A Leader’s Guide to Smart Employee Compensation

Article Summary: 

Many organizations stumble with inconsistent, opaque, or outdated compensation practices that erode trust and hamper performance. When leaders build a clear, fair, and smart employee compensation system, they foster engagement and unlock higher levels of motivation and results.

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Most leaders know compensation matters, but many rely on practices that are inconsistent or ineffective. The result is a workplace where people feel undervalued. They’re confused about how pay decisions are made—often leading to frustration and turnover.

Here we explore how leaders can design a smart employee compensation approach that builds trust and gets results.

 

First, do no harm: make sure compensation systems don’t incentivize the wrong behavior.

If compensation reinforces toxic behavior or internal competition, culture suffers.

“Occasionally integrity issues are a problem due to ‘bad apples,’ but often they are the result of giving people financial targets with compensation incentives that they cannot meet honestly.” -Michael Critelli, former chairman and CEO, Pitney Bowes

 

The best organizations pay for “performance with integrity.”

Review and reward workers not for just performance but also for how they go about it, including how they’ve defended the shared values or contributed to the culture. According to Benjamin W. Heineman Jr., former senior vice president and general counsel at GE, smart leaders design compensation systems to include not just “pay for performance,” but “performance with integrity.” Companies whose reviews address not only performance but also values and/or culture in significant ways include Chick-fil-A, HubSpot, Netflix, Patagonia, Ritz-Carlton, Salesforce, Southwest Airlines, Whole Foods Market, Wegmans, and Zappos.

 

Pay must match the market.

Don’t rely on outdated salary bands or opaque pay processes. Benchmark salaries and total rewards using industry-specific data sources.

 

Compensation must be fair—and perceived as fair.

Workers judge fairness not only by what they earn but also by how the organization sets pay and communicates it. Having clear criteria for merit-based raises and promotions, transparent pay ranges, and regular industry benchmarking can dramatically improve trust. According to 2025 PrimePay report, only 56% of leaders conduct an internal review of their compensation practices across the organization. As a result, pay disparities are common—as is employee resentment.

 

Total rewards matter much more than base pay alone.

Salary matters, but so do bonuses, benefits, flexibility, career development opportunities, wellbeing support, and meaningful work. The best organizations offer thoughtful, comprehensive total rewards packages that reflect how people actually live and work today.

 

The best organizations offer choice and customization in their compensation system.

Having a single, monolithic compensation and benefits plan is bound to be ineffective. Why? Because different workers value different things. For example, working parents may prioritize flexible schedules and childcare benefits. Aspiring leaders may seek stretch opportunities that accelerate their career trajectory. Offer a flexible menu of benefits, with a reasonable amount of choice and customization.

 

Compensation must be aligned with the organization’s vision, goals, strategy, and culture.

In his classic article, “On the Folly of Rewarding A, While Hoping for B,” Steven Kerr notes that managers often hope for things like teamwork, innovative thinking, risk-taking, empowerment, and long-term growth. But they tend to reward vastly different things, like individual performance, proven methods, not making mistakes, tight control over resources, and quarterly earnings.

Ensure compensation aligns with the organization’s shared purpose, values, and vision as well as its strategy and desired culture. Do you have incentives that reward sustainable performance, not short-term bursts? Does your compensation system fit with your desired culture? Do you have rewards that reinforce teamwork and accountability for collective goals?

 

Promote pay transparency.

Clearly communicate your organization’s compensation philosophy—the why and how of pay decisions. Are you publishing salary ranges, spelling out the criteria for pay increases, and providing clear policies and benefits statements to help workers understand the totality of their package? According to Lexi Clarke, chief people officer at PayScale, “organizations need to get better at communicating pay practices with managers and employees.” Transparency also helps with recruitment.

“SHRM’s research shows that salary information in a job posting makes 82 percent of candidates more likely to consider applying…. employers say that providing pay range information up front has led to more (70 percent) and better (66 percent) applicants for these roles.”*

 

Leverage managers as your key compensation communicators.

Make sure managers understand the compensation system inside and out. Equip them with the information, training, and scripts they need to have open and clear conversations about pay, performance, and career progression. Managers are the primary translators of your compensation philosophy, so give them what they need.

“Companies struggle to communicate pay.”
-Mariann Madden, Willis Towers Watson

Also, be sure to train managers to evaluate worker performance robustly and consistently.

Of course, there are other things you can do when it comes to compensation. For example:

• Make sure your compensation systems are flexible.
• Revisit your compensation systems regularly and as your organization grows and changes (e.g., annual checks and deeper reviews every 3-5 years).
• Make adjustments for inflation and other cost-of-living changes, as well as for shifts in the market.
• Prioritize pay equity by regularly auditing compensation and eliminating disparities based on gender, race, or other factors not related to performance.

 

Conclusion

Smart employee compensation goes beyond numbers. It reflects your organization’s values and culture. And it motivates people to do their best work.

By designing a fair, transparent, and strategic compensation system, you can foster engagement, retain top talent, and drive sustainable high performance. Ultimately, thoughtful compensation isn’t just a reward. It’s a powerful tool for building trust, loyalty, and a thriving workplace.

Wishing you well with it. Your people deserve it.
–Gregg

 

Tools for You

• Leadership Derailers Assessment to help you identify what’s inhibiting your leadership effectiveness
• Personal Values Exercise to help you determine and clarify what’s most important to you
• Alignment Scorecard to help you assess your organization’s level of alignment

 

Related Articles

• “The Importance of Heart in Leadership”
• “How Great Leaders Recruit People with Heart”
• “The Hidden Cost of Poor Employee Recognition–And What to Do About It”
• “How Great Leaders Reward, Recognize, and Celebrate People”

* Source: Joanne Sammer, “Updating Your Compensation Strategy: A Step-by-Step Guide,” SHRM.org, November 4, 2023

 

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Gregg Vanourek is a writer, teacher, and TEDx speaker on leadership and personal development. He is co-author of three books, including Triple Crown Leadership: Building Excellent, Ethical, and Enduring Organizations (a winner of the International Book Awards written with his father, Bob Vanourek) and LIFE Entrepreneurs (a manifesto for living with purpose and passion). Check out his Leadership Derailers Assessment or join his rapidly growing community. If you found value in this, please forward it to a friend. Every little bit helps!