For a company’s compensation strategy to be effective, it must be linked to the overall business strategy.

Because compensation accounts for 30-60% of business costs, it is essential for organizations to identify the drivers behind pay. For this reason, the foundational step of creating any solid compensation strategy is linking it to the business strategy.

The business strategy informs the direction in which the organization is going relative to its overall environment. It comprises both its short and long-range goals and objectives, and can encompass its SMART goals, pay for performance objectives, or any other goal setting methodology the company utilizes.

Oftentimes, the jump from business strategy to compensation strategy is made without considering a crucial middle part: the human resources strategy. This entails the organization’s overall plan for attraction, retention, and motivation of employees, and should therefore not be overlooked when developing a compensation strategy.

The Foundations of a Compensation Strategy

Your compensation strategy should include the principles that guide the design, implementation, and administration of the overall compensation program (including pay and benefits). To choose the right compensation approach, be sure to select a rewards system that supports and reinforces the strategy, goals, and objectives of the business. The strategy must also respond to external pressures, using pay as an opportunity to create a competitive advantage in the market. Additionally, because a business’s strategy is only as good as the employees’ ability to execute it, the pay strategy should ultimately recognize and reward the performance that drives results.

Of course, there are many intricacies involved with developing a compensation strategy that reflects your overarching business strategy. The general guiding points described herein can act as a framework on which you can approach compensation to align with your company’s needs, culture, and goals. Once that framework is in place, you can begin to make more detailed decisions on pay, benefits, and other aspects of total rewards.

HRsoft is the trusted global leader in compensation management software whose compensation management solution is proven to control and simplify the full process and allocation of merit, bonus and equity awards to drive manager and employee engagement.