Crafting an effective total rewards strategy is no easy task. This is especially true in today’s competitive environment where employees have continually challenged companies to reconsider their approach to designing compensatory offerings that will attract, retain, and motivate the very best talent available.
At Zayla Partners, we specialize in helping our clients navigate the intricacies of executive and non-executive employee compensation, ensuring their compensation programs are competitive, align with shareholder interests and overall corporate strategy, and consider market best practices and employee expectations.
In this article, we will explore the various pieces that make up a competitive compensation package and the importance of each individual element.
Direct vs. Indirect Compensation
At its core, a compensation strategy encompasses the total value of direct and indirect compensation and benefits that an employee receives from their employer. This can include base pay and variable play, retirement plans, health and wellness benefits, learning and development opportunities, mentorship programs, and many more.
Direct compensation has historically included a salary paired with a form of incentive (variable) pay. Common incentives include annual cash bonuses, profit sharing and commission programs, phantom stock programs and even actual equity ownership via restricted stock. In recent years, private companies have adopted the use of long-term incentives as a critical component within their pay programs as a means to compete with public counterparts and many have considered long-term cash or phantom stock programs in leu of actual equity.
Indirect compensation, on the other hand, can be defined as customizable non-financial compensation (commonly referred to as employee benefits) that are unique to each company. These benefits include insurance offerings, health and wellness initiatives, remote work opportunities, leadership programs, and more. Companies narrowed their focus in this area following the “Great Resignation” as a way to combat record attrition rates and attract a new generation of employees who have shown to value certain perks that allow for more freedom and flexibility (i.e., remote work) over direct compensation.
Direct Compensation: The Big Three
Base Salary. A competitive base salary is the foundation of a strong compensation package; however, in today’s competitive market, salary alone is often not enough to attract and retain top tier talent. Companies must consider other elements of direct compensation, such as annual cash bonuses and long-term incentives to remain competitive, and the appropriate mix of each component.
Short-term Incentives (STI). Pairing base pay with variable compensation (i.e., cash bonuses), can act as a powerful tool that rewards employees for their efforts and contributions to organizational success in a given year. Designing the right short-term incentive program can be challenging, as this takes buy in from key stakeholders on what the appropriate performance metrics should be. Well-designed short-term incentive plans will include key metrics that are important to near-term goals and objectives of the company to avoid any negative consequences of being too nearsighted.
Long-term Incentives (LTI). Incorporating long-term incentives into your compensation strategy is essential for fostering employee loyalty and aligning their goals with the long-term objectives of the company. Such incentives not only motivate employees to contribute to the company’s sustained success but also help retain key talent over the longer term. While more common for executive-level and key employee positions, LTI plans should be designed with the end in mind – driving the desired behaviors that achieve long-term corporate strategy while retaining employees over the long haul. LTI can include equity, long-term cash bonuses, phantom stock, and more. Retirement plans, such as deferred compensation programs, 401(k)s, pension plans, are also considered a form of long-term incentive and are key to helping employees meet long-term financial goals.
Indirect Compensation: Perks that Work
Health Benefits. These often include medical, dental, and vision insurance, which are imperative for employee well-being. Offering comprehensive health benefits can significantly enhance the attractiveness of your compensation package.
Paid Time Off (PTO). PTO, encompassing vacation, sick days, and personal time, is a necessary benefit to ensure the well-being of your employees. It not only meets legal requirements but also demonstrates your company’s commitment to work-life balance and culture. Another for of PTO includes the hot topic of maternity and paternity leave. The US has historically seen these perks as a burden to companies but in recent years have made strides to prioritizing the personal lives of their employees by offering longer periods of time off for parents.
Unique Perks. Supporting employee development through tuition reimbursement or professional development opportunities is becoming more common and a win for employee and employer alike. These initiatives boost employee skills and motivation while enhancing your company’s expertise. Remote work, flexible hours, and work-from-home options cater to the evolving work environment, promoting a balance between personal and professional life.
Equity and Inclusion. It is essential to ensure that your compensation practices promote equity and inclusivity. This involves conducting regular pay audits to prevent wage gaps based on gender, ethnicity, or other demographic factors.
Wellness and Lifestyle Benefits. In today’s work environment, emphasizing employee wellness and lifestyle is becoming increasingly important. Offering benefits such as mental health support, wellness programs, gym memberships, or lifestyle stipends can have a significant impact on employee morale and productivity. These types of benefits, which go beyond traditional compensation elements, demonstrate a company’s commitment to the holistic well-being of its employees, contributing to a healthier, more engaged workforce.
Tips for Effective Compensation Plans
Communication. Clearly communicating the details of your compensation package is as important as the package itself. It ensures that employees understand and appreciate the full value of their benefits.
Evaluating Your Compensation Package. Your compensation strategy should reflect your company’s mission and values. This alignment ensures that the benefits you offer resonate with your employees and reinforce your company culture.
Supplemental Benefits. Beyond the basics, consider offering unique benefits like pet health coverage, travel insurance discounts, or financial planning consultations. Such benefits can distinguish your company in a crowded market.
Zayla’s Approach to Compensation
At Zayla Partners, we understand that every business is unique, and so should its compensation strategy. Our team helps you tailor your compensation package to suit your company’s specific needs and culture. We guide you through evaluating and implementing various types of compensation plans, ensuring they are both competitive and sustainable.
Designing an effective compensation package is a complex task that requires understanding of both market standards and employee expectations. Zayla Partners can assist you in crafting a package that not only attracts but retains the best talent. From base pay to unique perks, every element should be considered carefully to ensure it aligns with your business goals and employee needs.
For more guidance on creating a competitive compensation package, explore our services at Zayla.com. Let us help you develop a strategy that benefits both your company and your employees, ensuring a harmonious and productive workplace.