DEFINE

YOUR COMP
STRATEGY
Step up to Smart
Compensation Planning

A PayScale Publication

factors to consider
Who is My Market?
When choosing salary data that reflects your labor

of their time not in the office, but in the Washington

market youll want to be conscious of how you define

DC area where business deals were done. Their labor

your market. PayScale recently worked with a customer

market wasnt Texas aerospace as they assumed,

in the aerospace industry. They are a small company

(less than 100 employees) based in Texas. When running
local market data they found that the data for the
sales positions seemed highly inaccurate. With further

but global aerospace and defense. After making

modifications to more accurately reflect their talent pool
the numbers seemed right on.

investigation it turned out they were sourcing sales

Make sure to correctly identify the labor market that is

people from the two largest aerospace companies in the

the source for your talent and think through the varied

United States, and those same sales people spent much

markets for different departments in your business.

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A Tale of Two Cities

General economic indicators arent specific enough for
compensation decisions. To win the talent wars, know
whats happening right now, according to your specific
location or locations. For example, the national yearover-year wage growth for Q3, 2013 was 1.7%, but
these two cities arent exactly average:

San Francisco 3.7%

Its warm in San Francisco and its not just the weather,
its also the hot economy with wage growth beating the
national rate by 2 percentage points. While innovative
companies like Apple and Google get press in the Bay,
tourism is the primary contributor with the financial
industry also very active.

Boston -0.1%
Boston is feeling pretty cold these days, trailing the
national average by almost 2 percentage points. Boston
is one of Americas oldest cities. Its economy depends
mainly on healthcare, finance and education with tourism
also an active contributor.
Learn about the wage trends specific to your business
here.
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How Competitive do You Want or

Need to be?
There is no universal rule that says you must pay at the

They may choose to achieve this by targeting general

50th percentile. As a matter of fact, this is not a strategy

administrative and support positions at the 40th

that is going to work for most organizations. Instead,

percentile. This is a strategy that can work well for an

your strategy should reflect the competitive pressures of

organization who wants to be competitive in the areas

the market and your willingness to pay higher salaries for

where it really matters most.

key talent.

Start by benchmarking your positions to get an

For example, an organization that is coming out of start-

understanding of where your salaries currently place

up mode and focused on expansion may choose to

in the market range. Identify underpaid and overpaid

reward their marketing employees at the 90th percentile

employees. This helps to identify where weak spots exist

and their development group at the 75th percentile.

in your current practice.

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What do I Want to
Reward?
Longevity
Skills
Certifications

Performance
Proficiency

In most cases, a combination of these variables is the right

strategy. Most organizations use a combination of these to reward
employees and have a set amount of money that can be spent
on increases. Important decisions need to be made about how to
allocate those increases.
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How to Create a

Comp Strategy

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Executive Leadership Team

This is non-negotiable. They must be part of the
process since the comp plan will most definitely fail
without their buy-in.

Who Should
be Involved?

Human Resources
You should be an advisor to senior leaders, coming
up with ideas, research and advice, but HRs role is
to champion the project.

Directors and Managers

Engage them early, make sure they understand and
identify with the process and goals. This will improve
your chances of buy-in.

Employees
Some organizations choose to involve employees in
the process especially a group of highly influential
employees who have the ability to gain support
from their colleagues. If you are going to involve
employees in the process be sure to consult with an
attorney about potential labor issues (even if you are
in a non-union environment).
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What is the process?

HR Should Prepare for the
Strategy Conversations With
This Knowledge:
1. Where is the Organization Now?
o Growth Cycle: The growth stage of your
organization will influence the emphasis of your

Timing
A typical overhaul of an existing comp plan or creating
one from scratch can take months. Take this into
account and plan accordingly, working back from when
you will need to have your new strategy in place.

comp strategy.

= Equity
Established Co = Benefits

Startup

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o Demographics: Early stage career employees may

need different incentives than those later in their
career.
o Culture / Management Style: You have to create
a culture of pay-for-performance before you can
reward it. Challenge the executive team if they are
not willing to change the company culture.

2. The Relative Importance of Attraction,

Motivation and Retention.
The issue is not if each factor is important by itself
but understanding the way each factor influences the
others. Spending top dollar for a candidate may affect
the motivation of everyone else in that department. Be
prepared with recent examples where this was the case
to talk about these issues in an open way.

3. Market Competitiveness vs.

Internal Equity.
Companies struggle with this issue when theyre paying
a highly specialized individual contributor more than
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managers or directors at the organization. An example

would be a highly specialized engineer who is being paid
more than the manager who supervises him. A focus on
external alignment would address this while a focus on
internal alignment would not. Its a good idea to bring a
few of these issues to the table.

4. The Right Mix of

Compensation Elements.
You must have a clear picture of the amounts youre
spending on training and development, benefits, equity,
compensation, and other non-cash items. Its a good
idea to understand how these compensation elements
compare to the market but more importantly, how they
are valued by your employees.

The goal is to get your leadership team talking about

these issues so you can reach a consensus on the
goals of your compensation plan. When you have
engagement from your senior leadership team, they will
start to own the outcome.

Writing Your Comp Philosophy

At the end of the strategy process its a good
idea to write your strategy in a way that it can
be shared with employees. This is often called
a compensation philosophy. Its a broader
way to talk about the decisions that were
made by the senior leadership team.

A Compensation Philosophy has Very

Specific Goals:
o Recognize organizational goals. These usually have
something to do with people whether its reaching
people in a new market or introducing new products
and services.
o Discuss how talent links to these goals. What talent
is key to reach your goals?

10

o Discuss how the comp program will support these

goals. How will it achieve these goals? How will the
company utilize its people to reach these goals?
o The philosophy should be optimistic and realistically
represent your organization. If your goal is to
understand the market and set wages that are
competitive based on your company strategy, that is
an optimistic way to say that you have a goal that is
aligned with business priorities.
o Demonstrate your commitment to ensuring fair,
equitable and competitive pay increases.
o Your philosophy should be broad enough that you
can make changes in your strategy as the market
warrants. It is similar to a mission statement that
states the overall goal, but doesnt have to describe
how you will achieve it.
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Sample
Comp Philosophy
The philosophy behind XYZ companys compensation
program is to provide an attractive, flexible and marketbased total compensation program that is tied to
performance and aligned with shareholder interests. Our
goal is for XYZ Company to be competitive in recruiting
and retaining employees through its high-quality
compensation practices.
Equally important, we view compensation practices as
a means for communicating our goals and standards
of performance and for motivating and rewarding
employees in relation to their achievements.
XYZ company competes in several different businesses,
most of which are involved in helping individuals
manage financial risk and secure their financial futures.
These businesses draw their key people from different
segments of the marketplace.
Thus, our compensation programs are designed with the
flexibility to be competitive and motivational within the
different marketplaces in which we compete for talent,
while being subject to centralized design, approval and
control.

Conclusion

Now that youve started the hard work of

stepping up to good comp planning, check
out all the other steps in this e-book series:
Step 1: Gain Executive Support
Step 2: Define Your Comp Strategy
Step 3: Develop Market Based Pay Structures

Stay on top of compensation

with PayScale:
Follow the PayScale Index
Subscribe to our Blog: Compensation Today

Step 4: Build Pay Ranges

Attend a Webinar

Step 5: Implement Your Total Rewards Plan

Download an HR Whitepaper

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of current market salaries to employees and employers through its online tools and software. PayScales products are powered by
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in real time. Publisher of the quarterly PayScale Index PayScales subscription software products for employers include PayScale
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and large across industries including Mozilla, Tullys Coffee, Clemson University and the United States Postal Service.
For more information, visit www.payscale.com/hr.