Firms Struggle to Align Compensation, Business Strategy

Even though many companies plan to increase organization-wide compensation during the next year, murkiness remains as to how connected firms’ compensation programs are with overall business strategy.

Roughly 40 percent of companies say their organization’s compensation program is fully aligned with the business strategy, according to a 2014 compensation and benefits survey by Human Capital Media Advisory Group, the research arm of Talent Management magazine. Still, about 35 percent of those surveyed did not think their organization’s compensation program aligned with the business strategy, while 25 percent weren’t sure.

The HCM survey included 198 respondents who are human resources professionals from companies of varying size and industry.

Meanwhile, about 42 percent of HR professionals surveyed said their organizations plan to increase compensation during the next year, while 52 percent said it would stay the same and about 6 percent said compensation would decrease.

Roughly 70 percent of those surveyed said they plan to keep benefit levels flat during the next year, while nearly 24 percent said they plan to increase benefits and about 7 percent said they will decrease benefits levels.

Not surprisingly, salary and pay remain the most important form of compensation among employees, as reported by about 88 percent of HR professionals in the HCM survey (Figure 1). Health care benefits (57 percent) were the second most important, followed by training and development opportunities (33 percent) and work culture (31 percent).


Among the least important compensation areas were rewards programs (17 percent), family benefits (16 percent) and recognition programs (15 percent).

Individual performance is the primary basis for employee compensation, according to the survey. About 83 percent of HR professionals reported employee performance as the primary basis for rewards, followed by team performance (41 percent) and tenure (35 percent). Just 5 percent of respondents reported basing rewards on meeting diversity and inclusion goals. Educational attainment and benchmarked industry standards were also among the lowest drivers of employee rewards and compensation (Figure 2).


Compensation planning is more integrated with performance management than any other department, according to the survey. Almost half of respondents saidcompensation planning is integrated with performance management (Figure 3).



On the other hand, just 30 percent of respondents said retention strategy was integrated with compensation planning, despite the fact that 65 percent of respondents cited retention as the primary measurement for program success.

Among the other noted measures of compensation program success are employee satisfaction (54 percent), employee engagement (39 percent), productivity (37 percent), benchmarking (30 percent), job offer acceptance rate (25 percent) and return on investment (16 percent).

Most firms keep development of compensation, rewards and recognition programs in-house, according to the survey, while nearly 15 percent reported outsourcing the process “to some extent.” Roughly 3 percent outsource it entirely.

When it comes to specific rewards and recognition programs offered, pay-for-performance and length of service programs are most common, as nearly 60 percent of respondents reported offering the two. Spot recognition rewards, company parties or retreats and gifts were also among the top programs offered, though to a lesser extent (Figure 4).


Respondents in the comments section of the survey said “lack of leadership support,” “equity of unionized and nonunionized employees” and “too many fragmented elements,” due to incomplete linkage between pay and performance evaluation, were among the top difficulties when implementing a pay-for-performance program.

The least-offered rewards and recognition programs were points programs (9 percent), annual report or yearbook (11 percent), stock options (14 percent) and profit sharing (22 percent).

Just 32 percent of respondents reported having a formal review process for ensuring pay equality, while nearly half reported having a process “to some extent.” About 22 percent said they did not have a formal pay equality review process.

What’s more, 61 percent of HR professionals in the survey said their companies did not have a formal policy or process to address the pay gap between entry-level employees and the C-suite. About 15 percent reported having such policies.

Finally, about 3 percent of respondents described their organization’s compensation package as completely customizable. The vast majority of HR professionals in the survey said their compensation packages were mostly uniform, while 20 percent described them as “somewhat customizable.”

Xin Sheng is a former editorial intern at Talent Management. She can be reached at