Compensation strategy

What is a compensation strategy?

A compensation strategy is a plan that outlines how an organization compensates its employees in terms of both short term financial rewards (like salaries and bonuses) and long term financial rewards (like equity). This strategy aligns with your overall business goals and ensures that compensation practices are fair, competitive, and motivating for employees.

Having a strong compensation strategy is essential for attracting and retaining top talent. A comprehensive compensation strategy goes beyond just salaries, encompassing a variety of employee benefits that contribute to overall job satisfaction and employee performance.

How does a compensation strategy differ from other aspects of employee compensation?

While the following topics may sound similar, there are some important differences:

1. Compensation philosophy: The “why” behind a company’s compensation approach. A comp philosophy sets the guiding principles and long-term goals.

2. Compensation strategy: The “how” and “what” that operationalize the philosophy. Your strategy outlines the comprehensive plan and methods you'll use to achieve the compensation philosophy.

3. Compensation plan: A detailed “roadmap” that implements your comp strategy. It provides specific guidelines and structures for day-to-day compensation decisions.

4. Compensation package: The combination of salary, bonuses, and equity that an employee receives.

The compensation philosophy provides the foundational principles, the compensation strategy outlines how to achieve these principles, and the compensation plan details the specific methods and structures to implement the strategy. Together, they ensure a cohesive and effective approach to employee compensation. In practice, here’s an example of what that might look like:

• Philosophy: “We value equity and competitiveness in our compensation.”

• Strategy: Conduct market salary surveys, implement performance-based bonuses, and offer comprehensive benefits.

• Plan: Specific salary ranges for job roles, criteria for performance bonuses, and detailed benefits descriptions.

Types of compensation strategies and positioning

An important part of your compensation strategy is deciding how your company is going to position itself relative to the market. This positioning can be categorized into three main strategies: leading, lagging, or meeting the market. It's possible to lag on one aspect (such as cash) and lead in another (such as equity). 

Leading the market

Market leaders offer compensation packages above the 50th percentile to attract and retain top talent. The most common percentile range within this strategy is between 75-90. This approach is often used by companies looking to establish themselves as employers of choice.

Meeting the market

A “meeting the market” comp strategy aligns compensation packages with the 50th percentile of the market. This approach ensures competitiveness without overspending on salaries and benefits.

Lagging the market

Offering compensation packages below the 50th percentile of the market is considered “lagging the market.” This strategy might be used by early-stage startups or non-profits with budget constraints. 

Although early-stage startups may be below the market for cash compensation, they often balance their strategies by exceeding the market standards for equity compensation compared to other companies. This type of strategy can be further supplemented with other attractive non-monetary benefits, such as general PTO, childcare reimbursements, or other perks.

With Carta, you can hire competitively and strategically using salary and equity benchmarks tailored specifically to reflect the needs of your business. For example, if you were strapped for good engineers, you might set your benchmarks for engineers to lead the market, paying in the top 90% of startups, while keeping all other positions’ benchmarks to 50% since you just need to meet the market to find the right talent. 

Sales compensation strategy

A sales compensation strategy specifically addresses the compensation of sales teams. It typically includes a mix of base salary and performance-based incentives, such as commissions and bonuses. This strategy is crucial for motivating sales teams to achieve targets and drive revenue growth.

How to implement an effective compensation strategy

Creating an effective compensation strategy involves several key steps:

1. Define objectives: Determine what you want to achieve with your compensation strategy. This could include attracting top talent, ensuring pay equity, or motivating employees to reach higher performance levels.

2. Conduct market research: Benchmark your compensation practices against industry standards to ensure competitiveness. This involves analyzing salary surveys and understanding market trends—or using startup-specific benchmarks for every role, level, and region like with Carta Total Compensation.

3. Develop a compensation philosophy: Establish the guiding principles for your compensation strategy. Decide whether you want to lead, lag, or match the market in terms of pay.

4. Design the compensation structure: Create a detailed compensation plan that includes pay scales, bonus structures, and benefits packages.

5. Communicate the strategy: Clearly communicate the compensation strategy to all employees to ensure transparency and understanding.

6. Regularly review and adjust: Continuously monitor the effectiveness of your compensation strategy and make adjustments as necessary based on market changes and business needs.

Compensation strategy example

To illustrate how this works with a hypothetical example, consider an early-stage tech company called Meetly that aims to attract top-tier software engineers. If Meetly’s compensation philosophy is “We value equity and competitiveness in our compensation,” Their compensation strategy might include:

• Competitive salaries: Offering base salaries that are above the industry average to engineers.

• Performance bonuses: Providing significant bonuses tied to project completion and performance metrics.

• Equity options: Granting large stock option packages to engineers as an incentive to join and feel more invested in the company’s success.

• Comprehensive benefits: Offering extensive health insurance, retirement plans, and wellness programs.

The example above ensures Meetly not only attracts but also retains high-quality engineers by providing a compelling total compensation package.