Compensation Planning: Strategies for Success

A well-designed compensation plan helps companies balance financial goals with the need to attract and retain top talent. Learn how strategic pay systems enhance employee satisfaction, boost productivity, and ensure legal compliance in today’s competitive landscape.

By Douglas Wade, Attorney

Email | Call (800) 484-4610

Have a quick question? We answered nearly 2000 FAQs.

Table of Contents

1. What does HR compensation planning mean?

2. The need for compensation planning in organizations

3. The components of compensation

4. What goals does compensation planning seek to achieve?

5. How does one go about creating a compensation plan?

6. In sum

What does HR compensation planning mean?

With careful planning, your company can come up with pay systems that are fair to workers and help the company reach its goals. What is compensation planning, what are its goals, and how is it implemented in real-world situations? Let’s investigate.

Let’s take a moment to define compensation before moving on to the compensation planning process. All monetary and non-monetary benefits that a worker receives as payment for their labor are combined to form compensation. Base salary, employee bonuses, stock options, and perks like parental leave, insurance, and pension plans are some examples of different forms of compensation. Later on, we’ll discuss this in further detail.

Employee salary is an essential component in attracting and retaining talent inside your organization, particularly in the context of the talent wars. It also directly affects the efficiency of your company. Nevertheless, less than 50% of businesses have a strategic compensation plan, according to a recent Payscale report.

Human Resources and/or a specialized Compensation & Benefits manager/department are in charge of compensation planning. It involves a calculated strategy for striking a balance between your business’s operating objectives and financial interests while drawing in, keeping, developing, and rewarding its workforce.

A compensation plan covers, among other things, how you pay your employees, the bonus structure of the business, and the dates on which your team is eligible for raises.

The need for compensation planning in organizations

To draw and keep top personnel, businesses require a strategic pay plan in order to stay competitive in their respective industries. Employers who don’t research their competitors and pay their employees whatever they want risk losing their best workers to rival businesses and receiving unqualified applicants for available positions.

PayScale’s 2021 Compensation Best Practices study states that hiring and retaining competent personnel is becoming more difficult than it has ever been for organizations. Many businesses have shifted to a strategic approach to pay and career progression prospects, together with improved perks and performance-based awards, in an effort to draw in long-term employment.

Furthermore, running a business without a defined budget for pay is a recipe for disaster for both the employer and the workforce. Employees may not be happy with the pay they are offered if choices about the budget for compensation are made without any oversight. They may then start to look for work elsewhere. Additionally, according to Gallup, turnover can cost a company 1.5–2 times the compensation of the departing employee. You won’t be able to reach your company’s financial objectives if too many employees are quitting.

There’s also the legal aspect of the issue. An example of an unfair pay practice that could land your company in hot water is paying different workers different amounts for doing the same work.

The components of compensation

Compensation consists of five elements. Another name for these components is a comprehensive incentives system. This approach takes into account every pay-related step a business takes to draw in and keep talent. The following are the five components:

Pay: Direct compensation, on its own, is the amount of money an employee is paid for their labor. Usually, this takes the form of an hourly income or basic salary. Bonuses and tips are also possible inclusions.

Well-being: You should provide a work atmosphere that encourages a good work-life balance for your staff members. Health and mental health plans, meditation apps, or workshops on how to deal with stress are some of the ways that compensation planning can support well-being.

Benefits and perks: Laws dictating what a firm must provide, such as paid time off, social security, and sick days, vary across countries. But many businesses decide to add more benefits to make sure they can hire and keep good employees. Examples include the ability to work remotely, on-site daycare centers, and dog-friendly workplaces.

Development: Lack of challenge or opportunity for advancement is the main reason employees leave their organizations, according to Indeed.com. Maintaining a strategy for internal development will keep your staff motivated and challenged. This will provide them with an incentive to remain with your organization.

Recognition: According to the same Indeed study, worker dissatisfaction with their current job is the fourth reason they start looking for other work. Workers want to feel that they are contributing to the organization’s success and that their efforts are having an effect. Making sure that your business honors exceptional effort is an essential part of a successful comprehensive incentives program.

What goals does compensation planning seek to achieve?

HR should start by understanding the objectives of compensation planning. Each goal should be accompanied by a key success metric. This will allow you to assess whether your organization has achieved the desired effect.

Goals for compensation planning should include:

Outlining how your company’s pay and compensation policies support your goals and operating costs, as well as your business strategy and competitiveness in the market.

Making sure you pay your workers fairly and honestly is part of compensation planning. It means reviewing your pay practices on a regular basis.

Drawing in capable individuals to work for your organization. Pay is an essential component of your employee value offer. In terms of basic pay, incentives, and perks, it makes you a competitive employer in the market.

Creating a workforce that is engaged. Workers who believe their efforts are valued and appreciated will work for your organization longer.

Boosting profits and productivity. Forbes reports that a contented staff produces 20% more and adds more to the profitability of the organization.

Encouraging the well-being of the team. Companies discovered that promoting a good work-life balance results in a cohesive team and high employee retention.

Companies have come to understand that fostering a good work-life balance is the key to a productive workforce and high employee retention rates.

Contributing to lower voluntary turnover and higher retention. Workers who are satisfied with their pay are less likely to quit.

How does one go about creating a compensation plan?

Describe or reevaluate your approach to compensation.

A compensation philosophy gives your company’s compensation decisions direction and clarity. It will form the cornerstone of your compensation strategy and the cornerstone of your approach to total compensation.

An overarching compensation philosophy can serve as a guide for future revisions. As you develop a new philosophy or modify an existing one, make sure it fits the culture, size, and resources of your company.

Conduct market and industry research

While creating a strategic compensation plan is a complex process, it shouldn’t be too difficult. By investigating and evaluating salaries and pay in the same industry for jobs that are comparable, HR will get off to a good start. Another name for this is salary benchmarking. There are two main ways for your team to do this:

Use tools such as Payscale, Glassdoor, LinkedIn Salary, and the U.S. Bureau of Labor Statistics to conduct your own study. You can also find information on job postings from competitors. To enable future review and analysis, compile all relevant information into a separate document.

Another option is to employ a different party to conduct market research on your company’s behalf. Companies like Deloitte and PwC, for instance, frequently have large data sets including information on salaries and pay both locally and internationally. Your team will be able to save time by obtaining this information from a third party. Also, compared to free tools, it will provide you with more precise compensation data.

Examine your internal pay information.

To make sure your current pay plan is still competitive, you will also need to collect data on it. Although it’s not required, some businesses have tools for compensation analysis that can arrange this information for you. Alternatively, your team can begin pulling data directly from your HRIS using a spreadsheet.

If employees are receiving considerably different salaries for the same position, it might also be a good idea to perform a pay equity analysis. Let’s say, for instance, that you recently recruited someone to fill the same position as you but at a greater wage. In that instance, in order to minimize turnover, you should make plans for bringing the current staff members up to speed.

Match your planning to your company’s objectives.

Your organization’s goals should be supported by your compensation plans. Your organization has a certain goal and vision, and the only way you can realize it is by drawing in, inspiring, and keeping the best personnel.

In light of this, one of your organization’s biggest costs will be overall compensation. That’s why you need to consider your resources while designing a compensation plan.

It might be difficult for certain HR professionals to handle the complex process of strategic compensation planning. Acquiring the information and abilities required for compensation planning that generates business effect will be advantageous to you and your department. For HR professionals, earning a Compensation & Benefits certification is an excellent place to start.

Begin establishing grade levels and pay ranges.

Developing a pay structure for your company consists of two steps. Firstly, by establishing a pay range. This aids companies in controlling their benefit costs and ensuring that workers receive equal compensation. Employers are required to provide rational justifications for the salaries they give their employees. Establishing pay ranges facilitates that. Work your way down to the positions that are most important to the mission and/or have a large staff. If you have salary ranges in place already, go over them and see what your team can do better.

You should include salary grades within the wage range. A pay arrangement known as a salary grade scale places employees in pay levels according to their experiences. Consider the scenario where you appoint two HR managers who share the same title and duties, but only one of them has five years’ more experience. With compensation grades, it’s easier to see why one candidate with more experience would command a higher income than another with the same job title.

A key method for establishing reasonable pay ranges is job evaluation, which is defined as “the systematic process of estimating the relative value of different positions within an organization.”

Keep track of your salary budget.

The US Bureau of Labor Statistics states that although compensation is your biggest asset, it also accounts for an average of 70.8% of employer expenses. It goes without saying that controlling your compensation budget is essential to the financial health of your business. You can more precisely estimate your compensation budget with the aid of compensation planning. You can then determine which areas you are overpaying or underspending in.

If you only have a few employees, you can use an Excel sheet to keep track of their pay and other earnings. On the other hand, a lot of specialized systems for compensation management can track your employees’ pay, incentives, and perks in addition to providing real-time data in an intuitive dashboard.

Evaluate the planning process and make the necessary adjustments.

After all of your hard work to develop a strong compensation plan, you should establish a framework to facilitate ongoing evaluation and the identification of areas for development. To ensure that you can provide a competitive total pay package, be sure to gather input from stakeholders in the business, such as managers, staff, and even potential candidates.

Also, you want to conduct a yearly or biannual competitor study and adjust your pay scale appropriately.

In sum

Compensation planning is a sophisticated procedure that strikes a balance between an organization’s operating objectives and financial interests while luring, keeping, developing, and rewarding its workforce. A strategic compensation plan also takes into account the company’s bonus system, how you pay your employees, and the circumstances under which they are eligible for raises.

This may seem like a lot of extra work for your HR department, but it will pay off in the end by helping your company build a system that complies with regulations, is equitable, and can compete in your field.

Have a quick question? We answered nearly 2000 FAQs.

See all blogs: Business | Corporate | Employment

Most recent blogs:

What Is a Pay Stub and Why It Matters for Employees and Employers

Pay stubs detail wages, deductions, and taxes, helping employees track earnings and employers comply with state payroll regulations. They support loan applications, reduce payroll disputes, and are required or regulated in many states across the U.S.

What Are the Proper Steps to Fire Someone in California?

Terminating an employee in California requires following legal guidelines, maintaining professionalism, and ensuring proper documentation. This guide outlines lawful termination reasons, key procedural steps, and best practices to reduce legal and financial risks.

How Long Does a Misdemeanor Stay on Your Record in California?

A misdemeanor conviction in California stays on public record indefinitely but may be eligible for expungement under specific conditions. Background checks typically show misdemeanor convictions for seven years, but expungement can remove them from most employment screenings.

How Do I Prepare a Script for Firing Someone?

Learn the professional steps for firing an employee, from preparing a script to handling emotional reactions. Understand the proper procedures, reasons, and communication techniques to ensure a smooth and respectful termination.

What Is Involved in a PAGA Lawsuit?

PAGA lawsuits allow employees to file claims for labor code violations on behalf of themselves and others in California. Employers can face significant penalties, prompting many to settle to avoid costly judgments.

What Are the Rules for 10-Minute Breaks?

California law mandates two paid 10-minute breaks and a 30-minute unpaid meal break for an eight-hour shift. Employers who fail to provide required breaks may face penalties, and employees can seek legal action for compensation.

Can I Work Six Hours Without a Lunch Break?

California law requires a 30-minute meal break for shifts over five hours, but employees can waive it if working exactly six hours. Employers must comply with strict labor laws, ensuring uninterrupted meal breaks and legal protections for workers.

What Can I Do If My Employer Didn’t Pay Me on Payday?

Employers in California must pay workers on time, or they may face penalties of up to 30 days' wages for delays. Employees can file wage claims, seek legal assistance, or report violations to the California Labor Commissioner's Office for unpaid wages.

What Qualifies as a Hostile Work Environment in California?

Employees in California facing severe or persistent harassment based on protected traits may have legal options under state and federal laws. Filing a complaint with the California Civil Rights Department or consulting an employment attorney can help protect workplace rights and seek compensation.

When Is a Doctor’s Note for Work Required in California?

California employers generally cannot demand a doctor's note for sick leave, but exceptions exist under specific laws and circumstances. Legal conflicts persist, and employers may require medical documentation for disability accommodations, FMLA leave, or other valid reasons.

What Does California Law Say About Final Paycheck Rules?

California law mandates that final paychecks be provided promptly, with termination pay due immediately and resignation pay within 72 hours. Employers must include all owed wages, expenses, and accrued benefits, with penalties for late or incomplete payments.

Can an Employer Deny a Doctor’s Note?

An employer may deny a doctor's note if the absence does not qualify for legal protections under disability or family leave laws. Employers must evaluate medical documentation, employee statements, and applicable laws before considering disciplinary action.

How Much Can You Sue an Employer for Misclassification?

An employer's misclassification tactics can deny you fair wages, benefits, and legal protections. You may be entitled to compensation, including back pay, retirement contributions, and potential punitive damages, by pursuing legal action.

How Serious Is an EEOC Complaint?

An EEOC complaint can lead to costly legal battles, reputational damage, and mandatory policy changes for businesses. Employers may face financial penalties, investigations, and compliance requirements, impacting operations and workforce morale.

Do You Have Sample Letters for Termination of a Contract?

A contract termination letter formally ends a business agreement while protecting interests. This guide outlines key steps, considerations, and sample letters.

What Is a WARN Notice in California?

The California WARN Act requires businesses with 75 or more employees to provide 60 days' notice before mass layoffs, plant closures, or relocations. Noncompliance can lead to fines, back pay, and healthcare costs, making adherence essential for legal and financial stability.

What Is FICA and How Does It Impact Payroll Taxes?

FICA is a payroll tax that funds Social Security and Medicare, requiring contributions from both employers and employees. Employers must withhold, match, and submit FICA taxes while following IRS guidelines on deposit schedules, wage bases, and additional Medicare tax requirements.

What Is At-Will Employment and How Does It Impact Employee Rights?

At-will employment allows employers and employees to end their working relationship at any time without cause, impacting job security and flexibility. While it provides businesses with staffing flexibility, employees face fewer legal protections and potential job instability.

Employers Should Exercise Caution When Terminating Employees After Disability Leave

Employers should exercise great caution when considering whether to terminate an employee who is on leave. Employers are cautioned not to automatically terminate employment solely because an employee has used or exhausted their disability leave entitlement.

What Is FUTA? 2025 Rates and How to Calculate FUTA Tax

The Federal Unemployment Tax Act (FUTA) imposes a payroll tax on businesses that have employees, collecting revenue that funds unemployment benefits.

What Is the Difference Between a 1099 Contractor and an Employee?

A 1099 contractor operates independently, covering their own taxes and expenses, while a W-2 employee receives benefits and employer tax contributions. Misclassifying workers can result in fines, making it essential to assess control, financial arrangement, and job nature before classification.

How Do Contractors Typically Get Paid? Payment Methods and Legal Guidelines

Contractors receive payments through direct deposits, checks, payroll services, or online transfers, following legal and tax regulations. Proper classification, documented agreements, and compliance with IRS reporting ensure smooth transactions and avoid penalties.

What Is the Definition of a Non-Exempt Employee?

Non-exempt employees are entitled to overtime pay and must earn at least the federal minimum wage under FLSA regulations. Unlike exempt workers, they are typically paid hourly and receive 1.5 times their wage for extra hours.

Can Union Representatives Be Present at Disciplinary Meetings?

Employees have the right to request a union representative during investigative interviews that may lead to disciplinary action. Employers must comply or face potential labor law violations under the National Labor Relations Act.

What Is an FTE (Full-Time Equivalent)?

A full-time equivalent (FTE) measures employee work hours, combining part-time and full-time schedules into a standardized metric. Businesses use FTE calculations for staffing, budgeting, and compliance with regulations like the Affordable Care Act.

What Are the Signs of Unfair Treatment at Work?

Unfair treatment at work includes discrimination, pay gaps, and biased promotions, impacting employees' well-being and career growth. Recognizing signs like harassment, favoritism, and wrongful termination helps employees take action against workplace discrimination.

What Is a Statutory Employee on a W-2 Form?

A statutory employee is a self-employed worker classified as an employee for tax withholding purposes, receiving a W-2 instead of a 1099-MISC. These workers can deduct business expenses on Schedule C but typically do not receive traditional employee benefits like health insurance or retirement plans.

What Laws Protect Employees From Workplace Bullying

270