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What Is Target Compensation?

What Is Target Compensation?

Organizations usually take one of four major approaches when talking about pay. 

They may choose to be silent, negotiating individual salaries in clouds of secrecy and leaving job posts as vague as possible. They may promise the moon by talking about amounts that could technically be possible but are rarely achieved. 

They might do the opposite and undershoot by forgetting to factor in things like overtime, bonuses, and commissions. And finally, some organizations may add salary ranges to job descriptions and leave it to candidates to figure out “how much they’re worth”. 

All four of these approaches are flawed. Wide ranges can lead applicants to falsely assume they are at the top of the range. Undershooting can limit your applicant pool to less qualified candidates. 

Promising the moon can lead to disappointment and high turnover rates. Lack of transparency can lead to general feelings of distrust and wasted time for everyone. 

Although there is no perfect way to talk about pay, there is a fifth and better way– target compensation. 

What is Target Compensation?

Target Compensation is what an organization believes, in good faith, a reasonably good performer will earn in a given role. It includes the base pay for the position as well as additional forms of compensation, including variable or incentive-based pay, such as bonuses, overtime, commissions, and more. 

 

Three Factors of Target Compensation

  1. Base Pay: The guaranteed gross income. This is the minimum salary employees will receive. 

  2. Variable Compensation: This incentive based pay is earned if the employee or team meets their goals over a set period of time. Variable compensation goals will look different for every role. At BerniePortal, we refer to variable compensation as ‘success shares.’ This language helps us promote the idea that when we each do our part to help the organization meet its goals, we win together and get to share in that success. 

  3. Overtime & Seasonal Considerations: If you know employees will likely work overtime in the busy periods, you should factor that compensation into the target compensation. 

Try this language: 

Keep in mind that some states have enacted specific pay transparency laws that may affect how target compensation looks at your organization. Check out our blog to learn about your state’s laws. 

 

Why You Should Use Target Compensation

Target compensation makes recruiting easier. Candidates typically have their own target compensation in mind when looking for a job, and setting a base pay with the possibility of incentives can help you attract more qualified, driven, and serious candidates. 

Target compensation also sets high expectations for employees. When employees know there is a monetary reward for hard work, they are more likely to feel incentivized to perform at 100%. 

Additionally, target compensation provides organizations with a more flexible expense structure. During quarters where your organization is not meeting its goals, eliminating that variable compensation expense can help you manage your budget and protect your business when it encounters difficult times.

For more information on target compensation, check out our HR Party of One episode on choosing the right salary for your employees.  

 

Additional Resources

You can stay informed, educated, and up to date with important HR topics using BerniePortal’s comprehensive resources:

  • BernieU—free online HR courses, approved for SHRM and HRCI recertification credit
  • BerniePortal Blog—a one-stop shop for HR industry news
  • HR Glossary—featuring the most common HR terms, acronyms, and compliance
  • Resource Library—essential guides covering a comprehensive list of HR topics
  • HR Party of One—our popular YouTube series and podcast, covering emerging HR trends and enduring HR topics

 

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