The Relationship Between Employee Retention and Compensation

Compensation and Retaining Employeers

Ineffective compensation strategies lead to poor retention. Are your compensation packages satisfying employees? Keep reading to better understand the relationship between employee retention and compensation and techniques that improve both.

Types of Compensation Strategies That Improve Employee Retention

There are several ways to enhance employee retention with compensation strategies

Competitive Salaries

Paying your employees a competitive salary based on their skills and experience is one of the best ways to increase retention. A Harvard study found when people are paid more than they initially expected, they put in more effort, are more productive, and are more likely to stay long-term.

Competitive pay not only increases retention but also productivity. One Paychex study found 70% of employees named low salary as their top reason for leaving a job or why they would leave a job.


Rewarding top performers with incentives not only motivates employees, but it also increases retention. Incentives include:

  • Monetary regular bonuses
  • Long-term incentives (performance shares, profit shares)
  • Cash spot rewards

Incentives are an effective employee retention/compensation strategy. Over 77% of employees say they would work harder if their employer offered more incentives, and the presence of incentive programs motivates 66% of workers to stay at their current job.

Modify Salary Based on Geographic Location

If your business operates on a hybrid or remote model, it’s important to modify salaries based on your employees’ geographic location. The cost of living differs in almost every city in the United States, so if you’re hiring remote positions, consider those cost differences. The current best practice is to pay employees based on the office they are assigned to rather than where the employee may live.

Merit Increases/Pay for Performance

Merit increases are a type of incentive where employees are rewarded with bonuses or raises for their performance. Employees are not promoted with a merit increase; they’re just given a pay increase while remaining in the same position.

Merit increases aren’t the same as general pay adjustments. Pay adjustments are regular increases based on how long someone has been with the company or changes in the cost of living. Merit increases strictly focus on rewarding employees for good performance. 

This incentive improves motivation, encourages employees to continue working hard, and increases employee retention. To succeed, your organization should have an objective performance assessment system.

Robust Benefit Packages

Employees want to work for people who care about them. Show your team members you value them by providing robust, customizable employee benefits packages.

Benefits include:

  • Health, dental, and vision insurance
  • Paid time off
  • Sick days
  • Retirement/401k
  • Paid medical or maternity leave
  • Profit sharing

Every employee has different needs, so allow them to pick which benefits apply to them instead of having a “one-size fits all” approach. Offering competitive benefits packages effectively increases employee retention, as employees won’t be searching for better benefits elsewhere.

Using Compensation Surveys

Compensation surveys are an excellent tool for improving the overall relationship between employee retention and compensation. These surveys offer insight into similar businesses and their compensation rates and strategies so you can stay competitive. Take time to thoroughly review the survey participant list and how long ago the data was collected.

Compensation surveys gather data regarding:

  • Benefits
  • Insurance
  • Base salaries
  • Merit increases

If you need help improving your employee retention with compensation, these surveys are a helpful tool. Many outsourced HR providers develop surveys based on your industry and company size to help you improve internal compensation processes.

Overtime Pay

Offering overtime pay gives employees a chance to work more hours and make more money, which benefits them and the company. It’s a win-win situation that improves retention. All pay provided (salary or bonus) to a non-exempt employee must be included when calculating the regular rate of overtime pay.

What’s the Best Compensation Plan For My Business?

Your compensation plan depends on your business’s structure and size. There are three compensation plans that suit different industries and positions:

Straight Salary Compensation for Exempt Employees

Straight salary compensation gives exempt employees a set annual amount of money. Exempt workers have the flexibility to work outside of the office since they don’t have to record hours. 

This compensation plan suits:

  • Positions that require 40 hours or less of work per week
  • The annual salary is more than an employee would make in a year if they made an hourly wage
  • Employees who want stable, non-fluctuating income

Straight salaries for exempt employees are excellent for businesses that offer regular raises, as they simplify the process of raises.

Salary Plus Commission Compensation

Salary plus commission compensation offers employees a secure wage while reflecting their individual contributions to the company. Team members make a set salary while bringing home extra money for any commission they’ve made.

This compensation plan suits:

  • People in sales or leadership positions
  • Employees who must hit monthly metrics/goals

Commission motivates employees to reach company goals and stay with the organization.

Straight Hourly Compensation

Straight hourly compensation pays non-exempt employees based on the number of hours they work. If an employee works over 40 hours with this compensation plan, they receive overtime pay, at a required time and a half wage.

Straight hourly compensation suits:

  • Low-paying jobs or entry level positions
  • Food and beverage industries
  • Businesses with non-consistent employee schedules
  • Employees with flexible schedules (students who work part-time or people who only work weekends)

Hourly compensation can be a competitive advantage depending on the starting wage. Non-exempt employees are eligible for raises and overtime pay, making it a great compensation plan for people looking for extra cash.

Want Help Creating a Compensation Plan That Suits Your Organization’s Needs?

If you need help creating a compensation plan that improves the relationship between employee retention and compensation, AAIM is the place for you.

Not only do we develop customized compensation surveys, but we also:

  • Help your company improve existing compensation plans
  • Offer market data relevant to your industry
  • Implement compensation strategies that increase competitive advantages
  • Ensure employees are paid fairly
  • Employee retention techniques

Contact us today to improve your employee retention and compensation plan.