Strategic compensation is when a business attempts to better calibrate its levels of compensation to reward work and output. Often this involves establishing certain rewards for certain levels of performance. Strategic compensation often involves a company moving beyond the typical salary or hourly wage and looking for more-innovative ways to reward employees. Strategic compensation means creating an incentive structure that directly rewards employees for their performance and skill.
Many companies offer their employees stock in the company either for free or at a sharp discount. This makes sense in a variety of ways. Employees who own stock in a company have a stake in its success. When it succeeds they become wealthier. This gives them more motivation to work better and makes them more likely to identify with the company's goals.
Many companies reward their employees with financial bonuses after they meet a certain level of performance. This sort of strategic compensation can be a great motivator by attaching specific goals in performance to specific goals in compensation. The goal of much strategic compensation is to turn a worker who is merely filling out his time into one who is engaged and actively working for improvement.
Strategic compensation almost always involves a strategy about how raises are awarded. Raises are one way of improving employee retention. By awarding employees for their time at a company, employees are more likely to stay. Raises can also be awarded for good performance, sending a message in an organization that merit is rewarded. Companies must balance the way that they administer raises, considering both merit and seniority, to encourage both behavior and retention.
Many people criticize the high pay of CEOs as excessive and unrelated to real performance. Even when a company is experiencing contraction, it is not uncommon for its CEO to be awarded with a large bonus. Some critics argue that this sort of compensation has distorted company performance. Defenders argue that raises of this sort are the only way to attract the top talent in any industry.