MaRS Library Salary, benefits and incentives: Key components of your employee compensation strategy
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- A competitive employee compensation strategy includes salary, benefits, incentives & non-cash compensation.
- Benefits are often the key differentiator between employment offers.
- To define your startup’s employee compensation strategy, understand:
- Your business plan
- Management views/preferences
- Employee preferences
- The market for skills
- Your startup’s current position within the market for talent
- In Ontario, Pay Equity Act obligations apply if you have 10 or more employees.
Salary: The most popular method of employee compensation
Salary is the most popular method of employee compensation due to its stable nature.
Benefits: Key differentiators between employment offers
Benefits are often the key differentiator between employment offers. Benefits focus on stability, health and wellness, and lifestyle.
Incentives as employee compensation
- Short-term incentives—these may include an annual performance bonus, profit-sharing and commission plans
- Long-term incentives—these may include stock and stock options
Like benefits, non-cash compensation focuses on the employee’s lifestyle and values. These may include flexible work arrangements and office space improvements.
What makes a compensation strategy successful?
Employee compensation is one component of a competitive human resources strategy. To be successful, compensation should:
- Include direct and indirect forms of employee reward
- Support, encourage and drive desired business outcomes
Strike a balance between business affordability and employee value
- Be fair and equitable, without any form of systemic prejudice (pay equity)*
*If you have 10 or more employees (or when you’ve hired your tenth employee), you must ensure you meet the Ontario Pay Equity Act obligations. For further information, refer to the Ontario Pay Equity Commission’s guide, Step-by-Step to Pay Equity: Mini-Kit.
Defining your employee compensation strategy
To define your startup’s employee compensation strategy, you need to understand the following five elements:
1. Your business plan
When reviewing your your startup’s business plan, consider the following:
- What is your startup trying to achieve and by when?
- How can compensation support this goal?
- What is the company’s cash flow situation?
- How dependent is cash flow on the company achieving these business goals?
- What can the business afford?
2. Management views and preferences in compensation
Your startup’s management team must reach consensus on its philosophy and strategy with respect to compensation policy. Management should assess:
- Who makes up the “market” for talent
- Whether the startup should lead, match or lag behind in this market
- Its views on cost containment
- Whether stock or bonus programs are important (and if yes, to what degree)
3. Your employees’ preferences
To evaluate employee compensation preferences, take into account where employees may place a strong emphasis. This may be:
- Base salary
- Short-term cash bonuses
- The longer term potential of stock options
- Life/health/dental insurance
- Non-cash based benefits, such as time off or private office space
Consider what trade-offs could be made, and whether all aspects of compensation should be the same for all employees.
4. The market for skills
Determining an organization’s competitive market for skills does not mean reviewing the market in which your product or service competes. Rather, it means examining the market(s) in which your startup competes for talent.
Most organizations typically hire the majority of their employees locally. Sometimes, however, when skills are scarce, it is necessary to broaden the search to national or even global markets
Reflect on the organizations to which you may have lost employees. To help you analyze the market and the related compensation implications, think about:
- Which organizations do you compete with for talent?
- Who should you realistically compare your startup against?
- What is the supply and demand for different jobs?
- Where can you find focused and relevant compensation data?
5. Your current position within the market for talent
By taking a careful look at your workforce and the market, you will be able to assess your current position and develop a plan to become competitive. Even if this process illustrates that your startup already offers competitive compensation, the value of knowing this and communicating this to your employees is unmeasurable.
To assess your current position in compensation:
- Understand the different jobs at your startup
- Obtain relevant market data on compensation
- Look at the market data in context with your startup’s hiring and retention experience
- Compare the compensation of current employees with the market data
- Assess alternatives and their costs to achieve your desired strategy
A realistic and affordable plan may take longer than one year to achieve. However, by carefully monitoring the market and communicating progress to employees, your organization can reach the desired competitive strategy.
Create a foundation for your employee compensation decisions
Exploring all these components of an employee compensation strategy will help you to create the foundation for your startup’s compensation decisions.
Summary: A competitive employee compensation strategy includes a mix of salary, benefits, incentives & non-cash compensation, with benefits having a critical value as they are often a key differentiator between employment offers.
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