For many organizations, the words "compensation strategy" might conjure images of spreadsheets filled with salary numbers and annual merit increases, along with complex calculations for determining future changes.
What Is a Compensation Strategy?
A compensation strategy is more than just how much you pay people. It's a comprehensive approach to attracting and retaining talent through a strategic mix of salary, benefits, performance incentives, and communication. When done right, it supports your business goals, reflects company values, and gives employees a compelling reason to stay.
But as the struggle to source skilled, qualified talent continues to intensify, that limited view is no longer enough. Today, a smart compensation strategy requires a comprehensive and dynamic approach that seamlessly integrates salary, benefits, transparency, and communication into a unified framework that aligns with both market trends and employee expectations.
Without it, companies risk losing not just any talent, but their very best talent.
Total Rewards: Beyond Base Salary
So, the days when employers could simply offer a competitive salary and expect loyalty are gone. Modern employees evaluate offers and employers based on a complete "total rewards" package. This includes wages, health benefits, retirement plans, flexible work arrangements, professional development opportunities, and even intangible factors like workplace culture.
Advisory and analysis group The Conference Board has found that many companies are shifting from simple one-time perks like sign-on bonuses and retention incentives in favor of longer-term and more comprehensive compensation strategies, like performance-based initiatives and promotions. “[E]mployers need to adjust their compensation strategies,” says Diana Scott, US Human Capital Center Leader at The Conference Board. “Given fluctuating market conditions, leaders are increasing their use of compensation strategies that aren’t tied to base pay, like performance initiatives and other strategic priorities.”
The Need for Constant Calibration
Next, while many employers may already understand the importance of total rewards, they may still be struggling to keep their strategies current.
Did You Know?
Only 38% of organizations are actively updating their total rewards strategy, even though 70% agreed it's critical to keep pace with shifting expectations.
This inertia can be costly. Inflation, evolving legislation, and growing demands for pay transparency have all amplified the pressure on businesses to adapt. High inflation, for example, has driven labor costs sharply upward, especially in sectors like healthcare and hospitality where competition for talent remains fierce.
Small businesses often feel this squeeze most acutely. William Beach, former commissioner of the U.S. Bureau of Labor Statistics, notes that while large corporations have greater flexibility, smaller firms struggle as both labor and non-labor costs surge. "Because prices have gone up so much, you can look at the data, and you can see that they've been squeezed," he says.
In fact, according to Society for Human Resource Management’s (SHRM) State of the Workplace Report, 78% of employers expected to pay more for talent in 2024, with 55% budgeting increases of 3% to 4.9%. But wages aren’t the only rising expense: Employers also anticipated a 5.8% jump in health benefit costs for 2025, and drug spending has grown dramatically.
In short, the best – and perhaps ultimately, the only – way to manage these constantly increasing costs is to continuously adjust the total rewards strategy.
Threading the Needle: Balancing Cost and Value
This financial pressure highlights the true challenge: how do employers offer compelling compensation while maintaining sustainable costs? The answer lies in thinking creatively. Sometimes, the most valued benefits don’t carry the highest price tags.
"When you're doing your annual review of your employee benefits package, see what it might cost you to have a little bit more robust child care, and a little bit more robust leave benefits for parents," Beach says. These types of flexible, family-friendly policies can yield surprising returns, with some studies showing that parents outperform non-parents in attendance and productivity.
Salary Benchmarking: The Foundation of Competitive Pay
Now, despite downplaying salary alone in favor of a total rewards package, salary benchmarking does remain a cornerstone of an effective compensation strategy. Without a clear understanding of market rates, organizations risk both underpaying (which harms recruitment and morale) and overpaying (which erodes profitability). Fortunately, salary benchmarking tools, data, and services are more accessible than ever, allowing employers to compare their pay scales against industry standards, geographic norms, and peer organizations.
Here, PEO (Professional Employer Organization) partners can play an outsized role. By aggregating salary benchmarking data across thousands of client organizations and the market as a whole, a PEO offers unparalleled visibility into real-time market trends. This allows businesses (especially those without large internal HR teams, to make informed) data-driven compensation decisions.
Plus, accurate salary benchmarking supports not only competitive hiring but also internal equity, helping to ensure employees feel fairly compensated relative to their peers.
Aligning Pay with Performance
Another hallmark of a mature compensation strategy is linking pay to performance in meaningful, measurable ways. Many large companies have embraced formulaic incentive plans, incorporating multiple financial and non-financial metrics. According to The Harvard Business Review, 83% of the S&P 500's largest companies use such plans, with profits, revenues, and individual strategic goals all playing roles.
However, many mid-sized and smaller organizations still struggle to connect compensation with performance in a way that feels equitable and motivating. Only a little over a third (36%) of organizations believe their compensation programs are well-aligned with employee performance. Closing that gap is critical, as employees want to see a clear, fair relationship between their efforts and their rewards.
The Growing Impact of Pay Transparency Laws
Layered atop these performance concerns is a complex regulatory landscape. Pay transparency laws are proliferating at both the state and federal level, requiring employers to disclose salary ranges, sometimes explain compensation decisions, and demonstrate pay equity. The Fair Labor Standards Act (FLSA) now requires disclosure of wage ranges under certain conditions, and its newly updated minimum salary thresholds for exempt employees are forcing employers to reassess classifications and adjust salaries to remain compliant.
For many employers, navigating this patchwork of regulations adds yet another layer of complexity to compensation planning. A proactive compensation strategy incorporates both compliance requirements and transparency best practices, helping to build trust and reduce legal risks.
Communication: The Missing Ingredient
Even the most thoughtfully designed compensation strategy will fail if employees don’t understand and appreciate it. Yet nearly half of organizations report that their compensation programs aren't well understood by their workers.
Just as companies market their products to external customers, they must market their total rewards programs internally to their workforce. Clear, persuasive communication that explains not only what benefits are offered but why they matter can dramatically increase the perceived value of a compensation package.
In short, framing total rewards as part of an organization's employer branding strategy transforms compensation from a transactional element into a driver of loyalty and engagement.
PEO Partners: A Strategic Ally
The benefits of action – and the consequences of inaction – are significant. For instance, salary.com reports that companies that offer fair compensation experience 30% lower turnover rates. Conversely, when employees perceive their pay as unfair, productivity declines, absenteeism rises, and the quality of work suffers.
But for many organizations, particularly small and mid-sized businesses, the scope and complexity of modern compensation strategy can feel overwhelming. This is where a PEO partner can add immense value by offering expert guidance on salary benchmarking, regulatory compliance, benefits design, and communication strategies.
CoAdvantage, one of the nation’s largest Professional Employer Organizations (PEOs), helps small to mid-sized companies with HR administration, benefits, payroll, and compliance. To learn more about our Professional HR Administration Services, contact us today.
**The information provided on this website is for general informational purposes only and does not constitute legal advice. While we strive to ensure the accuracy and completeness of the information, we make no guarantees about its correctness, completeness, or applicability to your specific circumstances. Laws and regulations are subject to change, and you should consult a qualified legal professional before making any decisions based on the information provided here.