Employee compensation: Leverage this talent retention strategy and boost satisfaction

All HR managers know, deep down, that no matter how much free merch we give employees or how many socials we organize each quarter, new hires ultimately join our companies for a paycheck.

They also usually leave for one. More than a third of workers quit owing to inadequate total compensation.[1]

A strong employee compensation plan is the bedrock of any employee retention strategy. Without it, other efforts like building a cohesive culture or establishing employee wellbeing initiatives don’t have the necessary impact.

But crafting the right employee compensation strategy can be tricky. 

Compensation costs are rising in the US, with employees able to command higher salaries from employers, so you must ensure your compensation package stands out.[2]

In this blog, we discuss the benefits of employee compensation programs and how to implement them in your business – plus employee compensation examples from real companies.

What is employee compensation?

Employee compensation is the combination of incentives that employees receive for doing their job. These incentives include a base salary, bonuses, and other benefits and perks. 

A competitive compensation and benefits package can help with talent acquisition, but it is also a powerful tool for talent retention.

Some employee compensation strategies come and go like any other employee retention trends as the market changes, but some new ideas emerge and gain lasting popularity over time. 

One example is pay transparency, which we discuss below.

What are the different types of employee compensation?

There are three main types of employee compensation: 

1. Direct

2. Indirect

3. Non-monetary

Direct compensation refers to money that employees receive in exchange for their work. It includes: 

• Salaries and hourly wages 

• Bonuses or supplemental earnings

• Tips and reimbursements

• Commissions 

Indirect compensation refers to incentives that have monetary value but aren’t money. They include standard benefits like health and life insurance and company stock options and non-traditional employee benefits like a lifestyle spending account (LSA).

Employees can use an LSA for health and wellness expenses not covered by health insurance. A massive 70% of employers are considering implementing this strategy.

Finally, non-monetary workers’ compensation refers to incentives that provide less tangible value to employees. 

It includes employee recognition programs and peer-to-peer recognition systems. It can also include policies like designated meeting-free days to help employees’ mental health.

Why is an employee compensation strategy important?

From a startup to an enterprise, every business pays its part-time and full-time workers, but not every business has a strong employee compensation strategy, creating blind spots.

If you set salaries on a case-by-case basis, interpersonal bias and lack of information could lead to over- or under-paying employees and create a negative atmosphere.

By contrast, creating a strong employee compensation strategy as part of your human resource management efforts benefits employers by ensuring they pay all employees fairly, thus increasing employee loyalty and retention.

It can also increase job satisfaction among employees by alleviating financial anxiety and giving them strong incentives to do their best work.

Strong incentives boost employee engagement and motivation, positively affecting productivity.

Finally, aligning your employee compensation strategy with your organizational values and corporate identity improves your company’s reputation for integrity. 

For example, many organizations enshrine diversity as a company value. However, this is an empty gesture unless backed up by compensation strategies like fair pay practices to prevent marginalized employees from becoming trapped in low-paying roles.

Building a reputation as a fair and trustworthy employer makes it more likely for employees to refer their friends to work for you, aiding retention and talent acquisition.

For employees, fair pay shows that they are a high-priority investment for their employer and improves their overall employee wellbeing – an equally important reason to prioritize it.

The benefits of an employee compensation plan

We’ve discussed the overall importance of having an employee compensation plan in place, so let’s look at specific benefits you can expect from implementing a strong employee compensation strategy. 

Here are some of the key advantages to consider.

1. Increases retention and reduces turnover

If you underpay an employee, they are likely to seek a new employer who can meet their needs. 

The number one factor making employees open to new opportunities is the need to make more money.[3]

Research shows base pay and bonuses are the biggest motivators for employees to stay in their positions.[4]

When employees don’t feel you pay them fairly, your employee turnover rate increases. 

Fixing this problem and stabilizing your employee retention rate means finding an affordable combination of types of compensation for your business and fulfilling employees’ needs.

2. Boosts employee satisfaction and engagement

Adequate employee compensation stops workers from leaving your organization and makes them more committed. 

Studies suggest that compensation strategies have a strong positive effect on employee engagement.[5]

Having engaged employees is a worthwhile investment in the long term. Teams with low engagement typically have turnover rates that are 18% to 43% higher than those of strongly-engaged teams.

Engaged teams also make you more money. Companies that score in the top 25% for employee engagement are more than 20% more profitable than those on the opposite end of the scale.[6]

3. Incentivizes high performance

When you offer fair compensation and work schedules, employees feel valued.

Feeling valued impacts their sense of loyalty and their desire to perform well. Employees who are satisfied with their pay are more motivated, although pay is not the only factor that affects motivation.[7]

You cannot expect to retain employees who don’t feel respected, and you don’t want to retain employees who aren’t interested in doing good work. 

Good employee compensation covers both of these bases.

8 best practices for leveraging employee compensation programs to retain your best performers

To enjoy the benefits of improved retention, performance, and employee satisfaction, you need to ensure your employee compensation processes are airtight.

Here are eight best practices to do that.

8 best practices for leveraging compensation strategies: Summary table

If you’re already mid-overhaul of your employee compensation programs and need a quick overview, here’s a summary.

1. Do market research to offer competitive salaries 

Retention begins with recruitment, and hiring the right people means offering monetary compensation that stacks up against other employers in your:

• Industry 

• Region 

• Niche

These are, after all, the other employers your candidates and employees are most likely to consider.

Check job sites like LinkedIn and Glassdoor to see the salaries offered by specific competitors. You can also gauge what competitive compensation looks like in your industry by looking at aggregate figures from sites such as PayScale.

When working with hybrid, international, or remote teams, consider where your employees live.

 Salaries for data engineers, for example, differ widely by region.

2. Consider employees’ total compensation 

Of course, we all know that employee compensation is about more than salary. You need to consider employees’ total compensation. That includes: 

• Salary 

• Benefits like disability insurance, retirement plans, and employee assistance programs 

• Life work balance 

• Resources and tools

• Learning and development

• Incentives like spot awards 

A high salary is desirable because it gives employees financial security and the freedom to live comfortably, support themselves and their families, and pursue the entertainment they love outside of work. 

However, direct compensation isn’t the only way to provide these perks for your workers. A strong employee benefits program can cover many of these bases. 

For instance, nearly three-quarters of office workers say they would prefer long-term flexibility to a higher salary.[8]

Understanding what employees value is key to determining the benefits for a competitive employee compensation plan. That brings us to our next tip.

3. Listen to employee voice to determine what employees want and need

Another resource you should use to gauge appropriate employee compensation is employee feedback or asking employees what they want and need. Do this by: 

• Making a note of the salaries employees ask for when their contracts come up for review, and particularly in exit surveys. As we’ve seen, compensation is likely part of their reason for leaving.

• Asking for feedback about direct compensation at regular intervals, for instance, in one-to-one meetings with managers and stay interviews. For example, if a team is working overtime to meet a deadline, ensure you ask them for feedback on how differential pay and other overtime pay is handled.

The same applies to indirect and non-monetary forms of compensation. To be competitive, an employee compensation package must include things employees want, which surprisingly few do.

There is an 83% gap between the benefits employees can use and the benefits they want.[9]

Let’s say you buy an online learning subscription for your employees without first asking them about their learning preferences. You might find that almost nobody uses the online learning subscription, but they all want employee coaching.

Asking for feedback before implementing new benefits ensures you provide a package that pleases most employees.

4. Try skills-based compensation 

Implementing skills-based compensation is one way to make your compensation process fairer across the board.

Skill-based compensation is a type of performance-based compensation strategy in which you pay employees based on their skills and competencies instead of their:

• Job title

• Qualifications

• Work history

• Tenure in the organization

One benefit of this approach is that, particularly when assisted by objective measurements like talent assessments and HR analytics, it is broadly meritocratic. 

It works best in highly technical industries such as engineering, data, and coding, where a more sophisticated skill set enables employees to take on more responsibility. 

It may be harder to apply in industries or functions where advancement doesn’t necessarily refer to acquiring “more” skills but to advancing existing leadership skills, experience, and business connections. 

Another benefit is that it gives top talent a clear path upward. They know that the path to higher pay is through employee training programs and are, therefore, more likely to invest in their skills.

Pair this strategy with a dedicated budget for each employee to pursue upskilling for the best results. At TestGorilla, we allot each of our employees 3% of their annual salary to spend on developing skills of their choice.

They can build on their existing skill set or try reskilling if they want, enabling them to work toward a change in their careers.

Deloitte found that skills-based organizations were almost twice as likely to retain high performers and more than twice as likely to innovate.[10]

5. Adjust your compensation strategies when dealing with global teams

Determining the right employee compensation strategy can be particularly challenging when recruiting internationally. 

Rates of pay differ around the world because of different costs of living and fluctuations in the market. Workers in regions with lower inflation expect smaller pay increases than those with high inflation. For example, experts predict an average pay increase of 2.6% in Japan versus 3.4% in the US.

There is no one fix for this. Depending on your business model, you can take different approaches, basing compensation on: 

1. Local rates for that role or skill in the country or area where the employee works. These are likely to be influenced by the local cost of living and could help you access skills that are expensive in your region for a lower price abroad. A massive 71% of employers opt for regional pay differentials like this.[11]

2. Local rates for that role or skill where your company is based. Setting rates based on your head office location can be more expensive if you live in a big city, but your employees may perceive it as fairer.

3. A global flat rate for each role, which works best for completely remote organizations.

4. Baseline rates with adjustments for local cost of living. Again, this works well for distributed companies where each employee works in a different location.

6. Consult with a professional to ensure legal compliance 

An essential part of any working relationship is ensuring that employee compensation is fair and legal – for example, meeting minimum wage requirements and tax obligations as established by the federal government and the Department of Labor.

International teams must consider these legal requirements because employment laws differ worldwide.

Don’t neglect this step because the cost of non-compliance can be huge and doesn’t include reputational damage. 

You can lose business and access to a talent pool because of customers and candidates thinking you’re unethical.

Fines and penalties are the least of your worries. A Globalscape study of multinational organizations showed that the cost of non-compliance in a 12-month period can be at least $1m in business disruption alone.[12]

Don’t take any chances with your internal compliance experts, either. Use talent assessment tests to examine their knowledge of employment laws in your target regions – hiring only the best and upskilling any gaps in your current workforce.

7. Practice pay transparency

Once you’ve decided on your employee compensation model and how to apply it across regions, it’s time to show this work to your employees and incorporate it into your efforts to create an inclusive culture.

The best way to do this is by adopting a pay transparency policy. 

Pay transparency is when you make the salaries for all roles available to employees and candidates. You can do this in job ads and internally, for instance, in an internal talent marketplace.

Adopting this policy sets you apart from competitors, which comes in handy during acquisition and as a retention tool to discourage your employees from jumping ship. 

Just 17% of organizations practice pay transparency, and a massive 41% discourage the discussion of salary information altogether.[13]

Pay transparency also benefits diversity in the workplace by ensuring that all employees have access to the same salary expectations for each role. 

Using pay transparency can have more impact than even diversity training because it enables all employees to advocate for themselves instead of relying on a few trained individuals to spot workplace diversity obstacles. 

It pays to make employees feel included through pay transparency. Employees who feel included are nearly three times more likely to pursue career development and promotions with their employer than those who aren’t.[14]

8. Adjust employee compensation programs as your business grows

We’ve seen the benefits compensation-driven retention and engagement can have on your bottom line. As you experience business growth, you must also consider your employees’ career growth and ensure they share in this success.

One way to do this is through a profit sharing plan, which sees employees receive a share of the company’s profits on top of their usual salary and is a strong incentive to keep up the good work.

Another method is to reinvest your profits into the workforce by spending money on employee benefits like better healthcare insurance, wellbeing plans, or more learning and development resources.

For example, you could dedicate time and money to creating professional development plans, including salary incentives to keep team players on track with their goals.

You can create these plans in one-on-one meetings between employees and managers or HR representatives or develop them as part of a general company-wide policy – like rolling out a budget for employee development.

4 examples of companies succeeding with employee compensation plans as a talent retention strategy

Statistics, research, and best practices only tell part of the story.  Here are four employee compensation examples to show you everything in action.

4 employee compensation examples: Summary table

Wyoming Machine

Traci Tapani, the chief executive officer of Wyoming Machine, a sheet-metal manufacturer, noticed that the company was hiring new workers at higher compensation rates than the pay of existing workers.[15]

Instead of waiting for incumbent workers to demand a raise, Tapani increased existing workers’ wages by 20%.

The company also offered more generous paid time off to further boost retention and employee loyalty.

Adobe

Adobe ranked number one in Comparably’s annual list of companies with the best employee compensation plans.

More than half of the roles at Adobe pay more than $134,676 per year, with 1,034 employees ranking the organization in the top 5% of similar-sized businesses for compensation and benefits. 

Adobe also offers employees perks – such as flexible working, mindfulness training, and fitness initiatives – to complete its compensation package.[16]

The results are impressive.

More than 70% of Adobe employees say they would not leave their employer if a competitor offered them more money.

Squarespace

Squarespace, a website building and hosting company, also ranks highly in Comparably’s list. More than half (60%) of employees at Squarespace say that they agree pay is fair.[17] The average annual salary at Squarespace is slightly higher than $97,000 per year.[18]

Like Adobe, Squarespace enhances these employee compensation plans with strong benefits, including 20 weeks of paid family leave and fertility and adoption benefits.[19]

As a result, 67% of employees at Squarespace say they would not switch to a higher-paying job if offered one, and just 16% are considering new employment.[20]

Buffer

Buffer is a software company that is leading the charge regarding pay transparency. All of its salaries are available to the public through its salary portal, so employees and candidates alike can see them. 

The leaders’ attitudes strengthen this impression of trust during onboarding. When introduced to recruits, the chief executive officer asks how he can help them get their next role, showing that there is no pressure to hide or stifle career ambitions at the company.

The result is that 79% of employees say they plan to stay with the employer for as long as possible, and only 4% of employees expect to stay for less than two years. 

The company’s retention rate in 2017 was 91%, an impressive figure.[21]

Strong employee compensation strategies start by understanding employees’ skills

In this blog post, we examined: 

• Different types of compensation 

• The benefits of having a strong employee compensation strategy 

• Best practices for implementing employee compensation strategies

• Examples of companies that compensate their employees fairly 

Applying these insights to your workforce helps you maintain the skills you need for your business to thrive. 

To find out how to evaluate your employees’ skills effectively, read our blog about how to test your employees’ skills.

If you’re ready to roll out an employee compensation plan for your global team, use our US Employment Law Test to hire an expert.

Sources

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2. “Employment cost index – September 2023”. (October 31, 2023). US Bureau of Labor Statistics. Retrieved November 16, 2023. https://www.bls.gov/news.release/pdf/eci.pdf

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5. Pranitasari, Diah. (August 10, 2019). “The Effect Of Compensation And Working Environment To Employee Engagement”. OSFHOME. Retrieved November 16, 2023. https://osf.io/68u39/

6. “What Is Employee Engagement and How Do You Improve It?”. Gallup. Retrieved November 16, 2023. https://www.gallup.com/workplace/285674/improve-employee-engagement-workplace.aspx

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8. “Why Employees Prefer Hybrid Working To A 10% Pay Rise – And What It Means For Business”. (September 13, 2021). International Workplace Group. Retrieved November 16, 2023. https://old.iwgplc.com/MediaCentre/Article/why-employees-prefer-hybrid-working-to-pay-rise

9. Yetman, Jill. (November 16, 2021). “Study: Canadian workplace health benefits critical for employee retention”. Telus. Retrieved November 16, 2023. https://www.telus.com/en/about/news-and-events/media-releases/canadian-workplace-health-benefits-critical-for-employee-retention

10. Cantrell, Sue, et al. (September 08, 2022). “The skills-based organization: A new operating model for work and the workforce”. Deloitte Insights. Retrieved November 16, 2023. https://www2.deloitte.com/us/en/insights/topics/talent/organizational-skill-based-hiring.html

11. Person, Loribeth. (July 27, 2022). “Salary Differences by Geographic Location - What to Know”. LinkedIn. Retrieved November 16, 2023. https://www.linkedin.com/pulse/salary-differences-geographic-location-what-know-loribeth-pierson/

12. “The True Cost Of Compliance With Data Protection Regulations”. (December 2017). globalscape. Retrieved November 16, 2023. https://static.fortra.com/globalscape/pdfs/guides/gs-true-cost-of-compliance-data-protection-regulations-gd.pdf

13. “Private Sector Workers Lack Pay Transparency: Pay Secrecy May Reduce Women’s Bargaining Power and Contribute to Gender Wage Gap”. (December 2017). Institute for Women’s Policy Research. Retrieved November 16, 2023. https://iwpr.org/wp-content/uploads/2020/09/Q068-Pay-Secrecy.pdf

14. “Understanding organizational barriers to a more inclusive workplace”. (June 2020). McKinsey & Company. Retrieved November 16, 2023. https://www.mckinsey.com/~/media/McKinsey/Business%20Functions/Organization/Our%20Insights/Understanding%20organizational%20barriers%20to%20a%20more%20inclusive%20workplace/Understanding-organizational-barriers-to-a-more-inclusive-workplace.pdf

15. Buss, Dale. (January 26, 2022). “12 Case Studies of Companies that Revised How They Compensate Employees”. Society for Human Resource Management. Retrieved November 16, 2023. https://www.shrm.org/resourcesandtools/hr-topics/compensation/pages/12-case-studies-of-companies-that-revised-how-they-compensate-employees.aspx

16. Eason, Dr. Vaughan C. (August 9, 2023). “Lessons Learned from Adobe: Creating Happy Employees”. LinkedIn. Retrieved November 16, 2023. https://www.linkedin.com/pulse/lessons-learned-from-adobe-creating-happy-employees-dr-vaughn-c-/

17. “Squarespace salaries: How much does Squarespace pay?”. Indeed. Retrieved November 16, 2023. https://www.indeed.com/cmp/Squarespace/salaries

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21. Griffis, Hailley. (2017). “We’ve Never Calculated How Long People Stay at Our Company Until Now – Here’s What We Learned”. Buffer. Retrieved November 16, 2023. https://buffer.com/resources/employee-tenure/