Building a Competitive Compensation Package: Definition & Key Components

One of the biggest selling points for a lucrative job offering is the compensation package that comes along with the position. For professionals in the administrative and Human Resources fields, understanding how to build an attractive compensation package may make the difference between hiring top-tier and average talent for your company. A compensation package can go far past the financial transactions between employer and employee and should extend enough to accommodate for all aspects of employee well-being and satisfaction. 

According to a survey conducted by Glassdoor, over 80% of employees attest to their preference for new or supplementary benefits to their compensation package as opposed to a bump in their pay. This points towards the effect that a good compensation package can have on the organization to attract and retain talent. 

If you are looking for creative and forward-thinking ways to boost the attractiveness of your company’s compensation packages, this article is right for you! In this article, we will go over everything you need to know about compensation packages, including how to build them, the most incentivizing benefits to include, and tips and tricks to determine the best package composition for different positions within the company.

A compensation package refers to the wages and other benefits that an employee is offered upon signing a working contract with a company. Building compensation packages is one of the key responsibilities of professionals working in Human Resources, and can be a challenging exercise for the untrained hand. Difficulties typically arise in understanding the relation between employee qualifications and corresponding additions to a proposed compensation package, which can lead to packages disbursed that are disproportionate to the qualifications of the employee. 

There is a common misconception that compensation packages are simply financial compensation. In reality, compensation packages are comprehensive and structured arrangements that can provide a much greater incentive to work with a company than a higher salary. Benefits, like paid vacation days, health and life insurance coverage, and attractive retirement plans, are just a few of the many additions that a company can add to a compensation package to sweeten a job offer for their most competitive employees. 

Money alone doesn’t make a compensation package attractive. In this section, we will discuss the most common and most sought-after additions to compensation packages. HR professionals can consider these additions to compensation packages to boost the appeal and attractiveness of open positions within their company.

Base salary

The base salary is the foundational part of a compensation package to which other benefits are added to. The base salary is typically one of the first items of negotiation in the job application process and generally makes up the largest percentage of the compensation package’s value. Base salaries are a dynamic figure that varies by country, industry standards for similar positions, and individual qualifications and experience that an employee brings to the table. 

As with all parts of a compensation package, prospective employees may choose to negotiate base salaries, choosing to cite personal and professional achievements of merit that they believe to raise their value; HR representatives that take part in these negotiations should be aware that increases in an employee's base salary may affect the quantity and quality of other perks and benefits in a compensation package. 

Variable pay and bonuses

Another sought-after addition to compensation packages is variable pay and performance-based bonuses. These perks are generally given more frequently in compensation packages for sales or commission-based positions and provide a large incentive for employees to perform at a higher level to receive a larger bonus to their base salary. Performance bonuses and variable pay are usually scaled by percentage and are disbursed to employees on the fulfillment of a set requirement, or a monthly, quarterly, or annual basis.

Benefits and perks

Another significant addition to a compensation package is the various miscellaneous benefits and perks that can be included that provide a non-financial incentive to sign with a company. The range of benefits is broad and can range from health insurance coverage, paid vacation and sick days, relocation coverage, more flexible work arrangements (like the option of working at home on some days of the week), and paid professional and education development opportunities to name a few. These benefits stand as great attractors for professionals looking to join your company because they demonstrate the company’s consideration for their employee’s work-life balance and continued growth with them. 

Stock options and equity

For large and quickly growing companies, a great addition to a compensation package is stock options and equity in your company. Stocks and similar investments are great ways to build long-term and generational wealth and are often part of the compensation packages offered by the world’s largest companies. Stock options and equity included in a compensation package are usually set to be disbursed to the employee over several years; this is to raise employee retention so that employees are more incentivized to stay with the company for longer. 

Retirement plans

Offering retirement plan options is a great way to boost the attractiveness of a compensation package and increase employee retention in your company. Retirement plans focus on the disbursement of pensions, insurance, and other related benefits to an employee following their retirement from a company after working there for an agreed-upon number of years. Retirement plans increase employee retention and greatly boost the appeal of a position because it assures prospective employees that their financial needs will be taken care of if they can commit to working with a company for a longer period. 

Non-monetary compensation

Not every addition to a compensation package is financial - in fact, many of the most attractive parts of a compensation package can indeed be non-monetary. Non-monetary compensation refers to professional development courses, mentorship programs, and other forms of further specialization programs that companies offer their employees when signing on. These forms of professional development both help the employee perform at a higher level, provide the environment needed for intentional and purpose-driven growth, and allow the company to perform and operate at a higher and more efficient level. 

It should be noted that not all compensation packages are the same within a company and even between professionals working in the same position. HR professionals need to keep in mind  that certain talents require certain incentives and that the final compensation package that an employee receives is the product of a thorough evaluation of a candidate’s skill set and qualifications, and comes after due negotiations between the company and the employee.

Compensation packages provide one of the most significant attractors towards one company and position over another in the job hunt. It is important to note that the compensation package that an employee receives on signing may be different from the one they will have after years of work for a company. One of the things that many employees look for in a company is the opportunities for growth within a company and the professional and financial incentives they have for doing so. In this section, we will discuss many of the top reasons that a compensation package is so important for potential employees.

1. It can attract top talent.

The most qualified and suitable employees seek out the best deal that they can get. An attractive compensation package attracts top talent, no matter the profession. HR professionals should be aware of industry standards within the company they work for, and should perform comprehensive analyses of their company’s assets and finances to determine the range of suitable and attractive offers they would be willing to make for the right employee. 

2. It can retain current talent.

In the same way that professionals are expected to continue learning and professionally growing to move up the ranks of a company, companies are expected to adjust compensation to reflect an employee’s increasing worth and value to them. The best way to retain current and competitive talent is to “sweeten the deal” with increasing additions and benefits to their compensation packages. This not only makes it an easy decision for top talent to stay with the company (because their financial and professional goals are being met), but it shows new and prospective applicants to your company the growth potential and that they could benefit greatly, especially in the long run, by signing on to your company. 

3. It can motivate employees.

Taking the time to come up with a well-thought-out and well-structured compensation package shows employees that they are being fairly compensated for their work. This positively reflects on performance and can increase employee satisfaction and productivity in the long run. HR professionals should know the value of every addition to a compensation package and how industry standards for each position affect the final value of the package presented to an employee. This is to ensure that employees are never under-compensated or overcompensated for the position and qualifications they have. 

4. It can enhance employer branding and reputation.

Reputation is everything in business, and maintaining a positive image in the eyes of the public and your employees is essential for keeping top talent and retaining good business. Making sure that your compensation packages are fair and equitable ensures that your company stays on the good side of public reputation, both from employees currently employed and from those no longer working with the company. 

5. It can ensure alignment with employees' career goals.

Compensation packages are an important part of a professional’s decision-making process when figuring out the right company for them. Motivated professionals are always forward-thinking and want to work in a space that supports and drives their growth. To this end, having perks within a compensation package that directly or indirectly supports this is a huge attractor for top talent in the market. Additions such as paid professional development or paid education leave are great ways to support and retain the workforce you have trained and developed over the years and is a great attractor for fresh and new faces looking to grow with your company long-term. 

Moving forward, this section will discuss tips and steps that the HR department should use to better design their compensation packages to reflect industry standards and employee expectations. 

Tip 1: Understand the market

The first step to building a compensation package is understanding the industry standard. The last thing HR wants for their company is for open positions to remain unfilled because offered compensation packages cannot match those offered by others in the market, or for company resources to be needlessly spent on overcompensating an employee who is not bringing the necessary experience or qualifications to justify the cost. Studying market norms and standards through comprehensive cost-benefit analyses of benchmarked data allows HR to accurately determine a final figure/amount for compensation packages for each position available within their company. 

Tip 2: Establish a clear budget 

A company should always offer compensation packages that are within tolerable and sustainable financial limits. The last thing HR wants is to promise an employee the world and then not be able to deliver. This will breed distrust and a bad reputation for a company. Ensure that your company’s budget for any compensation package is open enough that any small to moderate change in the market will not drastically impact other parts of day-to-day operations. 

Tip 3: Balance fixed and variable components

Fixed variables are set figures like base salaries or fixed benefits (insurance coverage, PTO, etc.) that are guaranteed amounts that an employee will receive at agreed-upon times. On the other hand, variable components to a compensation package, like commissions or performance bonuses, are incentives given to employees to boost performance and employee retention. Commissions and other variable additions can substantially increase a (high-performing) employee’s take home salary, so HR should spend time balancing the fixed and variable components when building a suitable compensation package.

Tip 4: Look beyond monetary compensation

Finances aside, benefits like health coverage and stock options offer great incentives for incoming professionals to your company. These benefits have the bonus of yielding more for employees the longer that they stay with the company. This encourages employee retention and fosters an environment where the long-term success of the employee is directly tied to the long-term success of the business. 

Tip 5: Customize for different roles

The compensation package should not be a cookie-cutter framework that is the same for every single employee. On the contrary, each compensation package should be individually tailored to the needs and expectations of the employee and should be reviewed and revisited throughout their tenure at your company. Compensation packages should always be a direct reflection of the negotiations in the job application process, an employee's experience and qualifications, and their tenure at the company.

Tip 6: Regularly review and adjust

Once an employee’s compensation package is agreed upon, the company must review and adjust the quantity and quality of the benefits included in the package per the time that the employee spends working with you. This review process should take the employee’s performance metrics, time with the company, and overall contribution to the workspace and the company’s success into consideration. Taking the time to review employee compensation packages results in a more motivated workforce that is more incentivized to perform at a higher level. 

Compensation packages are an important point of discussion in the job application process. These packages should be a reflection of an employee's performance and value to the company and should be weighed against industry norms and standards to ensure that your company remains competitive in the local market. HR professionals should take time to analyze the market and determine the appropriate standards to set when drafting and revising compensation packages for new and existing employees. 

If you are looking for articles, tips and tricks related to human resources and employee well-being management, CakeResume’s collection of articles focuses on every aspect of maintaining good business practices and keeping abreast with professional developments in the ever-changing global workplace. If you would like to take your business and professional life, check out our blog here!

— Originally Written by Alexander Coye —