How to Create a Compensation Strategy That Drives Retention

Offering equitable and competitive compensation is a challenge that almost every organization faces, especially in today’s diverse and global workforce.

You’ve just offered $75,000 to a brand-new software developer, fresh out of college, with the skills your organization needs. But your existing developer, with six years of tenure and a team leader role, only earns $3,000 more. Is this fair? These complexities highlight the critical need for a well-structured compensation strategy that attracts top talent and fosters fairness and transparency among your team.

At Deel, we’ve helped countless companies navigate these challenges across borders and industries, giving us deep insights into what works—and what doesn’t. In this guide, we’ll walk you through a 12-step framework to craft a thoughtful compensation strategy that aligns with your goals and meets your team’s expectations.

1. Define your organizational objectives

Compensation is the fuel that drives your employees to reach shared company goals. So, it follows that you must first define these goals to create a fair compensation strategy that motivates them.

Begin by understanding your organization’s core mission and vision statements. For example, outdoor retailer Patagonia’s purpose is simple: “We’re in business to save our home planet.” While this may seem like a lofty goal, Patagonia has developed its compensation strategy around this philosophy; for example, it offers paid time off for employees to participate in volunteer work and environmental and political activism.

Adopt a similar approach by:

• Conducting stakeholder interviews with HR leaders and executives to understand the organization’s mission, vision, and strategic goals
• Identifying how your compensation philosophy will support these goals; for example, are you aiming for your rewards package to attract top talent, retain key employees, or drive performance and productivity?
• Documenting your key priorities, paying attention to elements like cost control, internal equity, or market competitiveness

2. Understand your workforce and internal equity

Before you examine specific compensation figures, assess your current workforce demographics to understand “who” your strategy relates to.

For example, are you developing a company-wide compensation strategy or targeting a specific business function, such as your sales teams?

As part of your analysis:

• Analyze your employees’ demographics, skills, and motivations: For example, do they possess in-demand skills that carry a high value in the talent market? Are your workers likely to be motivated by certain types of compensation or paid employee benefits based on their age or parental status?
• Identify critical roles that drive organizational success: Which of your employees do you need to work harder to retain with the right compensation package?
• Evaluate current pay practices for fairness and consistency: Do you offer employees equal pay for equal work? Or does bias and inequity form part of your current pay system?

To achieve the steps above, try:

• Conducting feedback surveys or focus groups to understand their expectations. Gather feedback on what employees value most in their compensation packages. You might use anonymous channels to encourage open, honest feedback about perceived inequities or unmet needs
• Segmenting workforce groups to tailor approaches: Divide employees into categories such as department, job function, or career stage. For example, sales teams might need performance-based incentives, junior employees may prioritize career development programs, and long-tenured staff could value enhanced retirement benefits

3. Analyze the competitive market

Employees and job candidates will always view the salaries you offer in relation to what other companies pay their workers. If you’re paying less than bigwig brands or even beneath the industry average, you’ll need to refine your offering with different elements that entice top talent.

The first step is to understand where your compensation sits compared to your competitors.

To do so:

• Benchmark compensation against industry and regional standards: For example, you might use data from salary surveys, industry reports, or third-party providers
• Compare pay structures for similar roles in the market: Ensure you compare roles with similar responsibilities and skill requirements, even if job titles differ. For example, a “Data Analyst” at one company may align more closely with a “Business Intelligence Analyst” elsewhere
• Account for seniority: Break down salary benchmarks by career level, such as entry-level, mid-level, and senior positions, to align with the experience and responsibilities of your workforce
• Adjust for geographic, industry, and organizational size: For example, employees in high-cost areas (e.g., San Francisco, London) often require higher salaries to maintain their quality of life. Similarly, some industries have unique compensation dynamics. For example, tech companies often prioritize equity-based incentives, while manufacturing firms might focus on overtime and shift differentials

4. Define your compensation philosophy

Your compensation philosophy is the North Star guiding every decision about pay and benefits. It reflects your organization’s values and competitive positioning in the market. Are you aiming to be a market leader, offering premium salaries and perks to attract the best talent? Or do you prioritize internal equity and sustainability, ensuring fairness without overextending your budget?

For example, organizations like Buffer embrace compensation transparency by publishing salary formulas and employee pay. This fosters trust and positions the company as an equity-focused employer.

To define your compensation philosophy:

• Set your guiding principles: Determine whether your philosophy prioritizes transparency, meritocracy, equity, or performance. For example, do you want to reward high achievers with performance-based bonuses or ensure equal pay for equal work across the board?
• Align with your company culture: Ensure your philosophy aligns with organizational values. A startup emphasizing agility might focus on flexible bonus structures, while a nonprofit could prioritize mission-driven benefits
• Secure leadership buy-in: Present your philosophy to the executive team, showcasing how it supports long-term strategic goals. Use data and case studies to back up your recommendations

5. Establish compensation components

Your compensation strategy is a mosaic of many pieces—direct pay, benefits, bonuses, and perks. Design each component thoughtfully to align with your workforce’s needs and your organizational objectives. Consider the following as you establish your compensation components:

• Determine the mix: Decide on the balance between fixed pay (base salaries) and variable pay (such as bonuses and profit-sharing). For example, sales roles might rely heavily on performance-based commissions, while other departments may benefit from fixed salaries
• Build your salary structures: Define clear salary bands or ranges for each role and career level. Use tools like Deel’s Salary Insights to benchmark these structures against industry norms and regional data
• Align your salary bands with career progression opportunities: Your pay structure should support career growth and reflect market standards. Clarify how employees can progress to different levels within the same salary band and how different bands correspond with promotions or other opportunities
• Tailor benefits and perks: Go beyond the basics with offerings that align with your workforce’s values. For example, Amazon provides a Career Choice program that pre-pays tuition for degrees and skills development, encouraging employee retention and equipping workers for the future of work

6. Link compensation to performance (if it matches your philosophy)

When compensation is linked to performance, employees see a direct connection between their contributions and rewards.

Here’s how code intelligence platform Sourcegraph uses a performance-based pay model, according to its company handbook:

Implement your own approach to performance-based pay by following the steps below:

• Define performance metrics: Establish clear, measurable metrics to assess performance. Choose Key Performance Indicators (KPIs) or Objectives and Key Results (OKRs) that align with organizational goals, for example, sales targets, customer satisfaction ratings, or project completion rates. Metrics should be specific, relevant, and achievable, focusing on individual, team, or organizational performance as applicable.
• Establish a performance review process: Set up regular performance reviews to discuss progress and provide feedback. These can be formal one-on-one meetings with managers or more informal check-ins. Ensure both managers and employees are trained in giving and receiving constructive feedback, and determine whether you’ll collect peer feedback as part of a 360-degree cycle
• Link performance to rewards: Use performance evaluations as a basis for salary increases, bonuses, promotions, or other perks such as flexible schedules or training opportunities

Tip: Be transparent about how your company links pay to performance so employees know exactly what’s expected of them, just as Sourcegraph does.

7. Align benefits and perks with employee needs

Salary often takes center stage, but a well-designed benefits package also demonstrates your organization cares about employees’ overall wellbeing. By listening to employees and tailoring offerings, you can create a benefits strategy that drives satisfaction, engagement, and loyalty.

Consider these tips:

• Survey your employees: Ask employees what benefits they value most and which they’d be willing to trade for others. This can inform decisions on budget allocation or new offerings
• Prioritize health and wellness: Alongside medical, dental, and vision coverage, consider offering mental health resources, gym memberships, or healthy snack options. Beyond physical wellbeing, prioritize financial wellness with access to financial advisors or education on money management
• Offer flexibility: As the modern workforce increasingly prioritizes work-life balance and flexibility, consider offering flexible schedules or remote work options. These perks can improve employee satisfaction and retention while reducing burnout and improving productivity

8. Develop a budget

Most organizations won’t have the compensation budget of a FAANG company. It may not be realistic for you to pay at the top of the salary market, and this isn’t necessarily essential to attract high-caliber employees.

Develop a realistic compensation budget that encompasses both fixed and variable costs and aligns with your financial resources and strategic priorities.

You’ll need to collaborate closely with your finance teams to model various compensation scenarios, such as:

• Scaling with growth: Consider how pay structures and benefits should adapt as your organization expands. For example, as you add headcount or open new locations, factor in regional variations in compensation and cost of living
• Remaining competitive: Analyze benchmarking data and model the financial impact of starting to offer above or below-market averages
• Adjusting for inflation and market shifts: Stay up-to-date on market trends and economic conditions that could impact your compensation strategy. For example, if there’s a talent shortage or changes to minimum wage laws in your industry, you may need to adapt your approach

9. Ensure internal equity before launch

UN Women data shows that women earn 77 cents for every dollar men earn worldwide. The gap is wider for women of color, immigrant women, and working mothers. Addressing these disparities requires a thoughtful and data-driven approach.

To ensure lasting equity:

• Align roles with consistent pay structures: Base pay decisions on objective job evaluations, ensuring fairness across departments and locations
• Close identified gaps: Take immediate action to address any pay disparities related to gender, ethnicity, or other protected characteristics
• Embed equity in your strategy: Implement policies for ongoing monitoring, such as annual pay audits, to prevent disparities from resurfacing

10. Communicate the strategy

Compensation is a topic that can cause paranoia—your people may distrust your process and believe they’re not being treated as fairly as their peers. If you’ve created an equitable compensation plan, the next step is to prove, reassure, and inform your workers that this is the case.

Your communication plan should:

• Explain the strategy: Use guides, presentations, or meetings to share details on how you arrived at your compensation strategy, including market data and internal benchmarks. The aim is to enable employees to understand the rationale behind their pay
• Discuss timing: Inform employees when they can expect to see changes in their pay or benefits and any changes to the performance review process
• Provide resources for questions: Create a channel for employees to ask questions about their compensation and benefits packages, such as an HR email address or anonymous feedback form
• Deliver compensation training for managers: Ensure managers have the knowledge and skills to answer questions from their direct reports about compensation and benefits and can effectively communicate the strategy to their teams

11. Implement and monitor

The implementation phase is critical to the overall impact of your compensation strategy. Rush it out too quickly, and you may notice errors, backlash, and even legal implications. These tips should ensure success:

• Roll out the compensation strategy in phases, depending on the size of your organization. In larger companies, you may choose to tackle a specific branch office, department, or seniority level first to maintain a smooth, frictionless rollout. Small to medium-sized organizations may find it easier to execute any compensation changes in one hit
• Integrate your strategy with HR systems and tools: Make sure your compensation details are reflected or updated in each tool in your tech stack, for example, your payroll, employee benefits, and performance management software
• Regularly review the effectiveness of the strategy: Analyze the impact of your compensation strategy on employee engagement, retention, and attraction. Use these insights to refine and improve your approach over time
• Define a framework for compensation reviews and adjustments: Set clear guidelines for how often you’ll review and adjust compensation—for example, based on employee compensation conversations, market changes, or organizational shifts. You might also create a process for employees to request a salary increase or promotion

12. Evaluate and adjust

Building on the framework you’ve created in the previous step, your final ongoing maintenance step is to conduct regular annual or semi-annual reviews of your compensation strategy. Check your plan is still relevant and achieving your goals by:

• Tracking key metrics, such as employee retention rates, offer acceptance rates, or employee satisfaction rates, and compare actual outcomes with your strategic goals.
• Evaluating changing market conditions or business priorities. For example, if your organization decides to give more weight to employees with specialized skills, work these into your salary bands and update your overall strategy accordingly

Best practices for creating your compensation strategy

Bear these best practices in mind when creating your comprehensive compensation strategy:

Stay up-to-date on compliance regulations

Employment laws change often, as do local, state, and federal labor laws. So, it’s essential to stay informed about any legal requirements or industry-specific standards related to minimum wages, overtime, equal pay, or anything else that may impact your compensation strategy.

Involve your workers

As you research your plan, speak to your workers to extract their opinions and insights about what matters to them. Perhaps flexible work arrangements matter to them more than their base pay. Maybe they will remain loyal to your organization because you offer a fantastic healthcare package that they need to treat their daughter’s diabetes.

While the final version of your compensation strategy may not appeal to every person in your org chart, it’s worth listening to the worker’s voice as much as possible.

Be transparent

Secrets are not your friend when it comes to compensation. Provide comprehensive resources for employees to understand their pay, benefits, and opportunities for growth. And remember to signpost them so everyone can easily find the information they’re looking for without the details feeling buried.

Manage compensation and payroll with Deel

Deel offers a suite of tools you can lean on throughout the entire strategy development process, whether you’re delivering compensation to a local or global employee base. Here are the features you’ll use:

• Salary insights: Use Deel’s in-platform data to benchmark salaries across roles, industries, and regions, helping you stay competitive and informed as you develop pay structures. This is also valuable when creating new job positions.
• Compensation management: Manage pay structures, salary bands, and equity programs seamlessly with Deel’s tools, designed to simplify complex compensation planning and execution
• Pay-for-performance models: Link performance scores to specific salary bands with Deel Engage, ensuring high-performing employees receive fairly and consistent rewards while reinforcing your company’s goals and values
• Global payroll: Process payroll globally for both contractors and employees, ensuring compliance with local laws while offering a unified solution for your workforce

Ready to provide fair and equitable pay to everyone in your organization? Book a free Deel demo today.