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A Simple Guide To Employee Compensation For HRs

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Just like how employee compensation is a topic that concerns all employees, it’s a vital aspect of the HR function as well.

When it comes to compensating employees, what you offer and how you structure your pay plans are key factors in attracting and retaining talent.

Compensation refers to rewards paid to employees for their services to the company. It is a payment for the employee's time, effort, and skills while employed by the company. A total compensation package includes rewards and other benefits such as work-related training, pensions, and more.

As your business grows, the way you compensate your employees will vary with your company's growth stage. Studies suggest that employees in larger companies are two times more likely to perceive they are underpaid.

The key is to align your compensation structure with what you want to achieve for your business and your employees.

A good employee compensation strategy is not about offering a competitive salary. Often, it's not even about offering a salary at all.

In a true sense, addressing employee compensation is about getting to know your employees as individual personalities. It is vital that you understand how your employees make decisions and value most in their lives. You can then decide which employee compensation approach will be most effective.

Why Do We Need An Employee Compensation Strategy?

Employee compensation isn't about the money. It's about the value you place on your staff and what they bring to the table. It is often the single most oversized expense item for most companies.

In addition, aligning employee behavior with company goals and values is a crucial component in the development of an employee compensation plan. This is because it allows you to understand what drives your employees' motivations and what they value.

Therefore, you need to have an employee compensation strategy that you can follow to provide fair compensation packages to your employees.


1. To Attract And Retain Best Talents

The ability to attract and retain the top-performing employees is a significator of a company's competitiveness. The key to attracting the best talent is to offer employee compensation packages that make your company a desirable place to work.

It's challenging to find good people when many other employers are competing to attract the same talent.

If you find yourself in the position, focus on providing a unique workplace culture and other such benefits like profit-sharing, etc.

It will make your workplace a great place to work. You might also attract potential employees that are more interested in the quality of work-life over a hefty paycheck.

2. To Increase Satisfaction And Motivation In Employees

When it comes to raising employee morale, few things will help you as much as a salary review. But, without a solid understanding of your employees' worth, reviews can end up being pointless.

According to a study, 84 percent of employees with high compensation are satisfied with their jobs.

Employees who feel underpaid tend to have lower morale and job satisfaction. This, in turn, affects their performance in the workplace. Companies can combat this by paying employees fairly and equitably for the work that they do.

3. To Gain A Competitive Edge In The Market

Top talent is always in high demand, and they know their worth. Whether it's compensation, bonuses, or additional benefits, employees know what they want and learn how to get it. To create a great package that will attract top employees, stay up-to-date on current competitive pay ranges.

The advent of the gig economy and remote working has created new ways for talent to find and engage with jobs. According to Gallup, 36% of U.S. workers participate in the gig economy through their primary or secondary employment.

At the same time, the average tenure of an employee is declining. Employees are more likely to leave a job when something better comes along.

It doesn't mean you have to pay ridiculous amounts to hire good people. You just have to offer benefits that are on par with your competitors.

4. To Increase Productivity And Decrease Turnover

For the average employee, morale and job satisfaction are directly proportional to their pay.

If you pay your employees less than they deserve, they will be unhappy and may even leave. Companies rely on employee morale to keep their cost of turnover low. It also helps to make sure that their employees are focused on their work instead of on the next paycheck.

We must compensate employees with an appropriate salary and benefits package that keeps them happy and engaged at work. Failing to do so can lead to high turnover rates and extra costs of recruitment and training.

Recommended Read: High Employee Turnover: 6 Major Reasons (+How To Solve Them)

Effective Employee Compensation Strategies Every HR Must Know

Employee compensation plans are the most critical components of the Total Rewards Strategy. A well-designed employee compensation strategy can go a long way in building organizational culture and driving employee engagement.

Let's look at the primary employee compensation strategies.


1. Straight Salary Compensation

A salary is a premeditated payment for work performed that is usually paid at regular intervals. Salaried employees receive a guaranteed amount of money regardless of the number of hours worked or the quality of work produced.

Many companies offer their employees straight salary compensation. Straight salary compensation is when an employee gets a certain fixed amount as a salary with no other benefits.

This approach is considered "simple and easy" to manage because there are no external payroll taxes or complicated calculations to make.

Salary offers a fixed amount of money each pay period with incremental raises for the longevity of service.

Also Read: 11 Incredible Sales Incentives That Aren’t Cash

2. Salary Plus Commission

Salary plus commission is a commonly accepted employee compensation plan. Employees have a base salary and an additional bonus based on performance goals.

With this model, employees receive a guaranteed base amount regardless of how well they perform.

For sales and leadership positions, this type of employee compensation package is widespread. If they hit their goals, they'll receive an additional bonus on top of their initial salary as a reward for their hard work.

This gives employees real ownership in their work by tying performance directly to a part of their paycheck.

Some employees enjoy the idea of a commission-only role and some may not. The notion that they have to do better than their colleagues for more money might put them off.

When you choose to pay your employees using commission, it's vital that they feel comfortable in a competitive environment. The right team will compete for higher sales and profits, celebrating their wins together.

3. Straight Commission Compensation

Straight commissions are by far the most common employee compensation methods in direct sales businesses.

If you're a start-up looking to hire salespeople and want to establish a firm foundation, consider going "commission only." Not only is this a desirable proposition for salespeople, but it's also a safe way to test the waters before committing to full-time hires.

Some salespeople are motivated by money; others are inspired by job security. This type of position can be less risky for the company. But it can also lead to less motivation from the sales team.

Sale is a performance-based job. To motivate its workers, the company uses a commission structure. The problem with this is that, if their sales aren't up to par, they won't be paid at all.

In contrast, workers in a salary plus commission job will earn a salary regardless of their sales.

Recommended Read: 15 Incredibly Useful Tips To Drive High Team Performance

4. Hourly Overtime Compensation

Overtime is the extra time you spend at work over your 8 working hours a day or 40 hours a week. An employer may ask an employee to perform overtime if the company needs to produce more results faster.

Many businesses are unfamiliar with the laws surrounding overtime pay, and some even break them accidentally.

What complicates matters, however, is that in the US some states have their own overtime laws.

The federal Fair Labor Standards Act (FLSA) establishes that employees are entitled to overtime pay after working over 40 hours a week. Most people recognize 40 hours as a five-day workweek.

Wrapping Things Up

A strong employee compensation strategy balances all three pillars of compensation. They are salary, incentives, and benefits.

Compensating employees is about getting to know your employees not as an employer but as a person. What’s right for one business may not be best for another.

A good compensation strategy is one in which all parties understand the goals and benefits of each side of the equation.

Thadoi Thangjam is a content marketer and digital marketing executive at Vantage Circle. When she’s not geeking out over content strategies, she is probably hunting for the next perfect track to add to her playlist. For any related queries, contact editor@vantagecircle.com

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