Compensation Strategy

The compensation strategy is extremely important as the right compensation strategy helps to build the effective and competitive organization and the wrong setting of the compensation strategy, which does not fit with the needs of the organization and with the HR and Business Strategies, can destroy the organization within several years and the organization suffers from decreased performance and not utilizing the full potential of employees.

What is compensation strategy?

The compensation strategy is derived from the HR Strategy and it defines the position of the organization on the job market, the level of the total cash, the main bonus principles in the organization and rules for the base salary setting.

The compensation strategy is the strategy, which is approved by the Board of the organization as the owner of the compensation strategy is always the top executive management of the organization. The compensation strategy has a huge impact on the costs of the organization and that is the main reason for the top management approval. The rest of managers are the users of the compensation strategy.

Compensation Strategy: Simplified View
Compensation Strategy: Simplified View

The compensation strategy defines the pay market, the organization follows, the desired position on the pay market and the way, how the desired level and position on the pay market will be achieved. The compensation strategy defines the basic compensation components used in the organization and the standard rules applied to each compensation component.

The compensation strategy has to be in line with the business and HR Strategies as the compensation of employees is aligned with the expectation of the top management from them. The compensation strategy does not change often as the compensation principles cannot be changed within few days.

Compensation Strategy and HR Strategy

The compensation strategy is one of the main supporting document for the HR Strategy. The compensation strategy is closely monitored by the management of the organization and they ask for the progress of the implementation of compensation strategy on the regular basis.

The HR Strategy has to be always designed and developed with having the respect to the situation in the compensation area in the organization. The HR Strategy cannot set the ambition, which is not suitable for the company.

The HR Strategy always defines the basic principles for the compensation scheme in the organization and the compensation strategy defines the details for the components and when and how they will be introduced or redesigned.

The compensation strategy should be updated, when Human Resources makes significant changes to the HR Strategy or the organization changes its business strategy. The compensation strategy has always support the business and its selling capabilities.

Compensation Strategy Importance

The compensation strategy helps the organization to manage the personnel expenses of the organization and it sets clear limits for the managers and employees. It provides the top management with the certainty, the personnel expenses are under the control and the costs will not boom.

The compensation strategy gives the certainty to the HR employees and HR managers as they can promise the stability in the compensation, the stability and the managed development of the compensation components and they can explain the basic role of the individual compensation components.

The compensation strategy acts as the basic document driving the compensation and benefits processes and defines clear priorities for the development or redesign of the compensation components.

Compensation Strategy Importance for managers

The managers should be always informed about the existence of the compensation strategy and they should know the implementation plan. The managers should not be allowed to comment and decide about the strategy as they would tend to make their lives easier and they would make the personnel expenses of the organization to boom.

The managers are the users of the compensation policy and they should understand, it is based on the approved principles from the strategy. The compensation policy can change on the regular (usually yearly) basis, but the strategy is consistent over a longer period of time and the managers can plan the career of the subordinates.

Compensation Strategy Importance for employees

The compensation strategy is not intended to be read by the employees. The employees are the users of the compensation policy and they should not be informed about the general position of the organization on the pay market and the compensation components to be used to motivate the employees.

The employees can read the compensation policy, which describes the details about their compensation as they recalculate the salaries, but they should not read about the strategic compensation components, which help to build the competitive advantage of the organization.

Compensation Strategy Content