Creating a competitive compensation package supports attraction, retention, and broader strategic goals

Authors: Kevin Talbot, Susan Tang

The spotlight on competitive pay, sustainability and transparency isn't likely to fade anytime soon. All of these commitments are required to keep employees engaged and motivated. And a consistent pattern of missteps with employee rewards can invite internal turmoil, public scrutiny and legal risk.


Rethinking employee compensation funding

The impact of the COVID-19 pandemic on employee compensation has been widespread. As of July, over half of employers were reducing or freezing 2020 incentives for management and executives (54%) as well as non-management employees (51%). Yet some employees may experience relief in 2021, when these percentages are expected drop to 17% and 11%, respectively. Salaries for 2021 are a different matter, though, with 4 in 10 employers planning a freeze and around 3 in 10 planning to reduce their budgets for salary increases.1

The outcome of these unforeseen changes is that many employees are now asked to do more for less. Strategic creative thinking can generate practical ideas that help preserve the value of compensation and benefits, which supports engagement by showing appreciation for employees' dedication.

Variable compensation directly rewards employees based on their performance, incenting them to achieve their highest potential. When that happens, there’s a shared upside for those who increase their income beyond base salary—and employers who benefit from their work contributions.

Beyond sustainable pay models, what's increasingly important are flexible benefits, policies and practices that adapt to changing workforce needs and interests. They help keep total rewards relevant and affordable, and provide the chance to maintain competitive compensation.

Healthcare cost decisions that preserve rewards

Reassessing health plan cost sharing can identify significant opportunities to tighten spending by rebalancing financial responsibilities. Variable plan premiums are one solution that considers affordability and potential plan use—based on factors such as salary, the number of family members on the plan and participation in wellbeing programs. Employers may also benefit from evaluating coinsurance for prescription drugs as an alternative to copays and looking into value-based provider networks.

For many, financial protection and peace of mind have never been more important. Voluntary benefits provide both. Employers are able to choose from a broad selection of specialized insurance and discounted services, which they can frequently offer at minimal or no cost without administrative burdens. And employees profit from access to group rates for benefits that may be purchased with pretax dollars.

The unique circumstances caused by COVID-19 warrant a fresh look at PTO policies, too. While just 3% of employers have already implemented unlimited PTO and 5% are considering it by 2022, the actual uptake may be higher.2 Strengths of these policies are their ability to demonstrate trust in the workforce to use time off judiciously, and the fact that these days don't expire. At the end of the year, employees aren’t inclined to squeeze in PTO, and carryover periods are gone. The need to cash days out is also eliminated.

Employee turnover in a soft labor market

As organizations evaluate pay and benefits in the new normal, it's easy to lose sight of the fact that employee flight risk still exists. Employee turnover is costly, with replacement costs estimated at 50% to 200% of their annual salary.3 And finding the right replacement is critical for business continuity.

Crisis situations that negatively affect the economy usually dampen the motivation to look for employment elsewhere. But pent-up turnover can occur when better business conditions prevail. Workforce planning that takes a long-term outlook, supported by flexible total rewards, will help employers minimize disruptions and capitalize on new opportunities.

Benchmarking and internal assessment

Plotting a course for an equitable and competitive total rewards philosophy begins with good information. When employers evaluate the external market, they’re better able to stay in step with or stand out from competitors. Periodic reviews were sufficient pre-COVID-19, but fast-changing business dynamics demand more frequent checks on how peers are managing employee rewards. The scope of benchmarking can vary, but a broad focus will yield more insights.

There's also value in a direct survey of employees' preferences on compensation and rewards. Gaining that understanding increases the employee voice and leads to better talent investments tailored to the organization's workforce.

Diverse employee compensation needs

While employees generally put a high priority on compensation, there's no uniform standard for what they specifically value. The diverse experiences and beliefs that shape the expectations of a multigenerational, multiethnic workforce come into play. And the compensation needs and interests of highly experienced or long-tenured employees are likely to be distinct from those of newer or younger employees.

These factors create challenges in deploying total rewards effectively through base and incentive pay, alongside available benefits. Part of the solution for organizations is considering the spectrum of employees' roles and different locales when devising a total rewards strategy. For instance, rural and urban settings may influence different needs.

An emphasis on equality

Arriving at the right mix of total rewards is an accomplishment in its own right, but there's more to optimizing a compensation strategy. Competitive strength relies on equitably allocating salaries, benefits and bonuses, which requires rigor and an operational framework to ensure fairness and legislative compliance. This holds true with or without a pandemic.

Because employees expect and value a work culture that’s diverse and inclusive, the framework employers develop to sustain equity and fairness must extend to all areas of operations. This is best accomplished when perspectives and input from all levels are considered, including each employee band and operational group. Safeguards should also be informed by the opinions of a representative sample of the workforce, across the lines of gender, age, ethnicity and tenure.

For employers in search of more attractive, fair and efficiently allocated compensation, commitment starts at the top but doesn’t end there. It also demands the ongoing involvement of those responsible for rolling out the strategy to realize the organization' HR and operational goals.

Employees' total compensation needs and expectations are always evolving. By designing an approach with incremental and continual improvement, employers will be better able to sustain their investment value in this central element of total rewards.

Above all, employees want a sense of stability when facing the unknown. So it's important for employers to communicate what actions they are and aren't taking—and why. Trust is paramount to winning acceptance for decisions, and earning the respect needed to engage the workforce.

This article appears in the Gallagher Better Works Insights Report Volume 4: Think Differently: Culture, Costs & Community.

Author Information:


1 Gallagher. “COVID-19 Work in a New Normal Pulse Survey.” July 2020.
2 Gallagher. “2020 Benefits Strategy & Benchmarking Survey.” September 2020.
3 Gallup. “This Fixable Problem Costs U.S. Businesses $1 Trillion.” March 2020.


Consulting and insurance brokerage services to be provided by Gallagher Benefit Services, Inc. and/or its affiliate Gallagher Benefit Services (Canada) Group Inc. Gallagher Benefit Services, Inc. is a licensed insurance agency that does business in California as “Gallagher Benefit Services of California Insurance Services” and in Massachusetts as “Gallagher Benefit Insurance Services.” Neither Arthur J. Gallagher & Co., nor its affiliates provide accounting, legal or tax advice.

This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation.