Developing an Employee Compensation Strategy

Employee Compensation

When most people think about employee compensation, They only consider monetary payments to employees. However, employee compensation encompasses any benefit an employee receives for working. Employee compensation includes everything from employee discounts to company awards to paid time off and much more.

Why Is Employee Compensation Important?

Why is the total compensation package so crucial to your workforce? It’s all about attracting, retaining, and motivating your employees. As a result, If you don’t start with an employee compensation philosophy that is competitive within your industry, you’ll end up losing out on top tier talent.

In addition, many state and federal laws surround compensation. As a manager or business owner, you need to keep your compensation policies in compliance with these laws. If you don’t, you’ll risk severe penalties.

Types of Employee Compensation

Employee compensation falls into two major categories, direct and indirect compensation. Direct compensation is cash given to employees in the form of wages, bonuses, or commissions. On the other hand, indirect employee compensation includes medical benefits, retirement programs, and paid time off policies that you offer.

Both indirect and direct compensation share equal importance. As a result, you need to research and include both types of compensation in your company’s total package. Know your culture and the demographics of your workforce.

 Members of your workforce may value various forms of compensation. For instance, mature employees often place more value on retirement programs, whereas recent college graduates typically place more importance on a tuition repayment program. Read on for some examples of direct employee compensation.


Featured Resource:

HR Services Pricing Survey

Get straightforward, independent information to help you find the right service and price for your company.

Base Pay

Base pay is strictly wages for doing the job. Several factors come into play when determining base pay. Base pay factors include:

  • Employee skills
  • Career longevity
  • Industry experience
  • Internal equity programs
  • Level of education

Base pay often changes throughout the employee lifecycle as the above factors change.

Other Direct Payments

Other forms of direct payments include commissions and piece rates. While you may pay your employees on a commission basis or by the job, local laws vary. For example, California has strict requirements on which employees are eligible for piece rate.

In addition, you must pay an overtime premium for all hours worked over 40 a week. Ensure that you are paying all employees minimum wage for the number of hours worked and incorporate overtime pay as applicable. Remember, overtime calculations must include non-discretionary bonuses and commissions. If you are unsure of the many laws that govern employee pay, consult our On-Demand Webinar Library for a wealth of information.

Add Your Heading Text Here

Before setting up your compensation strategy, think through your compensation philosophy. Will you lead the industry with a competitive salary? Or will you come in at a lower compensation or a base wage rate and then offer some other robust benefits such as health plans, more time off, flexible work schedules, telecommuting, those types of things? Whatever your philosophy, make sure it’s achievable for your company.

A salary survey is one of the best places to start when developing your compensation strategy. A survey gives you detailed information about how other employers in your area compensate their employees. Salary surveys are expensive, but they’re worth it. You get a good idea of what your jobs are going for within your industry.

Next, set pay grades for each of your company’s positions based on the information you gathered and your compensation philosophy. Then, determine the spread of money within those pay ranges. Start with the lowest amount pay rate for each position and move to the highest. Finally, document your pay ranges for each job and evaluate them annually.

Pay Equity

You can’t switch on a TV, turn a radio, receive business alerts without hearing about fair pay, equal pay, or just general pay equity. Many large companies have had to pay millions to settle class-action lawsuits because they did not understand the state and federal laws that applied to them.

Take a look at your salary range. Take a look at people in those ranges to make sure that you’re not discriminating based on race, gender, or age. You need to make sure you have documented reasons on why individuals are making more within the range, based on their seniority, based on the duties of their positions. Lastly, be aware of your local state at posting notice requirements.


Developing a compensation philosophy and documenting your employee compensation rules is one of the most important things you can do for your business. This undertaking will help you avoid many HR risks associated with running a business, like labor lawsuits and government fines and penalties. More importantly, developing the right employee compensation strategy for your business will significantly increase your competitive advantage. Your company will attract and keep the right kind of employees and win the war for the best talent in your area. If you need help developing your compensation philosophy, writing your job descriptions, and documenting your compensation strategy, our HR partners can help.

Share This Post

Share on facebook
Share on linkedin
Share on twitter
Share on email

More To Explore

Employee Benefits for Small Employers

Employee Benefits for Small Employers

Studies show that businesses spend 38% of employee salary on hiring and training new employees. While the cost may be lower for small business owners, employee turnover is still a burden. So how do you keep employees? Well, you can start by offering them fair wages. You can up the ante with employee benefits. Wait a

Human Resource Development
HR Services

What Is Human Resource Development and Why Is It Important?

Many people think they know what makes up a company’s human resource development. But businesses have a variety of human resource development methods. There are many skills, abilities, and specialized pieces of knowledge that go into developing company leaders. It is why some companies become industry competitors that rise to the top. Companies that train and grow

Scroll to Top