As human capital grows scarce, flexible compensation can help attract and retain talent

The Great Resignation is among the most significant events in recent U.S. history. We are seeing a post-COVID-19 generation refusing to work under the same conditions as they did before. The U.S. is facing the most prominent labor shortage of the decade, and positions that require high-demand skills are harder than ever to fill.

Midsized companies are finding it particularly hard to retain qualified personnel. Confronted by notable resource constraints, smaller budgets and workers’ demand for flexible solutions, the problems for SMBs are as great or even more significant than for larger organizations.

One way to make your company attractive is by developing attractive compensation strategies and increasing pay transparency and equity. Employees don’t always leave or stay because of their pay, but an opaque model for allocating compensation exacerbates feelings of disconnection and lowers engagement.

Let’s dive into how startups can benefit from compensation analysis, and how they can utilize available data to develop a comprehensive compensation strategy.

Understanding the complexity of compensation

Pay equity is one of the most pressing social issues today, and any discrepancies can have adverse spillover effects on reputation and company relationships.

The amount that lands in an employees’ bank account is just one fragment of today’s compensation packages. Compensation can consist of a base salary, annual cash bonuses and long-term incentives.

When stirring a compensation mix together, there are different trade-offs to consider:

  • Fixed versus variable compensation: Base salary compared with bonuses.
  • Long-term incentives versus short-term incentives: Short-term incentives can be in the form of annual bonus structures. Long-term incentives are usually stock or other forms of compensation that vest over the years.
  • Cash versus equity: Equity can include stock options, restricted stock and performance shares.
  • Group incentives versus individual incentives: You could implement a percentage-based salary increase for all positions or give bonuses to select employees.

It isn’t ideal to have a uniform policy for all positions and departments. Managers should explain their reward decisions on an individual level, and compensation decisions should reflect the skills and contributions of every employee. In addition, companies are bound to have varying budgets (e.g., higher revenue during the holiday seasons) and philosophies on allocating them.

Many make the mistake of sticking to an approach that doesn’t pan out from a strategic standpoint or doesn’t motivate the team enough. Instead, managers should gather data, work through various analyses and scenarios and design a compensation strategy tailored to the company. This is where compensation management software comes into play.

The devil is in the data

Data will help you understand where the talent market is headed and where your company stands.