A Guide to Building a Compensation Strategy that Attracts and Retains Top Talent in 2025 and Beyond
In today’s labor market, it’s important to understand how to build a competitive compensation strategy. Continue reading as we discuss the key trends that are expected to shape the labor market in 2025 and beyond, as well as how to build a compensation strategy that responds and adapts to these conditions, and your organization’s needs. You’ll learn how to attract, retain, and motivate top talent to keep your organization running at its best – all through a competitive compensation strategy.
Key Trends Shaping the Labor Market in 2025
The first step to creating a competitive compensation strategy is understanding the current labor market this strategy will compete in. Here are the top three trends predicted to shape the 2025 labor market:
Easing Market Conditions – The market is easing back to normal with hiring returning to more sustainable levels and voluntary turnover rates declining. While unemployment has increased slightly, it still remains close to historic lows.
Growth Concentrated in Select Industries – While most industries continue to add jobs, their growth rates have slowed and a significant share of jobs added in 2023-2024 have been in just a few key sectors. Predominantly, healthcare and social assistance, government, and leisure and hospitality. Some industries are struggling, or experiencing minimal growth, and this is partially due to a talent shortage.
Talent Shortage – Limited growth in the labor force is restricting new job creation. While layoff rates remain low, the active talent pool isn’t expanding, creating an intense competition for talent that is driving wage growth.
By understanding these market dynamics and building your compensation strategy with them in mind, you are setting yourself up for competitive positioning, adaptability, and strategic decision-making. You’ll be able to align your pay with industry standards to attract top talent, while paying attention to high-growth sectors. You’ll be able to keep your strategy adaptable to changing market conditions, and ensure your compensation reflects your organization’s goals and values.
Compensation Benchmarking: A Tool to Build Your Compensation Strategy
Now that you have a comprehensive understanding of the current labor market’s climate, you can start building your compensation strategy with these conditions in mind. Methods such as compensation benchmarking can help you get started.
Compensation benchmarking is a process that compares an organization’s compensation practices, including salaries, bonuses, and benefits, against industry standards and competitor data. The goal is to ensure that the organization offers competitive pay and benefits to attract, retain, and motivate employees while remaining financially sustainable. There are several sources you can reference when conducting compensation benchmarking, but we recommend data from the Economic Research Organization. It compiles the most robust salary, cost of living, and executive compensation survey data available from thousands of small, medium, and large organizations.
When conducting compensation benchmarking:
Make regular updates to keep your compensation data up-to-date
Stay consistent in your practices
Utilize a broad data pool from diverse sources
Tailor benchmarking analyses to your organization’s specific needs and requirements
Adhere to legal and regulatory requirements when gathering and utilizing data
Communicate compensation decisions transparently to employees
Be Mindful of Pay Differentials When Building Your Compensation Strategy
You understand the current market as well as your organization’s place in it, but before you actually start building your compensation strategy, we need to cover one more touchpoint – pay differentials.
Pay differentials are variations in wages or salaries between employees performing similar or different jobs, and can arise due to a variety of legitimate factors. Some of these include job complexity, industry, location, experience, or shift differentials. However, unchecked or unexplained pay differentials can also lead to issues like wage inequality or discrimination claims, so be mindful.
To ensure your organization is employing ethical compensation practices and avoiding issues like wage inequality and discrimination claims, establish clear and transparent policies on how pay differentials are determined and communicate these transparently with employees. Conduct regular pay equity audits and align your compensation practices with market rates. Reward performance and merit fairly and if any unfair pay gaps are detected, mitigate them.
How to Build Your Compensation Strategy and Compensation Philosophy
Now, it’s time to start building your competitive compensation strategy and the first decision you have to make is if you want to lead, match, or lag market standards. This means offering compensation that is either above, consistent with, or below the median for your industry or region. The purpose of leading is to attract and retain top talent, especially in a competitive market or for roles that are critical. Matching aims to balance cost control with the ability to attract and retain qualified talent. Lagging is a cost-sensitive approach during times of financial difficulty, or when an organization offers strong non-monetary benefits.
All three approaches come with their own set of pros and cons, but choosing the right strategy for your organization comes down to its goals, culture, and values, current talent market conditions, and, of course, your organization’s financial position.
Your compensation positioning should align with your overall business strategy. For example, if your goal is rapid growth and innovation, leading the market might be necessary to attract the talent needed to achieve this. It’s also important to consider the available talent in your industry or region. If the talent pool is limited, leading might be necessary, while if there is a talent surplus, matching or even lagging might suffice. If your organization emphasizes a strong culture, work-life balance, or mission-driven work, you might be able to lag the market on compensation but still attract the right talent. And finally, your organization’s financial health is a critical factor that can’t be ignored. A strong financial position might allow you to lead the market, while budget constraints might necessitate a lagging approach – at least temporarily.
Finally, it’s important to define a compensation philosophy when building your compensation strategy that formally states your organization’s approach to compensation and provides a framework on how decisions regarding salary and rewards are based on. When designing your organization’s compensation philosophy, make sure that it aligns with your organizational values and culture, supports business objectives and goals, and considers the competition.
A well-defined compensation philosophy will help your organization establish a compensation strategy that supports its mission and strategic direction. It will also help attract and retain the right talent, while adhering to compliance by ensuring pay equity. A good compensation philosophy demonstrates and reinforces your organization’s commitment to providing fair and equitable compensation.
In today’s competitive market, having a compensation strategy that takes into consideration the current labor market and your organization’s goals and values is essential. Conducting regular market benchmarking using real-time compensation data as well as creating and updating your compensation philosophy will help you attract, retain, and motivate top talent.
If you need help updating your compensation strategy for 2025, our compensation advisors at Premier HR Solutions are here to help – click the link below to schedule a free consultation!