In our years of working with organizations on their compensation strategies, we’ve seen firsthand the costly mistakes that can undermine even the best intentions. These are real challenges we’ve encountered time and again in our direct work with organizations.
While your organization may be feeling some of the effects of these mistakes—everything from unnecessary turnover, legal complications, and financial strain—you might not know that some of these challenges may stem from your organization’s compensation strategy (or lack thereof).
In this post, we’re sharing some of the most common compensation mistakes we’ve seen, along with the consequences they can have, so you can steer clear of these and create a more effective, fair, and strategic compensation plan.
Mistake #1: Lack of Compensation Strategy
When you lack a strategic approach or financial controls in managing your organization’s compensation, you miss out on a powerful lever for attracting, retaining, and motivating employees.
Without a clear strategy, compensation decisions become inconsistent, reactive, and often misaligned with your company’s overarching goals. As you’ll see, this can lead to a range of problems, from overpaying underperformers to losing top performers—all of which impact the bottom line. Organizations without a strategy struggle to maintain a sustainable budget, which limits the ability to invest in other areas.
A lack of a well-defined compensation strategy can also lead to pay compression, where long-term employees are paid similarly to new hires. This issue is particularly common in tight labor markets where organizations offer higher starting salaries to attract new hires without adjusting the pay of existing employees.
What to Do:
If your organization doesn’t have a compensation strategy, it’s time to take action:
- Start by assessing your organization’s financial health to understand what resources are available for compensation.
- Define clear compensation goals that align with your company’s long-term objectives—whether that’s attracting top talent, retaining key employees, or incentivizing performance.
- Conduct a market analysis to benchmark your pay against the market and the competition.
Mistake #2: Using Anecdotal Compensation Data
Relying on anecdotal compensation data—the most common example being “Googling” data for a position—can be a misstep for any organization. When you piece together compensation benchmarks from a variety of scattered sources, you’re missing out on reliable, validated data that’s necessary for accurate and informed decision-making.
The solution here is to invest in comprehensive, accurate salary data that’s up-to-date and reported by organizations, not individual employees.
And don’t forget, compensation isn’t limited to wage or salary. A study in the Scholarly Journal of Management Sciences Research found that performance-based rewards, career development opportunities, and health care benefits have a huge impact on employee commitment, motivation, and retention.
What to Do:
Rather than using Google or piecemeal data sources, we recommend investing in validated data like ERC’s compensation survey data or industry-specific surveys.
Mistake #3: Overpaying and Underpaying Employees
We mentioned above that simply “Googling” compensation data can ironically lead to both overpaying and underpaying employees, causing financial strain and inequity within your organization.
When you overpay workers who aren’t top performers, you end up straining your budget without getting the return on investment that high performance should yield.
On the other hand, underpaying your best employees can lead to dissatisfaction, decreased morale, and ultimately, increased turnover as they seek out better opportunities elsewhere.
Developing a compensation strategy that is both fair and data-driven is important to maintaining this balance of financial health and retention.
What to Do:
To set the right pay levels for your team, it’s important to link compensation with both performance metrics and market standards. Regular reviews—ideally once or twice a year—help you adjust pay based on individual performance and constantly-evolving market data.
Mistake #4: Being Reactive Rather Than Proactive
Waiting until your top performing employees are on the verge of leaving before addressing pay concerns is an issue. But it often also leads to hasty and costly fixes that don’t end up addressing the underlying issues.
This band-aid approach—throwing money at problems as they arise—fails to create a structured, strategic compensation plan. It leaves your organization vulnerable to a continuous cycle of turnover, employee dissatisfaction, and inequitable pay across the board.
What to Do:
Start by implementing regular compensation audits or reviews to ensure your pay structure stays aligned with market trends and internal equity. Consider setting up triggers or reminders for compensation reviews when employees reach specific performance milestones or tenure benchmarks.
The Cost of Not Having a Compensation Strategy
Lacking a sound compensation strategy can be costly, both financially and in terms of retaining and developing your organization’s future leaders. As we’ve outlined, without a strategy, you risk overpaying underperformers, underpaying top talent, and facing the high costs associated with employee turnover. These financial strains are just the beginning.
Here are some of the invisible costs and unexpected outcomes of making some of these common compensation mistakes:
- Increased Employee Turnover: You risk losing top performers while retaining less effective employees.
- Higher Costs in Recruitment and Training: Frequent turnover leads to increased costs related to recruiting, hiring, onboarding, and training of new hires.
- Loss of Institutional Knowledge: When key contributors leave, they take valuable “tribal knowledge” with them, which can disrupt just about any department if this knowledge is not well-documented.
- Challenges with Pay Transparency and Equity: As more states move toward pay transparency and equity laws, organizations without the right compensation system in place may face not only employee dissatisfaction, but also compliance-related fines and penalties.
- Poor Employee Performance: Perceived pay inequities can lead to employee dissatisfaction, lower employee engagement, and ultimately productivity over time.
- Difficulty in Hiring and Promoting Efficiently: Without established market data and accurate pay ranges for roles, organizations will be challenged to hire, promote, and retain employees.
As you can see—and as we see every day—having a strategic and well-structured approach to compensation can cause some obvious (and also more subtle) ripple effects through your organization. The mistakes we’ve discussed are more common than you might think, but the good news is that these challenges are entirely preventable.
By investing in reliable compensation data, being proactive, and aligning your compensation strategy with your organization’s goals, you can avoid these negative outcomes. You’ll also be able to support an organization where employees feel valued and motivated to contribute their best work.
Next Steps: Access Expert Guidance and Data
Not sure if your compensation strategy is competitive and equitable? Check out ERC’s compensation consulting services and compensation data. Whether you need expert guidance to develop a compensation strategy or reliable data to inform your decisions, we’re here to help you create a plan that attracts, retains, and motivates your top talent.
