the key compensation strategy components?
A compensation strategy typically includes four key components:
1. Base pay
Base pay refers to an employee's salary or hourly pay for their particular job. It's the amount
the company and individual agree upon during the hiring process, which can also be
commensurate with their level of education and skills. When determining the amount of base
pay, it's also necessary to decide the frequency. Some employers may pay weekly, whereas
others may pay biweekly or monthly.
2. Incentive pay
Providing incentive pay can also help encourage employees to complete certain goals or to
meet performance objectives at a set time. It's a type of indirect pay that typically offers
additional compensation outside of an employee's regular job tasks or benefits, such as:
Referral compensation
Commission payment
Bonus payment
Overtime payment
Cost of living increase
Profit-sharing
Stock options
3. Employee benefits
Employee benefits are the additional benefits that employees receive besides their base pay,
which may include:
Health insurance
Dental insurance
Vision insurance
Short- and long-term disability
Life insurance
Retirement contributions
Company vehicle
Phone allowance
Gym memberships
Travel benefits
4. Time off
Time off refers to a company program that compensates employees when they're not at
work. Most companies require employees to work for the organization for a specific time
period before being eligible for this type of compensation. They may also require that the
employee work a specific schedule, such as full-time employment. Time off may include:
Paid time off
Vacation time
Personal leave
Maternal or paternal leave
How do you develop a compensation strategy?
You can develop a compensation strategy with the following six steps:
1. Review your compensation philosophy
A compensation philosophy is a statement that a company creates to set the system of its
reasoning for pay. This philosophy helps companies decide how compensation aligns with their
mission and goals. It may include:
How compensation supports the company's goals and objectives
How compensation aligns with the company's values
How the company aims to use compensation to become a competitive employer
The company's unique value proposition
The strategy is the actual actions, or procedures, put in place to activate this philosophy.
Reviewing or creating your company compensation philosophy can help you determine your
strategy. This includes evaluating how compensation helps the company reach its goals.
2. Collect data
Before creating a compensation strategy, it's crucial to collect employment data to find out
the average annual salary of employees in a specific industry and position. This can include data
on current demand in the industry and the number of available, qualified employees. You can
also gather this information using market trend reports or with information from the U.S.
Bureau of Labor Statistics.
3. Create guidelines
Create guidelines you can use when determining compensation packages for present and
future hires. This can include specific rules, or policies, that you apply when calculating
compensation. It may also include certain criteria that employees must meet to earn certain
types of pay. It's also a good time to review state and federal laws during this step, to adhere to
compensation policies set by the Equal Employment Opportunity Commission (EEOC).
4. Review the company budget
When you know how much funds the company allocates each year for compensation,
consider reviewing the company's budget. Try separating it into different departments, so you
can determine if any budget adjustments are necessary. You may also want input from
department managers during this step to understand how much they plan to offer for different
levels of employees.
5. Create pay structures
Creating pay structures means creating salary ranges, or a range of income that you plan to
pay employees. A range gives you more flexibility when making or negotiating offers and can
also give current employees an idea of promotion opportunities. This can include choosing
incentive pay structures and deciding hourly versus salary.
6. Discuss compensation strategy with other team members
Getting feedback from other team members can help you align everyone's goals. This may
include discussing with department leaders, supervisors and others involved in the hiring or
training process to ensure the compensation strategy is fair and meets industry standards. It
can also speed up the hiring process as you already know how much salary range is available for
positions. Once everyone agrees to the plan, review and publish it.
Tips for creating a compensation strategy
Here are a few tips you can use when creating a compensation strategy:
Be consistent. It's important to apply the same compensation criteria to staff and
management to maintain a level of transparency and trust within the company.
Set a timeline to reevaluate your strategy. Creating a specific time to reevaluate your
strategy can help you confirm that compensation meets industry standards or change the
strategy if needed.
Conduct salary audits. Conducting salary audits can help you measure how much you're
currently paying employees for certain duties. This allows you to compare this information with
new positions, calculating a fair compensation.
Focus on all-inclusive compensation. Including benefits like health insurance and
retirement contribution to your competitive pay model can also help you recruit high-quality
candidates interested in those all-inclusive perks.
