What are the two key factors we consider when establishing a compensation plan?
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. Show
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:
1. Harvard Business Review, 2022 What is compensation planning?
Compensation planning encompasses many elements that companies should consider to deliver fair and competitive packages that align with their budgets and industries. It’s crucial to plan your compensation packages strategically
Compensation strategies also account for:
Why compensation planning is important
Compensation planning is essential for many reasons — but let’s break down the top four:
Increased performance & productivityCompetitive employee salaries don’t just make people happy — they also result in team members working more productively
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
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
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
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. 💰 Want to build a streamlined compensation management process? 6 steps to developing & implementing a compensation plan
1. 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:
Here are a few additional factors to keep in mind when building your company’s compensation philosophy:
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
Some of the broader goals often associated with compensation planning are:
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
When researching, ensure your sources are credible; inaccurate data can result in companies:
4. Appoint a compensation manager
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:
5. Build a career progression framework
Let’s consider a company’s marketing department at three seniority levels: Entry-level roles
Senior roles
Expert-level roles
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. 🚀 Wondering how to build a career progression framework? 6. Approve & implement your compensation plan
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
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. ⭐️ Want to build a fair and transparent compensation plan? What are the two types of compensation plans?The four primary direct forms of compensation are salary, hourly, commission and bonuses. Beyond direct compensation, there is indirect compensation, such as benefits and equity-based programs, which is just as important a part of your plan.
What are the key determinants of compensation plan?Factors Affecting Employee Compensation – Demand & Supply of Labour, Capacity to Pay, Cost of Living, Productivity of Workers, Trade Unions, Wage Laws & Wage Rates.
What are two key questions for compensation strategy that need to be answered?In developing a compensation strategy, the two key questions that must be addressed are: “How much is to be paid?” and “When should it be paid?” 2.
What are the 3 main components of the compensation strategy?A compensation strategy typically includes four key components:. Base pay. Base pay refers to an employee's salary or hourly pay for their particular job. ... . Incentive pay. ... . Employee benefits. ... . Time off.. |