How to develop an employee compensation strategy

The importance of an effective employee compensation strategy can't be understated. It'll help attract and retain the best talent and contribute to a positive workplace culture. 

In this guide, you'll learn about the different types of compensation and how to create an employee compensation strategy that delivers on your business goals. 

What is a compensation strategy? 

A compensation strategy is how you approach paying your employees. You can base it on job description, average market rates and employee performance. Compensation strategies don't have to be money only – you can also offer incentives like a share of the company, wellness incentives or shorter work hours. 

Why is a compensation strategy important for your business? 

A compensation strategy helps you consider your business goals and financial constraints while boosting employee engagement and attracting, keeping and rewarding great people. It also keeps you up to date with employment law.

What are the benefits of an effective compensation strategy?

An effective compensation strategy will help reduce staff turnover and increase morale and productivity. You'll also be best positioned to recruit great new team members.   

Reduced staff turnover 

Reducing staff turnover saves your business money in the short and long term, keeps valuable knowledge and skills in-house, and contributes to a great workplace culture. While there are many reasons someone may choose to move on from your company, their compensation package will be a contributing factor. If your compensation package is competitive, your people will feel valued, making them less likely to look elsewhere for work. 

Increase morale and productivity 

Effective compensation strategies can boost morale and productivity in two ways. Transparent and generous compensation packages show you value your team members and treat them fairly. This helps employees feel more trust and loyalty to your company, increasing morale. Similarly, rewarding high-performing employees can incentivise productivity. 

Attract high-quality talent

The best talent can take their pick of job offers, so your compensation package needs to be at least as attractive as your competitors. The package shouldn't just include salary. Consider other things you can offer, like growth opportunities, career development and flexibility, and benefits like family friendly policies, company cars, access to wellness programs or additional leave.  

Become a market leader

By attracting, retaining and motivating the best talent, you'll be well-positioned to improve productivity and innovation while avoiding the expense and disruption of recruiting. Both of these factors support your business to become a market leader. 

What are some types of compensation? 

There are five types of compensation: fixed pay, variable pay, bonuses, commission and overtime. All these are governed by New Zealand law — and you must ensure you comply. For example, different occupations and industries have different minimum pay rates and conditions. 

Fixed pay compensation

Fixed pay compensation doesn't change monthly and will include your employee's salary and other regular allowances, insurance premiums or KiwiSaver contributions.

Variable pay compensation

Variable pay compensation is often based on performance and can include bonuses, commissions, profit-sharing, stock options and more, paid over and above fixed-pay compensation.  

Commissions 

Commissions are variable compensation that reward employees for bringing in more income or completing projects. Employers may include commission payments in an employee agreement. You should consult Employment New Zealand to ensure your commission payments are legal.

Bonuses 

Like commissions, bonuses are on top of ‌regular fixed pay in recognition of an employee's continued hard work and results. You don't generally tie bonuses to a particular project or include it in an employment agreement. 

Overtime 

You pay overtime when an employee works more than their regular hours, typically at a higher rate, as outlined in their employment contract.

Indirect payments and staff benefits

You pay indirect payments on behalf of your employees. You may pay for their childcare or subsidise an onsite childcare centre, for example. Staff benefits might not be financial, but they go directly to the employee, like access to an on-site gym, flexible hours or free use of the company products or services.   

Flexible work terms

Since ‌the COVID-19 pandemic, working from home at least some of the time has become increasingly common place. Offering your team the chance to choose where they are based some of the time gives them a sense of autonomy, offers them flexibility to dovetail work with the demands of their personal lives and can result in reduced staff turnover. 

Development programs 

These can be attractive to ambitious employees to help them build skills and progress in their careers, and to keep staff from feeling they're stagnating. Programs can include tuition, training, mentoring and coaching. You could also let people shadow more experienced employees or rotate staff around different roles. This benefits your business in two ways — your people are more highly skilled, and they're likely to stay with your company longer. 

Transportation 

Transportation compensation can include providing a company car and car park, reimbursing staff for public transportation costs, or setting an allowance to help with fuel and car maintenance. 

Example of a compensation strategy 

Let's say you run a small IT support company with a staff of six. On top of their standard salary, you supply each IT support technician with a car to visit clients and use personally. You let your team work remotely when it suits them, pay for gym memberships, subsidise child care and run internal training days to keep people up to date with the latest technology. When your company has had a profitable year, you share some of that with your team in the form of bonuses, which increase the longer someone stays with your company. 

How to develop employee compensation strategies 

Your employee compensation should be attractive to top staff while balancing the needs and goals of your business. Here's how to develop your strategy. 

Gather input from current employees 

Talk to your team — what part of the existing compensation package do they most appreciate? What's on their wish list?

Perform market research 

Market research can help you understand the average salaries and benefits for different roles and industries. It can also reveal which employees and skills are most in demand. 

Analyse what competitors are doing 

Explore the job ads and policies of your closest competitors and those of companies you admire — how do their compensation strategies compare to yours?

Identify your company's unique advantage 

While you must offer competitive compensation rates, the most effective strategies build on your company's unique advantage. For example, perhaps your people have access to technology, skills, job opportunities or influence they can't get anywhere else. Maybe your investment in a positive workplace environment means your people report high levels of job satisfaction.

Compensation strategy FAQs

What are the features of a good compensation strategy? 

A good compensation strategy will be:

• Fair, based on factors like job responsibilities, market rates and employee performance

• Competitive with others in your industry 

• Transparent, so employees know you've calculated their compensation

• Flexible, so you can offer other incentives when you want 

• Aligned with the goals of your organisation

What is the most common employee compensation method? 

Most employers pay their team a salary or wage as fixed-pay compensation.

What is direct compensation? 

Direct compensation is the money you pay directly to staff, including wages, salary, bonuses, commissions and profit or equity shares.

What is the most common form of indirect compensation? 

The most common forms of indirect compensation include benefits such as flexible and family friendly work arrangements, extra holidays and use of company assets like a car or laptop. 

Attract, retain, succeed 

Keeping and attracting the best people to your business is critical to your growth and future success, and a well-thought-out compensation strategy is vital. You'll need to match or beat the market while meeting your responsibilities as an employer and delivering on your business goals.

Implementing your strategy is simple with MYOB. Automated payroll can take care of your direct payments and keep you compliant. Further, MYOB has teamed up with workplace benefits provider Flare to offer an employee benefits and discounts program to all customers on MYOB Business. 

With MYOB, whatever your business size or budget, you can attract the best people to your company and strengthen their commitment to your workplace. Start your free trial now.

Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.