Compensation strategy

What is a compensation strategy?

A compensation strategy is a plan that outlines how an organisation compensates its employees – with regard to 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 your compensation practices are fair, competitive and motivating for employees.

To attract and retain top talent, companies need a comprehensive compensation strategy that goes beyond just salaries, encompassing a variety of employee benefits that contribute to overall job satisfaction and 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,  establishing the guiding principles and long-term goals.

2. Compensation strategy: the “how” and “what” that put a compensation philosophy into practice. Your strategy provides a comprehensive plan and outlines the methods you'll use to achieve it.

3. Compensation plan: a detailed roadmap for implementing your compensation 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.

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

• Philosophy: we value equity and competitiveness in our compensation.

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

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

Types of compensation strategies and positioning

An important part of your compensation strategy is deciding how to position your company relative to the market. This positioning can be split into three main strategies: leading, lagging or meeting the market. It's possible for a company 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, and establish themselves as employers of choice. The most common percentile range within this strategy is 75-90.

Meeting the market

“Meeting the market” means aligning a compensation package with the 50th percentile of the market. This approach ensures competitiveness without overspending on salaries and benefits.

Lagging the market

Companies that offer compensation packages below the 50th percentile are considered to be “lagging the market”. This strategy might be used by early-stage startups or non-profit organisations with budget constraints. 

Although early-stage businesses may be below the market for cash compensation, they often balance their strategy by exceeding market standards for equity compensation or other non-monetary benefits (such as annual leave, childcare reimbursements, learning and development (L&D) stipends, medical insurance and flexible working opportunities).

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 typically includes a combination 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 in a high-pressure environment.

How to implement an effective compensation strategy

Developing an effective compensation strategy involves several key steps:

1. Define the objectives: determine what you want to achieve with your compensation strategy – whether that’s attracting top talent, ensuring pay equity, motivating high performance or something else.

2. Conduct market research: benchmark your compensation practices against industry standards to ensure competitiveness. This may involve analysing salary surveys and market trends. You can also access startup-specific benchmarks for different roles, levels and regions via Carta.

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 a benefits package.

5. Communicate the strategy: ensure that all employees understand the compensation strategy and what it means for them. Transparency is important for getting buy-in from your team.

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 ,we’ll walk through a hypothetical example. Meetly, an early-stage tech company, is looking to hire top-tier software engineers. If Meetly’s compensation philosophy  is “We value equity and competitiveness”, here’s what the compensation strategy might look like:

• Competitive salaries: offering base pay above the industry average for engineers.

• Performance bonuses: providing cash incentives tied to project completion and business goals.

• Equity awards: granting share options to incentivise early hires and help them feel more invested in the company’s long-term success.

• Comprehensive benefits: offering a range of non-cash benefits, such as health insurance, retirement plans and wellness programmes.

With such a compelling total compensation package, Meetly can attract and also retain high-quality engineers.

Download our guide
to building an effective compensation strategy

Learn how to plan and implement a data-driven compensation strategy in order to attract and retain talent, manage your financial resources and align company goals with employee incentives.