Key Elements in Compensation Strategy

The compensation strategy is the underlying strategy for the general HR Strategy and its main role is to support the implementation of the HR Strategy and building the competitive and effective organization with the high performance corporate culture.

The compensation strategy does not explain the detail of the compensation scheme and the details of the individual compensation components, but it sets the general guidelines for the compensation components and sets the priorities to be implemented over the period of the HR Strategy implementation.

The high performance corporate culture and the high performance Human Resources organization have to be supported by the compensation strategy, which is designed to be business driven strategy and with the right compensation tools, which motivate employees to go the extra mile and rewarding the real successes.

Main Compensation Goals

The compensation strategy has to set the main compensation goals of the organization and they have to be kept as the main target for Human Resources to be achieved. The compensation goals have to be set in accordance with the business strategy and they have to visible in the HR Strategy.

The top management and Human Resources have to decide, what the goals are of the compensation schemes in the organization. The compensation goals should be aligned with the corporate culture and the general long-term expectations of the employees, when the organization does not implement a huge change in the corporate culture.

Main compensation goal is about the role of the compensation in the organization. Each organization pay salaries, but the role of the compensation has to be balanced with the other aspects of the overall motivation scheme applied in the organization. The organization has to choose to pay higher salaries and offer less development or career opportunities or it can offer lower salaries and better career opportunities to keep the motivation system balanced.

When the organization defines its basic compensation goals, it can continue with structuring the main compensation decisions formulated in the compensation strategy.

Main Strategic Compensation Decisions

The compensation strategy allows smooth and efficient operation of other HR Processes like the recruitment and staffing, performance management, proper KPI and goal setting process, performance appraisals. As the other HR Processes can run smoothly and they are not blocked by the wrongly set compensation strategy, the main compensation decisions have to be included in the compensation strategy and the top management and Human Resources have to be aligned in the understanding to the main compensation decisions.

Role of Compensation in Human Resources

The compensation is a part of the complex HR processes, policies and procedures. The top management and Human Resources have to decide, what will be the primary role of compensation in the organization. Some organizations prefer the supplementary role of the compensation and other organizations prefer the dominant role of the compensation.

This compensation decision is extremely important as it sets the general framework for the compensation components, if they will exist in the organization or they will be the part of the other HR policy.

The compensation strategy has definitely include the description of the role of the compensation in the organization.


The competitiveness of the compensation is another important compensation decision. The organization can decide to be aggressive with the compensation strategy and it can set the aggressive position on the pay market, but this strategy is extremely expensive for the organization and it has to balance it with high margin on the products and services.

On the other hand, the organization can choose to offer the career and development opportunities, it can increase the responsibilities of the individual employees and it can balance aim to the lower level of the compensation on the pay market.

The decision about the competitiveness of the compensation strategy is extremely important as it has a huge impact on the costs of the organization and it requests the right setting of other HR Processes.

Internal Structures

The organization does not have to follow the same pay market and the same level for all the job positions. It is extremely important compensation decision to be included in the compensation strategy.

The organization can decide about making huge pay differences across different units or it can decide about the different pay level for the experts and managers as it protects the know how.


The administration is a tough compensation decision in the compensation strategy as it sets the roles and responsibilities of Human Resources, managers, top managers in the compensation processes.

The organization can decide about preferring the decentralized compensation model, when the manager decides most issues and pay increases, but Human Resources is in a danger of not keeping the total personnel expenses budget.

In the centralized compensation strategy, the HR Managers are the main decision makers and the employees and managers do not feel the comfort of the free decision.