From providing a catalyst for employee performance to helping you remain compliant with various equal pay and financial laws, compensation planning helps organizations in a wide variety of ways. In this article, PeopleFluent Product Marketing Manager Katie Coleman takes a look at the benefits of compensation planning, before providing seven tips for creating a successful compensation plan. You won’t want to miss them!

The 5 Main Benefits of Compensation Planning

Having a comprehensive strategy for how you pay and reward your employees is unequivocally a worthwhile investment of time and resources, establishing clarity for employers and employees alike. Let’s take a look at some of the main benefits of using compensation planning.

1) Compensation Planning Helps You Attract the Best—And Keep Them

Compensation is about so much more than just salary. It’s worth remembering that your current and future employees can be easily tempted away by organizations with a better approach to benefits and incentives. For example, a recent survey featured in Fortune found that around 59% of employees say they’re willing to give up some salary in order to get better healthcare benefits.

A better overall compensation package is also a solid retention strategy. MetLife research found that employees are 1.3x more likely to remain loyal to their employer and to be engaged by their work if they’re satisfied with their benefits package. Your compensation planning strategy should additionally encompass:

• Flexible work options
• Career development
• Wellbeing benefits
• A culture of inclusion and recognition

Employees also increasingly seek personalized rewards that align with their values. Organizations must respond by becoming more transparent about their compensation structures, and they must consider adopting pay-for-performance models.

LEARN ABOUT PERSONALIZED REWARDS | ‘How Personalized Compensation Incentives Enhance Your Total Rewards Strategy’

2) Compensation Planning Improves Employee Productivity

When your total rewards approach is tied to performance, and you also take the time to explain the different ways employees can strive towards excellence, you will likely increase productivity, quality of work, and overall performance. Returning again to MetLife’s research, it found that employees were 1.2x more likely to feel more productive if they were satisfied with their benefits package.

3) Compensation Planning Establishes Your Commitment to Equity and Fairness

We mentioned above that a modern compensation planning strategy should encompass being part of a culture of inclusion—and compensation planning itself can play a part in demonstrating your inclusive and equitable values. If you’re transparent about your strategy, you will generate proof that employees are paid fairly and equitably based on their roles, skills, and experience. You will also greatly reduce the risk of discrimination and the legal issues that come with it, while cultivating a sense of trust among your employees.

4) Compensation Planning Helps You Control Costs

Careful planning can add much-needed structure to the potential chaos of compensation. If certain teams or individuals are found to be overpaid, the remedy rarely involves paying those overpaid parties less: more often than not, you’ll end up boosting the pay of other employees in the same bracket to even things out, which can be an expensive measure. Compensation planning stops you from creating such problems in the first place, and can ensure that appropriate salary ranges are determined based on the best available data.

5) Compensation Planning Cements Compliant Practices

Organizations have various legal requirements related to pay benefits, pay equity, and other compensation-related issues. The consequences of non-compliance can be highly problematic: organizations can be fined, may lose contracts, and often see a reputation hit. The process and tools used to manage compensation planning can help organizations comply with these laws, ensuring that illegal pay practices aren’t overlooked or allowed to develop unchecked.

KEEP LEARNING ABOUT COMPLIANCE | ‘7 Best Practices for Implementing Pay Transparency’

Quick Tips for Compensation Planning

Now that we understand why compensation planning is a positive addition to your strategic toolbox, it’s time to look at how you can get the most out of it.

1) Use Organizational Goals as Your Lodestone

Is your organization guided by growth, by innovation, by being a place people want to stay at, or by being a business that keeps costs predictable? These philosophies and the goals you define to achieve them must be aligned with your pay strategy, backed by key performance indicators (KPIs), and capable of actively reinforcing the desired behaviors and outcomes dictated by your vision. For example:

• Growth KPIs could be revenue generated, sign ups, new markets entered, customers engaged, increased customer lifetime value, and number of engaged sales leads.
• Innovation KPIs could include prototypes built, experiments run, data points collected, products brought to market, ideas contributed, time saved, and many more.
• Your organization’s retention KPIs could include employee retention rate, turnover rate, internal promotion rate, absenteeism, employee satisfaction and happiness scores, among others. In this context, you’d be attempting to prove that these KPIs are positively influenced by your compensation planning efforts.
• A cost-management-focused organization may consider improvements in budget variance, cost overrun, spend under management, and similar KPIs in alignment with their compensation planning efforts.

2) Lay the Groundwork for Streamlined Cycle Planning

Are you regularly performing system refreshes and testing that your file feeds successfully deliver the right employee information in a timely and accurate manner? This is an essential activity that ensures you make decisions based on up-to-date data and that everything is configured to reflect current organizational goals, market conditions, and employee needs.

3) Balance Internal Equity and External Competitiveness

Does your organization offer an attractive enough proposition that gets the best talent in the door? And once there, are people keen to stay within the fair and competitive pay structure you’ve built for them? Getting compensation right involves benchmarking and balancing individual salaries against internal roles and external market rates.

Your software compensation platforms and market research efforts should help you make these determinations. You need to easily understand how different roles within your organization are compensated, and you should consult public (e.g., Bureau of Labor Statistics) and commercially available compensation databases.

LEARN MORE ABOUT BENCHMARKING | ‘How to Benchmark Compensation in 3 Easy Steps’

4) Have a Pay Audit Schedule

Do you conduct regular pay audits? Just as your systems require regular tuning, you will need to run periodic checks to ensure that the whole process is having the desired results, and that you’re controlling for all factors. Audits should be scheduled to uncover gender, race, or tenure-related disparities, thereby prompting proactive corrective action. It’s always better to find and correct these issues yourself—equitable pay is a compliance requirement in certain states, countries, or when working with certain governmental departments, and the disparity can become larger and more complex over time.

5) Communicate the Value Beyond Base Pay

Do your employees appreciate the full value of their compensation package? Focusing exclusively on base pay can give the impression that what you offer is less special than it actually is. The alternative is to educate employees on the full value of your total compensation package, ensuring that these benefits are widely utilized and appreciated, and helping to build employee loyalty. Keep the following components of your compensation package in mind:

• Bonuses
• Benefits
• Equity (e.g. stock options)
• Development opportunities

6) Train Managers on Understanding Compensation Planning Decisions

Do your managers understand your pay structures, and are they able to convey this understanding to their reports? Without providing training on your structure, the rationale that informed that structure, and how it’s applied across your business, it will be far more difficult to communicate the value and fairness of your compensation packages. Speak to your L&D team to get started—and deliver this information via your learning management system.

7) Pay Attention to Regulatory Trends

Do you keep an eye on regulatory news that applies to your business? Regulations related to employee compensation come and go all the time, and staying informed about incoming laws will help ensure that your organization has a plan for new requirements when they come into effect. Recent trends include:

• A wave of wage transparency laws (requiring employers to disclose salary ranges in job listings)
• Pay reporting laws (requiring employers to send reports on salaries across workforce demographics to regional or national bodies—as covered in this infographic from our sibling company, Affirmity)
• Minimum wage increases (in 2023, nearly 60% of countries increased their minimum wage)

The national press, specialist business, HR, and financial outlets routinely cover these kinds of trends. For the latest information, it may also be worth subscribing to the newsletters of government agencies in relevant markets.

STAY INFORMED RIGHT HERE | ‘EU Pay Transparency: A Quick Guide On Staying Compliant’