As we navigate through a volatile and often inexplainable labor market, developing and implementing a compensation strategy means making tough decisions regarding how your organization will pay employees compared to your competitors.

Most large organizations have developed comprehensive compensation strategies, but many small organizations have not. Here are seven definitions and examples of compensation terms we throw around all the time that are crucial to your agency's retention and hiring strategy: 

1) Lead. An organization may determine that it wants to lead the market, meaning the organization decides to pay more than its competitors. That might be 10%, 20% or more.

The idea is that you will be known as the “best payer" in your competitive markets. This strategy works well when an organization is growing rapidly and has a lot of money to spend on recruitment and retention, or faces particularly stiff competition for talent.

2) Match. Most organizations decide they want to match the market. To do this effectively, it's necessary to gather compensation information about pay levels for specific jobs in certain geographic locations. This strategy works well for most organizations as long as salary information is regularly reviewed and updated as the market changes.

For example, pay levels for entry-level employees may have increased more than 10% in 2022 in some geographic areas. Salaries that matched or even led the market a couple of years ago may now lag the market.

3) Lag. Some organizations determine that their pay will lag the external market. Sometimes this happens by accident, but it can be a successful compensation strategy. Pay is important to employees, but often perks such as flexible scheduling, remote work and generous paid time off can be equally important.

It's important to remember that any of these approaches—lead, match or lag—can work for an organization as long as they're well developed and maintained.

4) Externally competitive. This means that an organization's jobs are valued appropriately compared to jobs in the external market. To be externally competitive, an organization must understand who its competitors for talent are and understand that these can vary significantly by job type and geographic location.

It's important to understand industry pay standards for certain positions, but if your new hires usually come from other industries and employees leave to take jobs in other industries, that information may be less valuable than information specific to a geographic area. 

Further, employees in accounting, human resources and IT may find jobs in other industries. Entry-level employees also can choose jobs in different industries, so if you regularly hire entry-level employees, it's critical to understand who else is looking to hire them.

5) Internally equitable. This means that employees in similar positions with similar skills are compensated similarly. That's a lot of “similars"—but similar doesn't mean the same. 

In organizations with formal compensation structures, internal equity is achieved by assigning specific jobs to a specific salary grade and range and paying individuals within that range based on performance, skills, length of service and other factors. In organizations without formal compensation structures, these same factors are frequently used to determine individual rates of pay.

6) Salary compression. This occurs when the pay of one or more employees is close to or even exceeds the pay of other employees doing the same or similar work.

Salary compression can occur throughout an organization but is most common when new hires demand salaries higher than incumbents with more experience and when salaries for new entry-level employees are equal to or exceed salaries for lead or supervisory employees. 

It's easy to blame salary compression issues on COVID-19, the Great Resignation, the Great Reprioritization, the Great Recognition, or whatever best describes this labor market. The reality is that salary compression has been a problem that organizations have faced for many years.

It's a complex issue that occurs over a long period of time and, as a result, doesn't have an easy fix. Regular reviews of paid salaries and salary adjustments based on these reviews are critical steps in addressing salary compression.

7) Pay equity. This term is sometimes used interchangeably with internal equity. In the past, the two were pretty much the same, but pay equity has recently taken on a different meaning. The term now refers most commonly to legislation, primarily at state levels, requiring employers to pay men and women equally for “substantially similar" work.

Some states have expanded this legislation to include fair pay requirements for race and other protected characteristics. The recent labor agreements for equal pay for the U.S. men's and women's soccer teams represent the settlement of a pay equity lawsuit.

Susan Palé is vice president for compensation at Affinity HR Group Inc. Affinity HR is the endorsed HR partner of Big “I" Hires, the Independent Insurance Agents of Virginia, Big I New York, Big I New Jersey and Big I Connecticut.