The Role of HR in Compensation Planning

Adding HR professionals to the compensation planning process will help it go more smoothly and get you a better final result—which will have major benefits for the company. According to a Gallup survey, pay is the most important factor a candidate considers when deciding to accept a new position. It would be prudent for HR executives to offer their expertise with compensation planning to attract and retain top talent.

What Is Compensation Planning, and Why Is it Important?

Effective compensation planning creates a strategy that is developed from and a driver of your overall business strategy. Your compensation plan determines how much your company will pay its employees and in what ways they are compensated for their work. This could include an hourly wage, annual salary, bonus program, stock options, and or other benefits. But more than just pay rates, it defines your company philosophy toward compensation and how you will leverage it as a strategic differentiator. 

Company leadership, accounting executives, and human resources should work together to create a compensation plan that makes people want to work at your company—and stay there. From attracting and retaining talent to ensuring everyone is paid equitably, a compensation plan is a critical tool for becoming an employer of choice.

Compensation planning evaluates how your company wants to be seen and compete in the talent marketplace.e. Will your company be an industry leader or one that maintains the status quo? If you’re below industry standard in pay, how will you communicate the other benefits of working for you? The compensation planning process is a cornerstone of your overall talent strategy. 

Why HR Is Critical to Creating an Effective Compensation Plan

Building a compensation strategy without HR’s thought leadership is like budgeting for a department without the department head’s input. HR has a pulse on the people who will do the work and what their expectations are. Accounting can tell you what funds are available, but HR brings insights into how the funds should be allocated to maximize recruitment and retention.

If the candidate pool is complicated by atypical economic conditions, sociological influence, or simply a shortage of qualified candidates, your HR professionals can help you craft a compensation plan that will attract the right people for your company. 

Using HR for Strategic Compensation Planning

Creating a compensation plan involves planning the future pay scales, positions, and evaluative policies for employees. This process can be as simple or as complex as you want to make it or as your company necessitates. Your leadership team, Accounting/Finance, and the company’s HR leader should work together to create a plan that works for your company. 

1: Define Your Compensation Philosophy

The first step in strategic compensation planning is determining your compensation philosophy. A good compensation philosophy will align with the company’s strategic goals. Do you provide a needed service that can operate on a standard industry scale, or is your company leading the future with innovation or technology? Answers to these questions will help generate ideas that will dictate your payment philosophy. Keep in mind that your compensation planning philosophy should also be in alignment with your mission, vision, and values.

Defining your compensation philosophy is something that will require input and alignment from leadership. Establishing your philosophy will help dictate how you will compensate current and future employees. Leadership will be critical to communication and adherence to this philosophy. Getting leadership buy-in to the compensation philosophy at the beginning will make the rest of the planning process much easier.

HR plays a crucial role in facilitating discussions and aligning the compensation philosophy with the company’s strategic goals, mission, vision, and values. They can gather input from leadership and ensure that the philosophy reflects the company’s culture and objectives. HR also communicates the philosophy to employees to promote understanding and alignment.

2: Conduct Job Evaluations

To properly benchmark your roles against industry standards, you have to first understand what all your employees do. Responsibilities far outweigh job titles when it comes to compensation planning. To do their job, are employees required to have a certain level of education, authority, autonomy, experience, skill, or talent? Are there tiers of this job or classifications that can help you rank each job within the company based on importance? 

Fully understanding the tasks, expectations, requirements, and responsibilities of each job within your company will ensure you’re comparing apples to apples when benchmarking and planning pay for the roles within your company.

HR leads the job evaluation process by collaborating with department heads and managers to thoroughly understand the responsibilities, requirements, and expectations of each role. They use this information to create job descriptions that accurately reflect the roles within the organization. They also ensure that job evaluations are fair and consistent across the company, which is essential for benchmarking and determining appropriate compensation levels.

3: Create Compensation Benchmarks

Once you’ve evaluated your roles and responsibilities, the next step is to create compensation benchmarks. This will involve researching and comparing your company’s pay rates with those of other companies in your industry and geographic region.

You’ll want to utilize industry surveys and compensation reports to gather data on what other companies are paying for similar roles and analyze your internal compensation data to identify trends and gaps.

An HR professional would be responsible for researching and gathering external benchmark data through industry surveys, compensation reports, and networking with professional associations. They analyze data to establish competitive compensation benchmarks for various roles within the organization. HR also evaluates internal compensation data to identify any gaps or disparities that need to be addressed.

4: Establish Pay Structure

After you’ve evaluated the jobs that exist within your company, it is important to determine levels of seniority and the corresponding pay. Figuring out pay grades or ranges is a critical component of compensation planning because it impacts what gets offered to a candidate. 

Candidates will compare the pay grades/ranges offered by your company to others in the industry. Why would someone want to work for less when another company will pay them more for the same work? Pay grades/ranges that at minimum match the market are necessary. Work with your finance or accounting team to fine-tune your organizational budget to make sure the pay grades/ranges will work with your business. 

An HR professional should collaborate closely with finance or accounting teams to develop a pay structure that aligns with the established compensation benchmarks and budgetary constraints. They determine pay grades or salary ranges based on market data and internal analysis to ensure that the structure is competitive enough to attract and retain talent. HR also maintains transparency in pay practices and compliance with legal requirements.

5: Determine Pay Levels

Within the structure are pay levels that correspond to responsibilities, seniority, and expectations. An employee can expect to move up to different pay levels within the structure as they gain skills, tenure, responsibility, or a combination of these factors. These should be clearly defined to ensure a fair process and one that can easily be budgeted.

HR staff will define clear pay levels within the established pay structure, taking into account factors such as seniority, experience, skills, and job responsibilities. They develop guidelines and criteria for pay progression and promotions to ensure a fair and consistent approach across the organization. HR professionals will communicate these pay levels to managers and employees to foster transparency and understanding.

6: Develop Incentive Programs

Incentive programs are an effective way to motivate employees to perform at their best. Monetary incentives are a proven method of engaging employees. McKinsey & Company published a 2023 study examining organizations, which showed that employers could expect a 20-30% increase in engagement with an incentive program.

HR designs and implements incentive programs in collaboration with leadership and relevant stakeholders. They determine the types of incentives (such as bonuses, profit-sharing, or performance-based awards) that align with organizational goals and employee motivation. Your HR team should also monitor the effectiveness of incentive programs and make adjustments as needed to drive employee engagement and performance.

7: Communicate the Plan

With your company’s philosophy, pay structure, and incentive programs determined and documented, it’s time to share the plan with the rest of the organization. Start by communicating the plan to each level of management. Ensure that they understand it and can speak confidently to employees with questions. FAQs can be helpful.  After preparing management, then share the plan and company philosophy with the rest of the organization. Make the plan accessible to everyone and incorporate it into your onboarding process for new hires.

Your HR staff will play a central role in communicating the compensation plan and philosophy to all levels of the organization. They ensure that managers understand how to effectively communicate the plan to their teams and address any questions or concerns from employees. HR develops communication strategies, including FAQs and training sessions, to ensure clarity and consistency in messaging across the organization.

8: Monitor and Adjust

The talent marketplace is never stagnant. Economic, technological, and cultural changes guarantee that your compensation plan will need to be updated on a regular basis. So build this into your plan! Determine a schedule for when you will re-evaluate your plan and re-benchmark your positions. We recommend a two-year cycle for most organizations. Of course, unexpected forces may require an increase your pay grades and levels far sooner than you expected. Having an HR leader monitor the industry and its overall wage standards, consider the current economic conditions, and the ability to adjust your rates as needed are all necessary components of compensation planning.

An HR professional will continuously monitor external market trends, economic conditions, and internal factors that may impact the effectiveness of the compensation plan. They conduct regular reviews and evaluations of the plan’s performance against established benchmarks and objectives. HR recommends adjustments to pay grades, incentive programs, or overall compensation strategies based on their analysis and feedback from stakeholders.

Using a Compensation Plan Template

Using a template can help with compensation planning because it’ll provide high-level considerations for its development. A template will give you the basics of what should be included, and then the compensation template must be adjusted for individual roles.

There are plenty of compensation planning templates online, but a template is just the beginning. An effective compensation plan is a data-driven plan that ties back to your business strategy. Developing it will require both hard and soft skills to research your position in the market and get alignment across your organization.  

An HR Compensation Plan Example

A final compensation plan should clearly outline your company’s vision for the future and how you want to be perceived by industry leaders and peers. Your compensation plan should also clearly identify pay grades, pay levels, and the rates that correspond to each, along with job descriptions of every job that falls within the grade and level. 

Additionally, bonus plans or other incentives should be made clear. Good compensation planning requires openness about its details, including incentives. Working with HR to develop, document, and distribute your plan protects the organization from inequitable decision-making that can hurt the long-term growth of your organization.

Talk to the Compensation Planning Experts

Do you need help with compensation planning or compensation benchmarking? Our compensation experts will partner with you to develop a data-driven plan that drives recruiting, retention, and your business strategy.  Contact us today!