How to Use Data to Build an Effective Compensation Strategy

In today’s competitive talent market, talent acquisition professionals and hiring managers face an increasingly daunting task when deciding what to offer to job candidates.

It is no longer standard practice, and even illegal in some states, to ask for a candidate’s salary history. Counter offers are on the rise and offer acceptance rates are declining. Savvy candidates now expect recruiters to explain what factors contribute to the salary they are offered. If you’re not relying on a strategy supported by data, you run the risk of losing candidates when your offers fall below market.

Consistently making lowball offers will undermine your credibility, and contribute to a poor employer brand in your market—making it  harder to attract top talent. The negative impact even trickles down to hiring managers, who will be frustrated by the extended time to fill.

Equally as unappealing, making offers above market can also lead to problems. While one engineer being overpaid by 5 percent isn’t a huge issue on its own, what if your organization has 50 engineers? For example, let’s say the 50th percentile in your market for the profile you are targeting is $125,000. If you don’t have access to data that reveals you are overpaying by five percent, and all 50 of your engineers are at $131,250, you may not realize that you are overpaying by more than $300,000 each year.

Although recruiters’ jobs are getting harder, this added difficulty presents a unique opportunity to partner more closely with leadership. One of the easiest things you can do to increase your offer acceptance rate and be seen as a true partner to your executive team is to push your company to develop a formal, data-driven compensation strategy.

But what if your company doesn’t have a formal compensation strategy? What if your executives don’t think it will move the needle? Below we’ll dive into the benefits of creating a compensation strategy and how to get the leadership buy in necessary to make it a success.

Why Create a Compensation Strategy?

There are many factors that influence the quality of talent you’re able to hire, and compensation is a key component. If you do not have a well thought out, data-driven compensation strategy, you will have a difficult time producing consistent results. Here are some of the key benefits of a thoughtful compensation strategy.

1. Deliver Consistent Results

Having a solid compensation strategy doesn’t mean you have to pay at the top of market. In fact, when companies dig into market data, they often discover that they were overpaying for certain roles and underpaying others. One of the strongest benefits of a compensation strategy is consistency.

Taking the time to identify your talent market, how you want to pay relative to the market, and what you want to reward (e.g. skills, experience, tenure, or performance), will help you consistently hire top candidates. Reliable hiring decreases your time to fill, reduces cost per hire, and improves the overall candidate experience.

2. Make an Offer They Can’t Refuse

A data-driven compensation strategy allows you to make the candidate an offer that gets them excited. Leading with your best offer upfront may seem counterintuitive, but can actually be the most effective strategy.

If you’re genuinely making what you think is the best possible offer, candidates may respond well to this approach. To make this an effective strategy, you need to lay the groundwork throughout your recruiting process to build trust with your candidates. Communicate early in your process that your goal is to offer a package that they will be genuinely excited to accept.

How to Get Leadership Buy In

There are many reasons why companies don’t have formal compensation strategies, and each requires a different approach to address. Use these tactics to address leadership hesitation:

1. Highlight the Urgency

For many startups, developing a compensation strategy simply hasn’t been a priority. If this is the case with your business, it’s important to point out that doing nothing can actually have a negative effect on your business over time. With low offers, you risk losing candidates and you run the risk of building up a bad reputation when candidates warn others about your pay practices. This will tarnish your employer brand and restrict your ability to attract qualified applicants into your funnel.

Highlight the benefits of taking action so that leaders understand how a thoughtful compensation plan can increase the quality of candidates and build your reputation as a company that pays fairly and competitively. In fact, many companies have reported on the benefits of establishing best pay practices, including Salesforce, Starbucks, and Fog Creek Software.

2. Show the Stats

If your execs don’t think that having a compensation strategy will make an impact on your business, there is concrete evidence that proves them wrong. PayScale’s latest Compensation Best Practices Report revealed that employees and employers aren’t on the same page about pay. While 43 percent of employers believe that their employees are paid fairly, only 21 percent of workers agree with that sentiment.

There’s a wealth of research showing that employees who feel they’re paid fairly are more productive and stay for longer. Don’t be afraid to show leadership the impact that compensation perception can have on employee morale as you make your case for a more structured compensation strategy.

3. Make Sure You’re Not Overpaying

Oftentimes there is a fear that digging into the data will reveal that the company needs to pay employees more. While this may be true in some cases, there is also a chance that you are overpaying employees—which can add up quickly. Conduct a benchmarking study to identify roles that you may be overpaying and others you may be underpaying.

Talent acquisition professionals are strategic partners to the business. If you want to up-level your position, you may have to take some risks—even if it means telling a hiring manager that you’ll refuse to make an offer because it’s too low or high. Not every organization is ready to embrace a strategic approach to compensation, so it’s up to you to craft a strategy that aligns with your company values and priorities.

This post originally appeared on Payscale.

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