What is compensation planning? Benefits & actionable steps
More than 47 million* US workers quit their jobs in 2021, and over 63%* of them reportedly resigned due to low pay. Despite concerns about a recession, millions of people are still moving on to new opportunities each month.
Recruiting, hiring, and onboarding employees is also expensive — replacing a staff member costs from half to two times their annual salary, and voluntary turnover costs US businesses over US$1 trillion* each year.
Losing top talent is about more than just money; it also means missing out on potential leaders, innovative thinkers, and problem solvers. That’s just too many opportunities walking out of the door. And putting together thorough compensation plans and offering employees fair, competitive salaries is one of the best ways to attract and retain top talent.
If you’re in the midst of your compensation planning process, this guide is here to help you. We’ll cover:
- What compensation planning is
- Why compensation planning is important
- The steps businesses should follow to develop and implement compensation plans
What is compensation planning?
Compensation planning is the process of developing a compensation strategy that can help attract, motivate, and retain the best talent. And well-thought-out compensation plans aren’t only about salary range — they also outline variable compensation, healthcare benefits, paid holidays, and other perks while upholding company culture, values, and strategies.
Compensation planning encompasses many elements that companies should consider to deliver fair and competitive packages that align with their budgets and industries.
Common elements of compensation plans include:
- Annual salary
- Incentives (i.e., bonuses)
- Lifestyle and remote work stipends
- Paid leave
- Sick leave
- Professional development opportunities
Compensation strategies also account for:
- Current employee salaries vs. market benchmarks
- When employees are eligible for pay raises or bonuses
- What giving out pay raises or bonuses should look like
Why compensation planning is important
Compensation is the first thing over 76% of employees consider when accepting a job offer. And direct compensation also has a big impact on how existing employees perform; low pay often results in reduced productivity, poor employee engagement, and a lack of motivation. In contrast, well-paid employees are often happy with their jobs and likely to stick around.
Compensation planning is essential for many reasons — but let’s break down the top four:
- Increased performance & productivity
- Improved employee engagement
- Higher retention rate
- Top talent recruitment
Increased performance & productivity
When employees aren’t paid fairly, they can feel unmotivated and are likely to move on when a better opportunity comes. And even when employees do stay with their company despite poor pay practices, they likely won’t work efficiently or feel invested in their performance — and may even build up resentment.
On the other hand, employees who are satisfied with their compensation are much more invested in company success. They work harder to help their team hit targets and feel happier and more valued in their positions. That means they’re more motivated to go above and beyond and achieve great results for their company.
And while compensation isn’t the only factor contributing to performance and productivity, it’s one of the most important.
Improved employee engagement
Employee engagement is more than just employees interacting with each other and feeling happy in their workplace. It extends to how committed staff members are to their work, how passionate they feel about what they’re doing, and how aligned they feel with the company’s values.
Great employee engagement is essential for individuals and their employers to thrive. People are generally much happier, motivated, and fulfilled when they’re engaged with their work. On the other hand, companies with engaged employees enjoy more productive workers, a richer company culture, and fantastic retention rates.
Over 73% of companies believe that compensation is a key driver of employee engagement. Of course, a competitive compensation plan can provide people with a sense of job satisfaction and happiness, but it also goes further than that.
A good compensation plan ensures employees know they play critical roles in your organization and feel that their ideas and contributions have a meaningful impact on company growth.
And when employees know their managers are invested in helping them excel and see leadership putting together career progression frameworks, they feel more connected to their workplaces and excited about what they can achieve — leading to higher engagement.
Higher retention rate
In the age of The Great Resignation and The Great Reshuffle, employee retention is a major concern for companies. In one report, the percentage of voluntary turnover stood at 36% in 2021 — a significant increase compared with previous years.
Over 44% of companies also reported insufficient compensation as a primary reason they lose employees. And with inflation being a central concern in 2022, employees are likely to look for new opportunities if their jobs don’t cover their expenses and allow them to pursue their personal interests.
To tackle this problem, it’s crucial to build an employee compensation plan that accounts for inflation and industry benchmarks, besides allowing staff members to understand the logic behind their current base salary and potential for pay raises, bonuses, and promotions.
As a result, your people will feel that the company is fair and transparent with them, and will be more likely to stay in their positions longer.
Top talent recruitment
Companies are always looking for talented individuals — even though many organizations are laying people off, the job market is still going strong.
In this highly competitive labor market, you must ensure that you’re fairly compensating all your employees — not just new hires. Otherwise, they might take a better offer from one of your competitors.
Remember: compensation packages aren’t just about salaries. You can make your company’s compensation program more competitive by including incentives like equity, healthcare, paid leave, and development opportunities.
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6 steps to developing & implementing a compensation plan
Implementing your compensation plan the right way is just as important as building and scaling it. That’s why we’ve listed the main steps businesses must follow to develop and implement their compensation plans. They are:
- Defining your company’s compensation philosophy
- Outlining compensation goals & breaking them down into objectives
- Researching & gathering relevant data
- Appointing a compensation manager
- Building a career progression framework
- Approving & implementing your compensation plan
1. Define your company’s compensation philosophy
To put together an excellent compensation plan, consider your people’s wants and needs. What you’re offering should be attractive enough to recruit top talent, fair enough to motivate current staff to stick around, and reasonable enough to fit your budget. And the first step is to define your company’s compensation philosophy.
Suppose you want to set US$70,000 as minimum annual compensation for all your people; in this case, your company’s compensation philosophy should explain the reasoning behind your decision. It should also define how employee salaries increase over time and what milestones they need to reach to get raises or bonuses.
Reflecting on and defining your compensation philosophy will help you understand:
- How to compensate employees in different departments and seniority levels.
- What people need to achieve to get a raise or promotion — and how often they should happen. Tools like Leapsome’s promotion management software can help you create streamlined, effective promotion processes.
- How your salaries compare with industry benchmarks and at what range you want to be (e.g., top 25%).
- How your compensation plan stacks up when you compare it with those of competitors.
Here are a few additional factors to keep in mind when building your company’s compensation philosophy:
- Industry type
- Company size
- Budget and financial considerations
- Company goals
- Compensation packages offered by competitors
Once you’ve established your company’s compensation philosophy, you can use it to build, analyze, and optimize your compensation plan.
2. Outline compensation goals & break them down into objectives
Once you’ve figured out your company’s compensation philosophy, the next step is choosing related goals and breaking them down into specific, measurable objectives.
Some of the broader goals often associated with compensation planning are:
- Attracting top talent
- Retaining and rewarding your people
- Increasing motivation
Let’s say your primary goal this quarter is to retain at least 85% of your people. Here’s how you’d break that down into measurable objectives that could help you reach your goal:
- Send out an employee engagement survey and assess how employees feel about their compensation
- Gather regular employee feedback with monthly employee pulse surveys
- Carry out exit surveys when team members leave to identify improvement opportunities for your company
As you outline goals and break them down into objectives, you’ll find it easier to develop and implement a well-balanced compensation strategy.
3. Research benchmarks & gather relevant data
While creating your compensation strategy, research what your competitors offer and familiarize yourself with market trends. If other companies in your industry pay senior Java developers US$100,000/year, but your yearly compensation package for the same position is US$70,000, you’ll have trouble attracting top talent.
When researching, ensure your sources are credible; inaccurate data can result in companies:
- Looking unprofessional
- Offering unattractive compensation packages
- Losing top talent
- Building a toxic workplace culture
4. Appoint a compensation manager
Hiring a compensation manager makes developing an excellent compensation plan much simpler for companies. These professionals are responsible for:
- Gathering and researching compensation data
- Making sure their company’s compensation plan is fair
- Aligning compensation with DEI best practices
- Managing the program’s development, implementation, and admin
- Ensuring compliance with compensation laws and regulations
If you think you could benefit from working with a compensation manager but aren’t ready to hire a full-time team member, you can:
- Collaborate with current HR/People Ops managers
- Hire an HR freelancer or consultant
- Bring someone on board on a part-time basis
5. Build a career progression framework
Once you’ve built the foundation of your compensation plan, the next step is creating a career progression framework (also known as a development framework) for every department in your company — that is, if you don’t have one yet.
Let’s consider a company’s marketing department at three seniority levels:
- Content Marketing Associate
- Performance Marketing Associate
- Social Media Associate
- Senior Content Marketing Manager
- Senior Performance Marketing Manager
- Senior Social Media Manager
- Content Marketing Lead
- Performance Marketing Lead
- Social Media Lead
When you’re done organizing your career progression framework, compare your role-based compensation packages with the research conducted in step three. It’s important to compare what you’re paying your employees now vs. industry benchmarks vs. employee expectations, so you develop a pay structure that’s both effective and logical.
Your career progression framework should be based on a skills matrix system for each role, ensuring you promote employees fairly over time and identify development opportunities.
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6. Approve & implement your compensation plan
It’s almost time to put your compensation plan into action! But first, ensure it’s compliant with state, local, and federal compensation laws and regulations.
Once that’s done, review your plan with upper management and C-level executives to get it approved. Afterwards, communicate it to all employees to ensure transparency — and likely make team members feel excited and more engaged too!
A word of warning: Implementing a compensation plan usually means discovering some people aren’t properly compensated. In this case, communicate raises and promotions to each affected individual.
As the labor market evolves, it’s critical to review and modify your plan, updating your pay structure so that your people remain satisfied with their compensation packages.
Create a competitive & fair compensation strategy
A great compensation plan should ensure employees are paid fairly, while factoring in industry pay benchmarks, benefits, and company budgets. Building and implementing a compensation strategy won’t just help you figure out how much to pay your employees — it’ll also help you attract and retain top talent.
It may seem daunting, but companies can simplify the compensation planning process with the right tools. Leapsome’s people enablement and compensation management tool helps companies build a streamlined compensation process for an equitable, transparent, and consistent compensation experience.
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