Compensation Planning Guide: How to Make Sustainable, Consistent Pay Decisions
by Employers Council Staff
California, California Legal Compliance, Colorado, Compensation, Diversity and Equity, Hot Topics, Pay Equity
You can’t create an exceptional workplace without effective employees. And you can’t develop thriving workers without paying them fairly and well. Successful, growing organizations are built on smart compensation planning. A thoughtful plan helps your organization recruit high quality talent, motivate current employee’s progress, and build an equitable working environment. What does it take to create a compensation plan that will serve your business or nonprofit in the long-term? And how do you find the right third-party compensation consultant to meet your play planning needs?
In this guide, Cyndie Meisner, Employers Council Consultant, Compensation Consulting Services, and Brianna Carter, Employers Council Manager, Payroll, ETA, & ASO Services, will walk you through a sustainable approach to compensation planning. From current compensation challenges to how to choose a compensation consultant, you’ll leave with everything you need to make consistent, competitive pay decisions.
- The Top Compensation Challenges for HR Professionals
- Six Benefits for Building a Solid Compensation Plan
- The Compensation Planning Process in Five Steps
- Compensation Plans, Pay Compression & Pay Equity
- Choosing a Compensation Strategy
- The Cost of Outsourced Compensation Planning
- What to Look for in a Compensation Consultant
- Why Choose Employers Council for Compensation Planning
The Top Compensation Challenges for HR Professionals
Making compensation decisions has always been one of human resource’s most demanding tasks. Organizations are still adjusting to sweeping changes brought on by the pandemic and its fallout, and outsourced compensation planning has become a go-to solution for many. Why is compensation so tricky?
Compensation isn’t calculated in a vacuum. Rising inflation erodes the value of pay increases and affects organization’s payroll budgets. “Everybody is trying to figure out the best way to manage inflation,” Cyndie said. “There really is a cost-of-living crisis, especially here in Colorado. And that obviously impacts an organization’s ability to recruit talent.”
Compensation is an essential element in building a competitive recruiting (and retaining!) strategy, especially when labor markets are tight and turnover is high. “One of the biggest challenges with compensation is that ability to retain and attract quality talent,” Cyndie said. “So getting your pay aligned with the market is the first step.”
Aligning your pay decisions with market realities is more difficult when the variables are in constant flux.
Factoring in benefits
Base pay is only the beginning when it comes to compensation. It’s important to build a competitive benefits package and clearly communicate its value to employees.
Administering pay fairly and consistently isn’t just the law, it’s a crucial part of developing an equitable, trust-worthy workplace. Organizations need to take pay equity seriously, both in evaluating and remedying discrepancies and committing to transparent decision making.
Remote and hybrid workplaces introduce new challenges to pay decisions. Remote work can function as a valuable work/life balance benefit. It also raises the question of geographic pay differentials: Does pay change if your employee is working from a more or less expensive location?
Barriers to planning
Thoughtful and up-to-date compensation plans can meet all of the above challenges and bring order and ease to pay decisions. But many organizations either don’t have a compensation plan or are overdue for a refresh because of buy-in, capacity or budget reasons.
“If they’ve been kind of operating in a free-for-all, bringing in some form and function can be a little bit tricky, especially in the initial implementation,” said Cyndie. Getting early buy-in from leadership on the importance of a compensation plan can help pave the way.
“It’s a balancing act of making sure everybody is on the same page when it comes to compensation,” agrees Brianna.
In addition to securing buy-in, organizations need to set aside resources. A comprehensive, strategic compensation plan takes time and budget.
Six Benefits for Building a Solid Compensation Plan
Whether conducted internally or with third-party outsourced assistance, a compensation plan is an upfront investment that will pay off in the end. When organizations get all players on board and marshall the resources to craft a plan that matches their vision, they can look forward to six key compensation plan benefits:
1. Competitive in the external labor market
Organizations will know how to use their particular strengths to make compelling, unique offers that separate them from their competitors.
2. Effective recruiting and retaining
With a compensation strategy in place, organizations can feel confident they will have the top talent they need to meet their mission.
3. Consistent approach to pay decisions
Pay equity is only possible with a clear compensation plan in place. “Without a plan, decisions are made kind of in a vacuum or emotionally,” Cyndie said. “It’s hard to administer.”
4. Financial prudence and flexibility
Compensation plans ensure you have the budget to compensate competitively as well as the flexibility to shift priorities as your organization changes. A compensation plan should strive for sustainability over time.
5. Values-based total rewards system
Compensation plans communicate what your organization believes in to employees. What do you value most? Performance? Length of service? Innovation? Your pay should incentivize the values you want to encourage while considering the total rewards employees receive.
6. Roadmap for career progression
A compensation plan can also give employees a clear picture of the path ahead, whether going into management or choosing an alternative career path inside the organization. “Sometimes organizations tell us their hierarchies are too flat and employees don’t know how to grow,” Brianna said. “We can help create structures in thoughtful ways.”
The Compensation Planning Process in Five Steps
1. Discuss your compensation philosophy
Gather your stakeholders and have the most important conversation first: Do you have a compensation philosophy? What lens will you use to make your compensation decisions? Use your organization’s mission, vision and values to guide you. What pay decisions will further your organization’s goals?
Once the big picture is sketched in, it’s time to get tactical. Who will you compare yourself to when benchmarking base pay, benefits and more? Who are your closest competitors? Will you limit your comparisons to your own industry? Your own region? Comparison guidelines are an important part of your compensation philosophy.
Finally, talk through what your organization can offer in terms of total rewards. Beyond base pay, what can you offer to potential and current employees? What benefits are available? What work/life balance options (flexible hours, work-from-home, etc.) are on the table?
2. Assign values to your organization’s jobs:
A job has both external equity (how is the job compensated on the external labor market) and internal equity (what is the job worth to your particular organization). Thoughtful job valuing takes both into consideration.
To begin, you must have up-to-date job descriptions for every position in your organization. Next, match those against others on the market to find a range of pay for similar jobs.
“If you had to turn around tomorrow and advertise and recruit for this job, what are the minimum qualifications and requirements?” Cyndie asked. “We take that to survey sources, and we job-match based on content and qualifications, not by title. The data can be exact, but compensation is definitely an art.”
The quality of the job matching will only be as good as the quality of your survey sources. Cyndie and Briana say you can get starting insights from crowd-sourced and self-reported sources, but compensation data that comes from employers and HR professionals will get you more accurate results. Review your job matches with managers and leaders to make sure you’re comparing apples to apples. The goal is to find positions that are 70 to 80 percent comparable; exact matches often aren’t possible!
Next, examine how valuable the job is internally in relation to others. What knowledge, skills and ability are needed? Does the job have decision making or financial authority? How essential is this position to your organization?
“We balance that with the external information, because some organizations may value a job differently than the market does,” Cyndie explained. “We want to make sure it makes sense for the organization.”
3. Design your base compensation:
Use the value you assigned to each job to create or update your organization’s hierarchy, with ranges assigned to each position and/or job grade.
4. Conduct a cost analysis:
Next review existing individual employee pay rates relative to the new ranges assigned to each job. Who is within range and who is being paid under the competitive scope of pay? What would it cost to bring key positions or high performers in-range? What would it cost to bring everyone in-range?
5. Implement and communicate the plan:
Create administrative guidelines to help your leaders make decisions in line with your compensation plan.
“We don’t want it to be rigid,” Cyndie said. “We want to give you flexibility within some guardrails, so that you can make decisions based on the information and the precedent that you’ve set.”
It’s also a good idea to create a communication plan to help managers and employees have transparent conversations about how pay decisions are made. Employees need to know how the plan was created and if it affects their own compensation in any way.
“Employers Council can help with that, whether it’s helping train managers in the new pay system or explaining to employees what we’ve done,” Cyndie said. Employees also need to know what to do if they think their position’s pay wasn’t evaluated properly. “We work through all of those communication plan details,” Cyndie said.
Compensation Plans, Pay Compression & Pay Equity
Crafting a comprehensive compensation plan can help counter two of the more challenging aspects of pay in today’s labor market: pay compression and pay equity.
Pay compression, or salary compression, is when the difference between wages for new and veteran employees or supervisors and their reportees get too close for comfort. If left unaddressed, pay compression can create employee dissatisfaction and internal tension. Wage inflation is a common cause of pay compression: In eras of inflation and competitive recruiting, organizations may be offering new hires higher pay than current employees are earning in similar positions. A compensation plan gives a clear view of the market’s range of pay and can guide compression corrections.
A well-communicated compensation plan can also help employees understand why some pay compression cases may be warranted. For example, an experienced and high-performing employee in a priority role may make more than their manager. Explaining the organizational values behind this decision can help keep confusion to a minimum.
“You can never solve pay compression one hundred percent,” Cyndie said. “It’s a moving target. The best way to address it is to have a formal compensation plan that you can review on a regular basis.”
Pay equity laws, including Colorado’s Equal Pay for Equal Work Act, prohibit employers from paying different wages to employees who perform “substantially similar work” on the basis of sex or other protected areas. A compensation plan, often paired with a pay equity analysis, not only acts as a good-faith legal defense but helps create a fair & equitable environment that can attract top talent.
“Pay equity is an ongoing process at this point,” said Cyndie. “Employees are much more informed and astute. They want to understand how people are being paid and how the organization’s values translate through pay. Because it’s such a competitive market, they have the ability to choose which organization they want to align themselves with based on equity.”
Assessing pay through a DEI lens is an important part of that strategy, as is learning how to manage pay equity across state lines for hybrid workplaces. As part of a compensation plan, many organizations conduct a wage gap analysis to identify discrepancies in pay (based on gender, age, years of service and job title) and the potential costs of remediation. An open-eyed, thoughtful analysis of your workforce can also highlight ways you can meet DEI goals by developing talent within your organization.
Choosing a Compensation Strategy
Compensation strategies underpin every solid compensation plan. Organizations need to choose their tactics carefully, based on their resources, position in the market, strengths and values. Strategies cover several different areas of compensation, including:
The most popular base-pay strategy is to meet the market and pay the going common rates. It’s rare, but some choose to lag the market instead, often because they believe their benefits package offsets lower base pay. Leading the market is a valid strategy for organizations with the budget. A mixed market strategy — where organizations pay above-market rates only for jobs that are mission-critical, hard to recruit, or experiencing a shortage of candidates — is becoming much more popular. “It’s adapting and pivoting to focus where your pay is more effective,” explained Cyndie.
Organizations need to choose how to allocate their total rewards package between direct and indirect pay.
Direct pay includes:
- Base pay
- Incentive or bonus pay (individual, spot, discretionary, retention, hiring, employee bonuses and more )
- Variable pay (stock plans, team or operational incentives, profit sharing and more)
Indirect pay includes benefits of all kinds, from health and wellness benefits to efforts to help lower the cost of living in high-price eras (see below). “Creativity is key right now,” Cyndie said. “If you can’t be as robust in base pay, can you offer your more in your benefits or in variable pay? What can you do to provide incentives, attract new people, and keep the employees you have?”
With inflation eroding the value of pay increases, many organizations are leveraging benefits as a part of their organization’s strategy to help address inflation. Instead of offering steep cost-of-living raises, some employers are offering creative benefits, including:
- Child care assistance
- Flexible work hours
- Gas cards and transportation passes
- Mortgage/rent/housing assistance
- Paying the increases in health insurance premiums instead of passing them on to employees
- One-time, ad-hoc bonuses
- Remote work
- Student loan assistance
Organizations are experimenting with a variety of compensation strategies to find out what works best for them. What do their current employees and top candidates find the most compelling? Cyndie said efforts like these have been popular lately:
- Broadening candidate searches outside of the local region
- Focus on retention in jobs where recruitment is difficult
- Providing training and development opportunities
- Filling jobs with existing staff who have growth potential
- Making market adjustments and increasing base salaries
- Remote work
- Retention bonuses
- Sign-on bonuses
- Increasing emphasis on employee referrals
“I think it’s great to see people think out-of-the-box a little more and move past the way we’ve always done things,” Cyndie said. “We’re adapting to the new socio-economic climate.”
The Cost of Outsourced Compensation Planning
Many organizations choose to outsource compensation planning because of the time and specialized knowledge it requires. A third-party’s unbiased opinion can also be helpful when valuing jobs and analyzing market data. It can be difficult to separate the position from the person with too much internal history!
What do outsourced compensation planning services cost? “Just like compensation is an art, pricing is an art,” Brianna said. Like other third-party compensation consultants, Employers Council considers many factors when pricing a compensation plan project.
Factors that influence compensation planning cost
- Scope of the project: Are you developing a completely new compensation plan from scratch or updating a fairly recent, existing plan?
- Total number of job titles: In general, the more job titles, the longer it will take to benchmark and job-match. In some cases, smaller organizations with fewer positions can also take more time to value because their job titles are more niche and/or encompass multiple traditional job functions.
- Level of communication: Does the consultant only interact with the HR team and leaders, or does the project include communicating the compensation plan to managers and employees?
As with any business investment, there are associated costs to going without a compensation plan that aligns pay with organizational values and the market.
Costs of not developing a compensation plan
- Inability to attract high quality talent. This major issue leads to a host of expenses. Higher quality employees reach peak efficiency faster than less qualified candidates and require less management time and attention. You’ll pay more in lost productivity and management resources with your second- and third-choice hires, not to mention having to re-hire if risky offers don’t work out.
- Inability to retain high quality talent. When employees know they are paid competitively, they focus more attention on the work and are less likely to look for another job. Poor compensation decisions can lead to more turnover, increasing recruitment and training costs.
- Increased pay compression costs. In order to have a competitive, market-driven compensation system, regular upward adjustment of the range structure is necessary. When a large number of incumbents fall below current market rates, the compression problem escalates and leads to talent loss and correction expenses.
- Poorer quality teams. If you don’t pay at, or above market, the overall quality of your team will decline over time. Lower performing employees frequently become adept at doing just enough to stay employed. Over time, top talent may leave for more lucrative positions while lower quality talent stays put and drags down company performance.
- Increased budget variance. Without a good plan, you can’t budget appropriately. For example, if you unexpectedly need to replace an under-performing, under-compensated employee, you’ll need to either hire a similar employee at the same salary or increase the salary in order to attract a higher quality candidate. This may require a spontaneous increase in compensation, creating a negative budget variance.
- Out-of-compliance fees. If you haven’t built pay equity analysis and correction into your compensation planning, you could be liable for various fees, depending on the laws in your region. (For example, employers in Colorado should pay close attention to the Equal Pay for Equal Work Act, and organizations in California should be familiar with its 2023 pay transparency law requirements.)
What to Look for in a Compensation Consultant
If your organization has committed to outsourcing compensation planning services, the next step is to find a compensation consultant who fits your needs. Here are four questions to guide your search:
Do you specialize in compensation services?
“A compensation consultant should have a strong knowledge base related to compensation and competitive pay analysis,” said Cyndie, “preferably as a practitioner and as a consultant.”
Compensation consultants should have specific experience creating compensation plans from the ground up. Generalist consultants are helpful for many projects but won’t be as good a fit for these in-depth, specialized projects.
What is your human resources background?
Compensation consultants should also have a solid understanding of HR policies and the ability to translate quality HR data into actionable strategies.
Do you have experience in my industry?
Brianna reports that most organizations seek out someone who has worked in their sector or industry before. Public, private, and grant-funded or nonprofit organizations all have different compensation nuances. Look for a consultant who understands your organization’s world.
Where do you source your data?
This is one of the most important questions to consider: Your compensation plan will only be as strong as the benchmark data you use to build it. Look for a consultant with trustworthy, employer-reported data sources that can be tailored to your organization’s needs. Can they draw from both national and regional data sets? Do they have access to data specific to your industry? How close can they get with job matches? If everything else is equal, opt for the consultant with better compensation data.
Why Choose Employers Council for Compensation Planning
Employers Council has been providing outsourced HR services, legal guidance and holistic training tools for decades. With more than 200+ HR professionals, attorneys and trainers, each of Employers Council’s teams combine general human resources acumen with specialized skills sets and deep experience.
The Compensation Planning team is made up of 10 consultants who spend their work days steeped in the best pay practices and industry trends. Benefits analysis, incentive plans, executive-level reviews—even if you have a specific compensation need, Employers Council has a consultant with the experience necessary to tackle it.
“Our consultants have worked in all different aspects of HR and have created compensation plans for publics, private entities, huge corporations and small organizations,” said Brianna. “They’ve seen it all.”
Employers Council project pricing fits many different budgets and is very competitive compared to market rates. When it comes to market data and survey sources, Employers Council utilizes high quality, audited, specialized pay surveys that thousands of employers participate in.
“The surveys we use are responded to by HR professionals,” said Cyndie. “They’re not just matching titles. They’re matching job content and qualifications. When we get survey information, we know that these are good comparisons.”
Compensation planning often leads to additional questions outside the scope of compensation. Employers Council compensation consultants can connect you with other experienced teams in the organization, including Recruiting, Payroll and Benefits Services, Strategic Planning, Pay Equity Legal Services and more.
EXPLORE Employers Council’s Compensation Planning Services
Preparing to plan? Members: DOWNLOAD our free Compensation Plan Development Checklist today.
Not a member? Learn more about the benefits of joining Employers Council, including in-depth resources to help organizations problem-solve, grow and thrive.