A HR’s Guide to Building a Competitive Compensation Strategy

When I talk to HR leaders about compensation, one point always comes first: without a successful compensation strategy, you won’t attract or keep the right people. With talent shortages biting and pay transparency becoming the norm, pay decisions are no longer just an HR concern, they’re a core part of business strategy. 

Get it wrong, and you risk high turnover, disengagement, and costs that spiral without delivering value.

In this guide, I’ll walk through what a compensation strategy really is, the core components that make it effective, the types and examples you can learn from, and finally, a step-by-step playbook you can use to design a fair, competitive approach for your own organisation.

What Is a Compensation Strategy?

A compensation strategy is a structured, long-term plan for how you pay employees and design employee compensation in a way that supports your wider business strategy. It’s more than setting salaries; it’s a framework that keeps pay fair, competitive and sustainable.

It helps to separate out a few terms. 

Your compensation philosophy is the guiding belief system: do you want to pay at market median, or be more aggressive to secure scarce skills? 

And just as important, what mix of monetary compensation will you use:

• Strong base pay?
• Variable incentives?
• Long-term rewards like equity?

A compensation plan is how you execute that philosophy in practice, while a compensation package is what each employee actually receives. 

Underpinning it all is the compensation structure: the pay grades, salary bands and governance that keep decisions consistent.

A modern strategy must be comprehensive. That means covering not only financial compensation but also non-monetary elements such as benefits and allowances, designed to deliver real ROI for the business as well as value for employees.

Key Components of a Total Compensation Strategy

A comprehensive compensation strategy isn’t one-size-fits-all. It’s made up of several core components, each of which needs to be designed carefully to balance employee retention, fairness and business sustainability.

Base Pay & Salary Ranges

At the foundation are salary ranges, underpinned by pay grades and pay structures. These ranges, informed by market data and anchored to at least the minimum wage, give you consistency in how you pay for skills and experience. They also provide clarity on salary growth, making progression more transparent and predictable.

Without clear ranges, you risk inequity and inconsistency. Two people in the same role can end up on very different pay, leaving the business exposed to equal pay challenges and undermining trust.

Variable Pay & Financial Incentives

Bonuses, overtime pay, and commissions can be powerful tools to motivate and reward employees. But they must be self-funding. I’ve seen too many organisations treat incentives as entitlements, and all that does is add cost without driving performance. Every variable element should be tied directly to measurable results and deliver a clear ROI back to the business.

Equity & Ownership

For critical roles and future leaders, stock options and profit-sharing are invaluable. They help attract and retain top talent by giving them skin in the game and aligning rewards with long-term company success.

Benefits Package

A strong benefits package can differentiate you in a competitive market. Think health insurance, retirement plans, enhanced paid parental leave and even perks like gym memberships. But again, these need to be strategic. For example, allowances for night shifts or hard-to-fill roles should be applied deliberately, rather than being given universally.

Legal Compliance & Fairness

Compensation has to stand up legally and ethically. That means ensuring fair compensation, equal pay and governance to ensure pay equity. Poor compliance doesn’t just risk claims, it damages trust.

Documented criteria are your strongest defence in equal pay audits. By recording how factors such as performance, potential, and role criticality influence placement within a band, you turn fairness from a principle into a demonstrable process.

Communication & Transparency

Finally, your strategy has to be understood. When company leaders make sure compensation reflects core values and is communicated clearly across the entire company, employees see fairness and consistency, not favouritism. That builds engagement and retention.

One of the most practical steps is to agree upfront on your level of pay transparency. Some organisations choose to share very little, others go as far as publishing pay scales openly. Wherever you land, the key is consistency: your stance on transparency should guide how you advertise roles, communicate internally and handle pay reviews.

Types of Compensation Strategies

There are several types of compensation strategies organisations tend to follow. The right pay strategy depends on your business maturity, your talent needs and the competitive landscape. No approach is perfect — each has trade-offs.

1. Lead the Market Strategy

Here, you deliberately pay above average, often positioning salaries at the upper quartile. The aim is to secure top talent quickly and build a competitive advantage. For roles that drive transformation – say AI engineers or senior sales leaders – a competitive wage can mean the difference between scaling fast and stalling. The downside is cost: if you’re not getting ROI from that investment, you’ll burn through budget without the performance to justify it.

2. Meet the Market Strategy

This is the most common approach: aligning salaries to industry averages through salary benchmarking. By conducting market research, you ensure pay remains competitive without overspending. It’s a pragmatic middle ground, but it requires constant monitoring. Market conditions shift fast, and if your data is even six months out of date, you can slip into over- or underpaying without realising.

In today’s volatile labour market, annual or even bi-annual updates are rarely enough. For fast-moving roles, quarterly checks on pay data may be necessary to avoid overpaying or losing talent.

Many companies use salary surveys for this, and I discuss in this article why salary surveys aren’t always enough.

3. Lag the Market Strategy

Some organisations deliberately pay below market, relying on a strong benefits package or unique culture to compensate. From my perspective, this only works with a very clear business case. If the role is non-core or you have a genuinely compelling non-financial offer, you might be able to make it work. But more often, it damages retention, slows the hiring process and creates inequity. Paying below market shouldn’t be a default. It has to be a conscious, ROI-tested decision, and even then, it carries risk.

Compensation Strategy Examples You Can Use

There’s no single blueprint for pay. The best approach depends on your market, your culture, and your strategic goals. Here are several compensation strategy examples I’ve seen work in practice, with their pros, cons and best-fit scenarios.

Market-Based Pay

This approach anchors salaries to salary benchmarks. It keeps your organisation competitive and ensures you’re not overspending relative to the market. The limitation is that if your data is outdated, you can suffer from wage drift quickly. 

Works best in organisations that want to stay firmly aligned with peers.

Pay-for-Performance

Here, bonuses and incentives are tied directly to results, helping to incentivise and motivate employees. Done well, it increases job satisfaction and aligns rewards with output. But it must be ROI-tested: incentives shouldn’t become entitlements. 

Best for sales-driven cultures or businesses where performance can be measured objectively.

Skill-Based Pay

A compensation system that rewards employees for acquiring and applying new skills. It encourages development and creates a more agile workforce. The downside is complexity/ You need robust tracking and governance. 

A strong option for organisations focused on upskilling and internal mobility.

Profit-Sharing

Employees receive a share of profits, tying rewards to company success and the performance of the entire company. It builds collective ownership and engagement, but payouts can fluctuate. 

Best for companies that want to foster a “we win together” culture.

Equity-Heavy Mix

Startups and scaleups often lean on stock options or equity packages to attract top talent when cash is tight. It aligns employees with long-term growth and can deliver outsized rewards if the business succeeds. The flip side is volatility: not every employee values equity over cash.

Best for early-stage businesses that want to compete for talent without overloading payroll.

COLA + Merit Increases

Combines cost-of-living adjustments with performance-based raises. This mix protects employees against inflation while allowing leaders to reward strong contributions. It helps retain employees but requires ongoing budget control.

Best for established companies facing inflationary pressure but still wanting to differentiate high performers.

Base-Pay Heavy Strategy

Some companies deliberately offer significantly higher base salaries, but strip back on bonuses and allowances. The advantage is stability — guaranteed pay supports mortgages and family commitments, which many employees value. It can attract strong talent quickly. But without variable pay, it’s harder to differentiate high performance, and costs can escalate. 

Best for organisations that want to compete on security and predictability, particularly in markets where consistency is prized over upside.

Developing a Compensation Strategy: Step-by-Step Guide

Designing a compensation framework isn’t a one-off exercise. It needs to be robust enough to support today’s needs and flexible enough to evolve. Here’s the process I recommend when developing a compensation strategy.

1. Audit Your Current Compensation Strategy

Start by looking at your current compensation strategy with a critical eye. Ask yourself:

• Where are the gaps in your compensation practices and pay system? 
• Are managers making ad-hoc offers? 
• Is there a disparity between what you’re paying and where the market sits? 

Without a baseline, you’re flying blind.

One practical way to baseline your current approach is by using the HR Datahub Pay Maturity Model.

It breaks pay maturity into five distinct levels:

• Level 1 – Ad Hoc: pay decisions made on the fly, little structure or fairness.
  
• Level 2 – Basic: informal bands and policies exist, but are patchy and inconsistently applied.
  
• Level 3 – Organised: structured pay bands and policies are in place, though overrides and inconsistencies remain.
  
• Level 4 – Strategic: reward is aligned with business planning, equity and transparency tracked, but still more reactive than predictive.
  
• Level 5 – Proactive: pay is fully data-led, with predictive analytics, scenario modelling and HR playing a proactive role in shaping business strategy.

Plotting where you sit today helps reveal not just the gaps in your pay framework, but also the roadmap for improving maturity over time.

👉 Take our Pay Maturity Survey to see where you currently stand.

2. Conduct Market Research

Benchmarking is essential. But here’s the truth: static salary surveys are already outdated the day they’re published. In volatile markets, six-month-old data means your pay decisions risk being misaligned. That’s why I recommend using real-time benchmarking platforms so you can see what’s happening right now, not last year.

3. Define Your Compensation Philosophy

Your compensation philosophy has to be anchored to your business goals, and it should be set at the ExCo or board level. This is where you agree whether you’ll pay the market median or whether you need to target the upper quartile to secure scarce skills. 

It’s also about the mix: will you lean on base pay, variable incentives, or long-term rewards? Without clarity here, everything else falls apart.

4. Budget & Align with Business Strategy

Compensation is often 30%+ of organisational costs. It must be aligned with your broader business strategy. 

Ask yourself:

• What talent do we need over the next five years? 
• What’s the ROI on this spend? 

This stops pay from being treated as an expense line and reframes it as an investment in business success. 

Think of pay as a balance point: over-invest and you burn cash; under-invest and you bleed talent. The goal is to stay centred, where reward is sustainable for the business and motivating for employees.

5. Design Salary Ranges & Pay Grades

Well-designed pay structures with clear salary ranges and pay grades give managers boundaries, keep internal equity in check and help avoid inconsistency across teams.  Governance matters here, and without it, salary bands quickly lose meaning.

When designing ranges, pay attention to how they overlap. Too much overlap between grades can make promotions feel meaningless, while too little can leave employees with nowhere to progress. Striking the right balance ensures that ranges motivate movement without inflating costs.

A simple way to structure pay ranges is to anchor salaries at the market median, set entry points around 80% of market and caps around 120%, with “on-market” defined as 90–110%. Within that band, progression should reflect performance, potential and role criticality — not just a default move to midpoint.

For a short, practical demo of how to turn market medians into salary ranges, and manage employees through those ranges, watch our on-demand Reward School webinar here.

6. Layer in Variable Pay & Financial Incentives

Bonuses, commissions and overtime pay can be powerful motivators. But they must be tied directly to results. Any incentive scheme should be self-funding: if it doesn’t deliver measurable performance or profit, it’s just another cost.

7. Incorporate Benefits & Retirement Plans

Cash alone won’t keep people engaged. A truly total compensation package should also include benefits like retirement plans, health insurance, and paid parental leave. These aren’t just perks; they’re essentials employees weigh when deciding whether to join or stay. Where allowances are concerned, apply them with purpose. For example, a night-shift or hard-duty premium makes sense if it solves a real business challenge. Handing out blanket allowances, on the other hand, is wasted spend with no return.

8. Ensure Legal Compliance & Pay Equity

Fairness isn’t optional. Enforce equal pay audits, fair pay governance, and ensure pay equity across groups. But don’t stop at the numbers: think about culture. Compensation should reward not just what people achieve, but how they achieve it. That’s how you avoid incentivising toxic behaviours.

To withstand scrutiny, record the rationale behind pay decisions. Documenting how factors such as performance, potential, role criticality and tenure influence placement within a band makes fairness demonstrable and defensible.

9. Communicate the Compensation System

Even the best framework fails if people don’t understand it. Company leaders must make sure the compensation structure is visible and transparent across the entire company. Communication should link back to core values, so employees see pay as fair, consistent, and in line with culture.

10. Review & Refine Regularly

A compensation system shouldn’t be static. The most successful organisations treat reward as something to continuously evolve, using each cycle to move from reactive practices toward more proactive, data-led decision-making.

Monitoring turnover, offer acceptance rates, and engagement will tell you if your strategy is working in practice. But to get a clearer view of your pay maturity and how you could progress, take the HR Datahub Pay Maturity Survey. Given that 63% of HR leaders consider their HR function only moderately effective at best, it’s worth doing.

Our research shows that organisations stuck at the lowest levels of pay maturity can waste 15-20% of payroll through inequity and inefficiency – standing still isn’t neutral, it’s costly. Progressing even a single level of maturity can deliver measurable ROI by reducing risk, improving fairness and building trust in your framework.

To embed this mindset, avoid flat increases or over-reliance on manager discretion. Instead, use structured matrices that combine performance with an employee’s position in range, so increases are applied consistently and strategically.

For a deeper dive into how pay maturity works in practice, join our on-demand Pay Maturity webinar.

What’s the Biggest Mistake Companies Make with Compensation?

The biggest mistake I see is building a strategy on poor, unreliable or outdated data. Too many organisations still rely on static salary surveys, anecdotal evidence from job boards or even ChatGPT. 

HR Datahub’s research into pay maturity shows that organisations operating at the lowest levels of maturity can waste 15-20% of payroll through inequity, inefficiency and inconsistent decisions. Standing still isn’t neutral, it’s costly.

Pay decisions made on six-month-old surveys or anecdotal job board searches might feel informed, but in reality, they leave you misaligned with the market. And when you’re misaligned, you either overspend without return or underpay and lose talent. Real-time benchmarking is no longer optional – it’s the only way to know you’re paying the right talent at the right price.

I discuss here how to make the business case for better salary data. 

HR Datahub, our salary benchmarking tool, offers real-time salary data drawn from over 30 million live job ads. It’s location-specific and role-specific, meaning you don’t have to worry about inaccuracy when making pay decisions.

Case study: How MAPP used real-time benchmarking to transform their approach to compensation

We spoke to Sean Greathead, Head of People and Talent at MAPP, about his experience of using HR Datahub for salary benchmarking:

MAPP is a property management company with over 680 employees across the UK that was facing a complex pay benchmarking challenge. With staff spread from London to Dundee and roles ranging from managers of iconic city towers to smaller regional sites, market comparisons were inconsistent and often misleading. 

They found that traditional salary benchmarking options, such as phoning recruiters, commissioning static salary surveys, or relying on anecdotal data, were slow, subjective and out of date almost as soon as they were compiled.

This created two problems:

1. The annual pay review process was ballooning into a twice-yearly exercise, consuming months of manual work. 
2. When employees challenged their pay, HR had limited evidence beyond outdated surveys or recruiter claims, making it difficult to defend decisions or build trust.

By adopting HR Datahub’s real-time benchmarking tool, MAPP was able to quickly pull live data on roles, regions and market shifts. Instead of debating where salary midpoints should sit, leaders could focus on action: how to move employees relative to those benchmarks. The approach also gave HR the credibility to rebut anecdotal claims with evidence, support fair pay equity conversations, and manage graduate salaries that change quickly in the market.

“The gift of HR Datahub is that it gives you the data to have a proper conversation, rather than spending all your time finding the information. It’s become an integrated part of how we deliver to the business — because the data doesn’t lie. It gives me the confidence and authority to do my job better.” - Sean Greathead, Head of People and Talent at MAPP

Bringing Your Compensation Strategy to Life

To get compensation right, you must build a comprehensive compensation strategy that delivers fair compensation, strengthens retention and creates a real competitive advantage. 

At HR Datahub, we give you the live, localised salary data you need to design strategies that actually work and drive company success. 

If you want visibility and confidence in every pay decision, start a free trial of HR Datahub today and see how real-time salary benchmarking can transform your approach to pay.