A List of Compensation Strategy Examples - 8 Most Popular Approaches
Having a compensation strategy in place is important for organizations to attract and retain top employees, improve employee satisfaction, and manage finances. Below is a list of the eight most popular approaches to compensation strategy that organizations use.
Learn about each and find out how compensation consulting can help you adapt these strategies for your organization!
Market-based
A market-based compensation strategy is an approach to determining employee pay based on market rates for similar positions in the same industry and location. This strategy aims to attract and retain top talent by ensuring pay rates are competitive.
Pay For Performance
A pay-for-performance compensation strategy revolves around paying employees depending on their work performance. This strategy incentivizes performance and may involve several incentives such as providing merit pay, bonuses, profit sharing, stock options, and promotions.
Total Compensation Package
A total compensation package is a combination of all the forms of pay and benefits an employee receives in exchange for their work. This can include base salary, bonuses, stock options, health insurance, retirement plans, and other benefits. This strategy should align with the organization's overall goals and objectives and be competitive with industry standards.
Base Salary Plus Commission
A base salary plus commission compensation strategy is when you pay an employee a fixed base salary with additional commission for achieving certain sales or performance targets. This strategy is commonly used in sales as it provides employees with a stable income while also incentivizing them to increase their sales. The commission is usually a percentage of the sales made by the employee and can be based on the total sales volume, the profit generated, or a combination of both.
Base Salary Plus Bonus
A base salary plus bonus compensation strategy is similar to a base salary plus commission compensation as it incentivizes performance. However, instead of being paid a commission on top of a base salary, the employee is paid an additional bonus for achieving certain performance targets or milestones.
Also, the bonus is usually just a one-time payment rather than a regular incentive. The bonus can be monetary, or take any other form of benefit. This type of plan is typically used to motivate and reward employees for achieving specific performance goals or for contributing to the overall success of the organization.
Profit Sharing
A profit-sharing compensation strategy is when a portion of a company's profits are distributed among its employees. The profit-sharing can be in the form of cash bonuses, stock options, or other forms of compensation. The profit-sharing can be calculated based on the company's overall profits or a specific division or unit's profit.
This type of compensation strategy aligns the interests of employees with those of the company, which can increase retention of employees who become invested in the company's success, and improve company culture as the company shares its financial success with its people.
Stock Options
A stock option compensation strategy is a compensation plan wherein employees are given the option to purchase company stock at a fixed price, subject to vesting conditions. This strategy aligns employee and company interests by giving employees a stake in the company's success.
However, the value of the stock options can change. If the company's stock price rises, employees have financial gains; on the contrary, if the company's stock price falls, stock options may become worthless.
Job-based
A job-based compensation strategy is a method of determining an employee's pay based on the responsibilities of the job, the qualifications and experience it requires, as well as the going rate of similar jobs in the market. This type of compensation strategy typically includes a base salary or hourly rate, as well as benefits such as health insurance and retirement plans.
Such compensation strategies are generally considered to be more objective and fair than other types of compensation strategies, as they are based on the specific job being performed rather than the individual employee.
Create a Compensation Strategy for Your Organization
Creating a comprehensive and effective compensation strategy for your organization can be a daunting task. But with FutureSense, you can streamline the process and design a strategy that aligns with your company's goals and values.
At FutureSense, we offer compensation consulting services to help you create a comprehensive and effective compensation strategy for your organization, including benchmarking, structure design, and communication.
Reach out to FutureSense and get a free quote!
About FutureSense
FutureSense is a management consulting firm that provides integrated solutions to build and sustain human capital capacity. The firm can work with you by offering support and guidance to manage your workforce. To learn more about FutureSense, please visit FutureSense.com.