A compensation strategy is the basic framework used by a company to decide how it remunerates its employees — including everything from base and variable pay, bonuses, raises, paid time off, 401(k)s, healthcare benefits, and reimbursements. Compensation strategies also contain guidelines for how a company evaluates its employees when determining compensations.

A compensation strategy has a massive impact on organizational costs, and therefore requires approval from upper management. Once approved, the strategy is used by hiring teams and managers to streamline efforts and standardize the recruitment process. The best compensation strategies reflect a company’s culture and business goals, ensure equity in pay, and provide assurance to top brass that personnel expenses are under control.