Cultivating a clear strategy for employee pay improves employee satisfaction (i.e., retention) and impacts the company's bottom line, yet many companies think about it reactively instead of proactively. Let’s discuss what factors go into developing a good pay strategy and how you can get ahead of employee turnover (ultimately losing valuable time and money).

Pay strategies are often underrepresented in organizations' conversations among leadership because key decision-makers may not be on the same page regarding the factors that make up strategic compensation decisions.

After working with leaders across over 500 organizations to craft their compensation strategies, we know that companies care about their employees and want to pay them fairly and competitively. However, they often don’t know where to start, especially given today's unprecedented and complicated environment.

The first step in developing, implementing, and maintaining an internally comprehensive and externally competitive pay strategy is having a trusted market data source, followed by a consistent compensation philosophy and clear communication from the top down.

What is Reliable Market Data?

You want reliable market compensation data to compare your employees' pay, but what is “reliable’?

For some, reliable market data means filtering and dissecting the data by endless possibilities (e.g., industry, Series funding stage, and employee headcount size). Doing so, though, often results in wonky data because of insufficient data sets that don't end up reflecting the talent pool they're recruiting from. For others, reliable market data might mean that the more data points there are, the more reliable the data is. Still, it's essential to consider where and how the data was sourced to determine its validity and how often the data is refreshed.

Validated data means not just taking raw employee salary data and reporting it back for various market percentile statistics but making sure it’s usable for your company and business needs.

The typical methodology of compensation surveys in the market is antiquated. They provide you with stale market data, often don't include newer jobs in the market, and ignore the variances between midpoints (not to mention how different job families and data cuts compare to each other). Let's say there's a job level 4 within a job family. That job level's compensation ranges should not be higher than those for job level 5. A job that requires technical skills (i.e., that are difficult to find candidates for in the market) also shouldn't have a lower salary range than a job at the same level that doesn't.

Reliable Market Data Checklist:

1. Make sure the market compensation data source uses a validation method that ensures that the aggregated data by job family, job level, and country are practical
2. Make sure that the way the employee data aligns to the market is accurate (e.g., a Head of Engineering may be a Director level at one company, but a VP level at another)
3. Ensure the data reported is updated with a frequent cadence

Establish a Clear Compensation Philosophy

A compensation philosophy allows you to establish guidelines for salary ranges that bring consistency to hiring new employees while ensuring your current employees’ pay is equitable. Start by deciding on the market positions (e.g., percentiles) you'd like to target for your company's existing and future job families. Then, review these regularly (at least once a year), but otherwise, stick to them. Changing these targets to fit the company's bottom line will interfere with the clarity and communications to employees and could result in workforce distrust.

When the focus is on the market data and the philosophy is consistent, paying employees competitively upfront promotes employee engagement and productivity.

Inflation and budget constraints will continue to be identified as issues all companies face in a changing market. However, utilizing frequently updated market compensation data will reflect evolving trends in the market. Regularly reviewing employee compensation based on their performance and how their pay compares to the current market rate also positively impacts the endeavor for fair pay.

Training leaders on the company’s compensation strategy and philosophy will result in consistent decision-making and better transparency in communications to employees.

Compensation Philosophy Checklist:

1. Develop a clear and consistent philosophy, including target percentiles for technical vs. non-technical jobs, and review at least once a year
2. Ensure the philosophy covers all available pay components, including base salary, target incentives, and equity
3. Decide on your strategy for every country/location your employees are in

Collaborate with Leaders

Let’s say you now have real-time market compensation data and have articulated a compensation philosophy. Now, you have to balance competitive offers and keep an eye on internal pay fairness – this can be tricky, especially with a limited budget.

The leadership team should work together to identify the critical roles needed for current and future needs and create consistent career paths. Doing so will empower your HR team to workforce plan and provide the hiring managers with data points and a proper budget to make good pay decisions.

Training hiring managers and recruiters on the philosophy and getting feedback on the pay ranges is vital. They’ll be able to provide details of what they see in the market with more context (e.g., are more than 50% of DevOps Engineers starting to reject salary offers?). HR can then reference these insights when revisiting their compensation philosophies as part of the yearly review.

If the people on the ground don't understand how the salary ranges were developed or where the market data came from, there could be pushback from managers, and pay gaps will remain.

Collaborate with leaders by:

1. Involving them in job leveling and establishing career paths
2. Factor in internal averages and how to use the salary range when making offers or pay decisions
3. Preparing the leaders to have pay and “next move” career conversations with employees

The Outcome

Having these things in place and training leaders on the strategy will mean consistency in decision-making and communications with employees, ultimately leading to higher engagement and productivity.

When developing and maintaining a comprehensive pay strategy, the leadership team should have a collaborative approach to establishing compensation philosophy and practices. Once that is accomplished, clear communication naturally builds trust among managers and employees, encouraging them to grow with the company instead of fleeing to a “better” opportunity.

About Kamsa

Kamsa's consultative approach to providing market data, budgeting, and forecasting was founded on the above principles, and our solution equips companies to create and maintain their compensation strategies painlessly. Features like our compensation review tool remove companies' heavy lifting and administrative burdens by automating routine compensation processes.