Why is Compensation Planning a Critical HR Process?

Mishandling compensation can undermine employee well-being and business profitability. Here’s how to develop an effective compensation plan.

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Why is Compensation Planning a Critical HR Process?

Any company leader knows that one of the most significant expenses of running a business is acquiring and maintaining employees. Depending on the organization, labor costs, including salaries, wages, benefits, and related taxes, can constitute as much as 40% of the total budget.

With such a large expense account for employee compensation, a solid compensation strategy is a no-brainer. Proper compensation planning is essential to ensuring you are rewarding the right people for the right input.

Read on to better understand the importance of compensation planning and how to develop an effective plan for your organization.

What are vital considerations in compensation planning?

Compensation planning entails designing and enforcing a strategy for rewarding employees commensurate with their skills, experience, and contributions to the organization.

A proper compensation plan takes several internal and external factors into account to set competitive, sustainable packages.

Some important inputs in a compensation plan include:

  • Analyses of roles to determine their value
  • Assessments of your organization’s financial health
  • Reviews of the cost of living where employees are based
  • Evaluations of the job market’s competitiveness
  • Surveys of employees’ attitudes and opinions on compensation
  • Government regulations on employee compensation and welfare

Why is compensation planning critical for HR?

The role of human resources is to ensure that an organization’s most valuable asset — its people — are well managed to support the company’s strategy. Because compensation plays a significant role in this area, it falls squarely within HR’s scope of work.

Below are 6 compelling reasons why compensation planning is a critical HR process.

1. Assists you in hiring top talent

Compensation is a top prerequisite for job satisfaction for 63% of U.S. employees, 2nd only to respectful workplace treatment. A well-designed compensation plan will help you identify the going rate for each position within your company so you can make competitive offers to attract the best candidates.

2. Helps employees maintain high productivity levels

Fair compensation is a key driver of staff productivity. If employees feel they are being paid less than they are worth, they will be less motivated to do their best. A compensation plan will help ensure fair payment and maximize productivity.

3. Promotes employee loyalty

Nothing wins staff loyalty more effectively than feeling that their organization cares about their career development. A well-designed compensation plan will help you keep track of each employee’s progress and ensure their compensation keeps up with their growth.

4. Helps control staff costs

A compensation plan will help ensure employees are only paid for the work they do and the skills they possess. By carefully monitoring salaries, bonuses, and other benefits, you can avoid overspending on your most valuable asset.

5. Ensures transparency in payment policies

A clear-cut compensation plan makes it easier to maintain transparent payment policies and prevent disputes. Employees can know how their compensation is determined, how their salaries compare to their peers, and what to expect when they earn promotions.

6. Assists you in complying with employment regulations

Finally, compensation planning helps you to stay on the right side of continuously evolving employment regulations. By keeping up with changes in minimum wage rates, tax laws, and other relevant legislation, you can keep your company compliant and avoid penalties.

How to develop an effective compensation plan

Building a compensation plan can be a challenging exercise. On 1 hand, you want to offer competitive rewards. On the other, you need to administer pay equitably for skills and work. You must also consider your company’s financial situation and objectives.

Nevertheless, by following the key steps below, you can develop a compensation plan that aligns with your organization’s strategy and satisfies your employees.

1. Create a compensation committee

Proper compensation planning needs input from more sources than just HR. So, start by creating a committee responsible for developing and administering the plan. Enlist representatives from various departments within the company so that all relevant perspectives are considered.

2. Analyze your workforce and update job descriptions

With your committee in full swing, analyze your workforce and document every role’s qualifications, accountabilities, and responsibilities. This will help you uncover errors, misalignments, skill gaps, and redundancies early. That way, you can be sure you are planning compensation for the right positions.

3. Determine every position’s value relative to every other position

Once you know what each role entails, you can start attaching value to it. Common factors to consider include:

  • Skills: Knowledge, education, and experience
  • Responsibilities: Degree of accountability, complexity, and scope
  • Effort: Physical and emotional demands

Make sure to consider the job requirements only, not the people occupying the role. The goal is to establish a clear, objective pay structure.

4. Conduct a market analysis to benchmark salaries

To ensure your pay is competitive, you need to know what other companies in your industry and region are paying for similar positions. Use salary surveys and data from job boards and professional organizations to get an idea of the going rates.

Use salary surveys and data from job boards and professional organizations to get an idea of the going rates.

Roles and responsibilities often vary from one company to another. So, besides the job title, consider other factors like the industry, geographical location, and employee demographics when analyzing the market.

5. Determine your company’s compensation structure

Now that you know what other companies are paying, you can start creating a compensation structure. First, decide on a salary range for each position and then break down the pay scale into increments.

For instance, suppose you want to offer salaries that are 20% above the market average. In that case, you could establish a salary range of $60,000 to $72,000 for a position that typically pays $50,000.

You may also want to refer to the relative position values you determined in step 3. This is especially important if a position’s value internally differs significantly from the external market or is a unique position with limited market data.

6. Develop the right mix of benefits for each role

As mentioned earlier, compensation goes beyond salaries. So, develop a blend of benefits that are well tailored to each position.

Some common benefits include:

  • Health insurance
  • Retirement savings plans
  • Paid time off
  • Employee assistance programs
  • Career development opportunities

7. Implement the new compensation structure

Now that you know what to pay for each position, you can compare your current pay rates to the newly established compensation structure. Note any discrepancies and create a plan to address them immediately or over time.

A critical part of implementation is communicating the new changes to your employees and getting their feedback.

Clearly explain the rationale behind the changes and solicit input on how best to implement them. Taking the time to do this upfront will help ensure a smooth transition and buy-in from employees.

8. Develop administration policies and procedures

Finally, develop policies and procedures to ensure the new compensation structure is administered fairly and consistently. Include guidelines such as:

  • How and when to review salaries
  • Who will be responsible for approving compensation changes
  • How job descriptions will be updated
  • How to manage compensation-related documentation
  • Guidelines for how and when to review the compensation plan

With clear policies, procedures, and timelines in place, you can be confident that the compensation plan will be executed effectively and stay in place for the long term.

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Compensation planning is key to business success

The compensation package you give your employees can make or break your business. It determines whether you attract and retain top talent, motivate employees to achieve company goals, and stay competitive in your industry.

Having a robust compensation plan provides 2 unquestionable advantages:

  • You attract and retain the best talent you can afford in your industry
  • You gain more control of a critical segment of your company’s operating budget

With an effective compensation plan, you can keep your business running smoothly and avoid costly disruptions down the road.

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