Compensation Planning in 7 Actionable Steps

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Compensation Planning in 7 Actionable Steps

Thorough compensation planning allows your organization to create compensation systems that reward employees fairly and support business goals. What exactly is compensation planning, what are its objectives, and how do you go about compensation planning in practice? Let’s find out.

Contents
What is compensation planning in HR?
Why organizations need compensation planning
Elements of compensation
What are the objectives of compensation planning?
What are the steps in compensation planning?

What is compensation planning in HR?

Before we get into the compensation planning process, let’s quickly discuss what compensation is. Compensation is considered the sum of cash and non-cash benefits that an employee receives for their work. Different types of compensation include base pay, company bonuses, stock options, and benefits like insurance, pension programs, and parental leave. We’ll get into this in more detail later.

In the so-called war on talent, employee compensation plays an integral part in how you attract and retain talent in your company. It also has a direct impact on your organization’s productivity. Even so, a recent study by Payscale found that less than 50% of companies have a strategic compensation plan. 

Compensation planning is the responsibility of Human Resources and/or a dedicated Compensation & Benefits manager/department. It includes a strategic approach to balancing your company’s financial interests and operating goals while attracting, retaining, growing, and rewarding its employees.

A compensation plan also includes how you pay your workers, the company’s bonus structure, and when your team is eligible for raises, among other things.

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Compensation Planning

Why organizations need compensation planning

Organizations need a strategic compensation plan to remain competitive within their markets and attract and retain top talent. Employers who don’t do a competitor analysis and pay their staff whatever they feel like will lose their employees to other companies and won’t get suitable applications for open roles. 

According to PayScale’s 2021 Compensation Best Practices report, businesses currently have a more challenging time finding and retaining skilled workers than ever before. In order to attract long-term hires to the team, many companies have moved towards a strategic approach to compensation and career growth opportunities, as well as better benefits and rewards for performance.

Additionally, managing a company without a predetermined compensation budget is a disaster waiting to happen – both for the employer and employees. When compensation budget decisions are made without oversight, employees may be unhappy with what they are offered for their work and start to look elsewhere. According to Gallup, turnover can also cost an organization 1.5-2 times the employee’s salary. If too many people are leaving your organization, you won’t be able to meet your company’s financial goals. 

There is the legal side of things as well. For example, if you unfairly pay employees a different salary for the same work, your organization can get in trouble for equal pay violations.

Elements of compensation

Five components make up compensation. These elements are also referred to as a total rewards system. This system incorporates all the compensation-related actions an employer takes while attracting and retaining talent. The five elements are:

  • Compensation: By itself, direct compensation refers to the pay an employee receives for their work. This is typically in the form of a base salary or hourly wage. It can also include bonuses and tips.
  • Well-being: The work environment you create for your employees should promote a healthy balance between work and personal time. Well-being in compensation planning is promoted by covering the costs of gym memberships, offering comprehensive health and mental care plans, meditation apps, or stress reduction workshops, as examples.
  • Benefits & perks: Different countries have different laws mandating what an organization must cover, like sick days, social security, and paid vacation. However, many companies choose to add more perks to make sure they can attract and retain their workers. Examples include remote working possibilities, onsight child care facilities, and dog-friendly offices. 
  • Development: According to Indeed.com, the leading reason talent leaves their companies is due to a lack of challenge or growth opportunities. Having an internal development strategy will keep your employees challenged and engaged. This will give them a reason to stay with your organization. 
  • Recognition: In the same study by Indeed, the fourth reason workers start to look for other opportunities is because of insufficient recognition. Employees want to know that their work is not only important to the success of the organization but that they are also making an impact. Ensuring that your company recognizes outstanding work is an essential step in an effective total rewards strategy

What are the objectives of compensation planning?

Understanding the goals of compensation planning is a good place for HR to begin. A key success metric should define each objective. This way, you’ll know if your organization is making the right impact. 

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Compensation planning objectives should include:

  • Defining how your organization’s pay and compensation principles reinforce your business strategy, competitiveness within the market, and operating costs and objectives. 
  • Ensuring fair and equitable compensation. Compensation planning involves a periodical review of compensation practices and making sure you reward employees in a fair and honest way.
  • Attracting qualified candidates to join your company. Compensation is a crucial part of your employee value proposition. It helps you become a competitive employer in the marketplace in terms of base pay, incentives, and benefits.
  • Helping to create an engaged workforce. Employees who feel that their efforts are acknowledged and rewarded will stay longer at your company.
  • Increasing productivity and profitability. According to Forbes, when your team is happy, they are also 20% more productive and contribute more to the company’s profitability. 
  • Promoting team wellness. Employers realized that encouraging a healthy work and life balance leads to a productive team and excellent employee retention.

What are the steps in compensation planning?

1. Define or review your compensation philosophy

A compensation philosophy provides direction and clarity for making compensation decisions within your company. It is the foundation of your approach to total compensation and will serve as the base of your compensation plan.

Compensation philosophy gives you a framework to come back to as you make updates later down the road. Whether you already have a philosophy or you’re making one from scratch, make sure it aligns with your organization’s culture, size, and resources.

2. Do your industry/market research 

Developing a strategic compensation plan is complex, but it shouldn’t be overwhelming. HR will start on the right foot by researching and analyzing salaries and compensation in the same industry for similar jobs. This is also known as salary benchmarking. There are two primary ways your team can go about this:

  • Do the research yourself with resources like Payscale, LinkedIn Salary and Glassdoor, The U.S. Bureau of Labor Statistics, and information on competitors’ job postings. Add all the relevant information in a separate document so you can come back to it later for further analysis.
  • You can also hire a third party to perform market analysis on your organization’s behalf. For example, companies such as Deloitte and PwC typically have big data sets that include international and local salaries and compensation information. Having a third party provide you with this information will save your team time. It will also give you more accurate compensation data than free tools.

3. Analyze your internal compensation data

You will also need to gather data on your existing compensation structure to ensure it is still competitive. Some companies have compensation analysis tools that can organize this data for you, but it’s not necessary. Instead, your team can start using a spreadsheet and manually take information out of your HRIS.

It may also be wise to conduct a pay equity analysis to make sure staff with the same job aren’t getting paid significantly differently. For example, suppose you recently hired someone with a higher salary for the same role you already have. In that case, you should plan for getting the existing employees to the same level to prevent turnover.

4. Align your planning with your business goals 

Your compensation planning should support your organizational goals. As a company, you have a specific mission and vision, and you’ll only be able to achieve it by attracting, motivating, and retaining the right employees.

With that in mind, total compensation is one of the highest expenses you’ll have as an organization. That’s why you must create a compensation package with your resources in mind.

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5. Start creating salary ranges and grades

There are two parts to creating a salary structure in your organization. The first is by creating a salary range. This helps employers manage their compensation expenses and guarantee that pay is equal among employees. Employers must have logical explanations for why they pay their staff a certain amount. Determining salary ranges helps achieve that. Start with the mission-critical roles or positions where you have many employees. If you already have salary ranges in place, review them to determine what improvements your team can make.

Within the salary range, you’ll want to add salary grades. A salary grade scale is a pay format where employees are placed within a pay level based on their experiences. For example, you hire two HR managers with the same title and responsibilities, but one candidate has five years more experience. You would pay the more experienced candidate more, and salary grades help classify why you’d pay someone with the same job title more than another.

Job evaluation, “the systematic process of determining the relative value of different jobs in an organization”, is an indispensable tool for creating fair salary ranges.

6. Manage your compensation budget 

According to the US Bureau of Labor Statistics, compensation-related costs are on average 70.8% of the employer’s expenses while also being your greatest asset. As you can imagine, managing your compensation budget is an integral part of your company’s financial well-being. Compensation planning will help you accurately estimate your compensation budget. From that point, you can see if you are overspending or underspending in certain areas. 

If you have a small team, you can manually track the salaries and compensation in an Excel sheet. However, many dedicated compensation management tools will not only track your employees’ salaries, bonuses, and benefits, but they will also be able to deliver real-time data in an easy-to-use dashboard. 

7. Monitor the planning execution and make adjustments

Once you’ve done all this hard work to have a fantastic compensation strategy in place, you’ll want to create a framework to support continuous monitoring and spotting opportunities for improvement. Make sure to get feedback from company stakeholders such as managers, employees, or even applicants so that you know you can offer a competitive total compensation package.

You should also do competitor analysis yearly or bi-yearly and update your salary structure accordingly. 

Over to you

Compensation planning is a complex process that balances a company’s financial interests and operating goals while attracting, retaining, growing, and rewarding its employees. A strategic compensation plan also considers how you pay your workers, the company’s bonus structure, and when your staff is eligible for raises.

While it seems like a lot of work for your HR team, in the long run, it helps you ensure that your organization is creating a system that is legal, fair, and competitive within your industry. 

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