Compensation planning needs to go beyond base pay if organizations want to stay competitive in a volatile market. This blog post examines the characteristics of contemporary compensation plans and discusses how to implement a winning pay-for-performance strategy.

If you want to attract and retain exceptional talent, it won’t be enough to simply pay your employees a livable wage. Top talent needs to know that you value them as people, not just performers. Base pay is still one of the most important factors for most people when they consider taking a job with a new organization. However, other forms of compensation like insurance benefits can entice skilled workers to join or remain with your company. In a recent Gallup poll, 54% of respondents said that significant income increases or improvements to their benefits packages were “very important” when considering accepting a new role.

A clearly defined plan for how you’ll compensate workers beyond their base rates will ensure every member of your team feels valued and respected. Outline not just the salary bands for every role but also how your organization evaluates its employees when determining their compensation. Your strategy should fortify your organization’s culture and encourage behaviors that will lead to its success. Developing and consistently updating your compensation strategy—as well as communicating any changes to your employees—will also assist your organization in:

• Reaching its overarching goals
• Promoting equity and fairness
• Preventing and avoiding legal issues
• Managing budgets effectively
• Increasing and enhancing employees’ motivation, performance, and productivity
• Attracting skilled workers and retaining top talent

RELATED READING | ‘How Compensation Management Software Helps You Customize Total Rewards and Retain Your Top Talent’

Characteristics of a Modern Compensation Strategy

Today’s compensation strategies need to be led by your organization’s pay philosophy. In other words, you need to know the answers to the question: “why does my organization offer specific salary bands and non-monetary compensation benefits?” Your compensation philosophy should reflect your organization’s mission and values. For instance, if your company values health and wellness, your compensation packages might include benefits like complimentary access to gym memberships or programs that support mental and physical health.

Modern compensation strategies should be holistic. In addition to monetary compensation and standard benefits, you also need to consider how and when your organization will communicate its strategy to employees, as well as how often you’ll review your plan and make adjustments. Most organizations should consider reviewing or adjusting their compensation strategies every three to five years. A 2024 poll conducted by PeopleFluent confirmed that most organizations (93%) have reviewed or updated their compensation strategies within the last two to four years.

Additionally, modern compensation strategies consider pay structures for every position in your organization. Your strategy establishes how incentive- or performance-based compensation is rewarded, including eligibility criteria and expectations. You should also have a plan for how your organization will communicate expectations with employees. Transparency will help your workforce better understand your philosophy and how compensation decisions are made.

LEARN MORE | ‘7 Best Practices for Implementing Pay Transparency’

Current Trends in Compensation Strategies

Increasing communication and pay transparency is just one of many trends that organizations are adopting when developing their modern compensation strategies. Despite the current volatility of DEI-driven initiatives across various market sectors, pay equity is still a major consideration for many companies. In 2023, the U.S. Census Bureau reported that the pay gap between men and women actually widened in a statistically significant way for the first time in 20 years. The female-to-male earnings ratio was 82.7% in 2023, down from 84.0% in 2022. Organizations that wish to improve equity in their workforces must consider pay disparities when developing their compensation strategies.

It’s also important for your organization to be aware of how changes to its pay scales and benefit offerings will affect operational budgets. Your company might wish to offer free wellness program memberships to every employee, but doing so could cost your organization a significant amount, with a negative impact on your overall budget. Your compensation strategy helps you determine whether the cost of providing specific salaries and perks to employees will outweigh your organization’s potential performance and productivity benefits.

Implementing a Pay-for-Performance Compensation Strategy

A common compensation strategy is the pay-for-performance model. This approach links an employee’s total rewards with their individual performance or productivity. Some pay-for-performance models may also correlate workers’ salary increases or bonuses with their organization’s overall success. The model is based on the assumption that high performers or more productive employees will receive better pay or greater benefits.

Performance-based pay structures can take many forms, and some organizations might choose to use different structures for the various roles within their company. Some possible performance-based pay options include:

• Merit pay
• Spot bonuses
• Piece rate pay
• Commission-based compensation
• Profit sharing
• Gainsharing
• Stock and equity options
• Competency-based compensation

READ MORE ABOUT COMPETENCY-BASED PAY | ‘What to Expect When Implementing a Skills-Based Compensation Strategy’

Pay-for-Performance Best Practices

Before you implement a pay-for-performance compensation plan, it’s essential that you mitigate any potential biases that might negatively impact your employees (and, by extension, your organization’s success). You’ll need to carefully consider your assessment criteria to ensure each employee is fairly reviewed. If your employees feel that your compensation structure is unfair or biased, you could easily find yourself with a disgruntled and unmotivated workforce.

Be sure to set clear, objective, and achievable performance expectations for your employees. If you offer bonuses, ensure everyone understands who is eligible to receive them and how they can be earned. If you offer commissions or other variable compensation incentives, define the key performance indicators that workers must meet before they can receive these awards. Communication is crucial. Share your performance-based compensation criteria with your workforce frequently and through multiple channels. This helps you ensure that your leadership team, line managers, and individual contributors all understand your expectations and how they can earn additional pay rewards.

Once your organization has implemented a pay-for-performance model, be sure to regularly review your compensation strategy. Request feedback from your employees about your compensation plan, and be receptive to any potential negative sentiments. One or two negative opinions usually aren’t cause for concern, but consistently poor reviews or an increasing number of complaints may indicate a need to adjust your strategy. Analytics tools in your compensation or talent management software can help you track feedback and reward allocations so you can determine what aspects of your strategy are working and which items need to be refined.