Best Practices

Compensation Planning: what it is and why you need it

Blog Author

by Rafael Fernández

February 15th, 2021


The ChartHop Team

Seventy-three percent of employers say their workers are fairly compensated, but 64% of employees think they’re paid below market value. And it’s not only salary that’s the problem; today’s workers expect more from compensation packages than money alone.

Health care, 401(k) plans, equity, flexible work hours, and home-office stipends are just a few of the benefits that top companies offer employees and should all be considered as part of a competitive compensation package.

A compensation planning strategy is essential for attracting and retaining talent, and you need to understand why so you can create an appealing one for your organization.

What is compensation planning?

Compensation planning is the development of a compensation strategy that supports a company’s business strategy, operating objectives, and employee needs.

It refers to all of its elements, including salaries, benefits, and incentives, as well as pay-band details and development levels with corresponding pay ranges. And with the expansion in remote work since the spread of COVID-19, employee compensation packages increasingly include benefits like expanded mental-health benefits and a stipend to set up a home office. In fact, 53% of employers began providing mental-health programs because of the pandemic

Compensation planning also incorporates how employees are paid, how and when they’re eligible for raises and bonuses, and more.

While 76% of people say that pay is their top priority when considering a job, salary isn’t everything. An organization doesn’t have to offer the highest pay to attract talent and keep workers happy.

Compensation can include a variety of elements, including the following:

  • health insurance
  • equity
  • retirement plans
  • time off
  • bonuses
  • flexible work hours
  • growth opportunities
  • personalized coaching
  • on-site services
  • subsidized transportation benefits
  • fitness stipends
  • catered meals

Even a positive company culture or the use of certain tools can add to an organization’s appeal. For example, “70% of workers say the availability of Slack would be a factor when evaluating a job offer, ranking this even higher than a fitness stipend (62%), catered lunches (59%) and weekly happy hours (57%).”

An organization’s bonuses and incentives can also be nonfinancial. Tech company DigitalOcean, for example, rewards top workers with gifts such as Kindles loaded with the CEO’s favorite books.

Why you need compensation planning

Now that you have a better understanding of what compensation planning is, let’s delve into why it’s so important to the modern workplace.

It motivates employees

A detailed compensation program gives employees a road map for career progression and drives them to achieve.

Compensation packages are especially effective at incentivizing employees to perform better when compensation is directly tied to job performance. For example, when a financial bonus is tied to hitting a specific sales goal, this can motivate sales teams to work harder to achieve it.

ChartHop comp change eligibility

And ChartHop makes it a cinch to identify which workers are eligible for additional compensation. For example, you can easily align relevant data - like performance reviews and OKRs - to eligibility. This ensures that your compensation is informed and unbiased.

It improves employee engagement

Numerous factors affect employee engagement, but according to research by TalentMap, compensation is an engagement element that has one of the lowest ratings.

Employees who think they’re paid fairly compared with coworkers or people at other companies are 4.5 times more likely to be highly engaged. And engagement isn’t important only because it helps an organization with employee retention; it’s also tied to your bottom line, which we’ll explore below.

It increases productivity and profitability

Closely tied with employee engagement is the fact that happy, satisfied workers feel valued and are more productive.

Organizations with highly engaged employees experience a 20% increase in sales and 21% greater profitability, according to Gallup. And, as you’ll see below, the longer employees are with the organization, the more they learn and the more efficient they become, making them even more valuable to the company — and a greater loss if they leave.

It reduces turnover

Compensation is the main reason people leave their jobs. In fact, a quarter of employees leave for higher pay.

And the cost of employee turnover can really add up. Take a look:

  • Entry-level employees cost 30% to 50% of their annual salary to replace.
  • Mid-level employees cost 150% of their annual salary to replace.
  • High-level employees cost up to 400% of their annual salary to replace.

But compensation planning can prevent turnover by ensuring that employees are well compensated and feel valued.

It reflects company culture

At work, a monetary figure is attached to each employee, affecting not only how workers perceive themselves but also how their employer values them. So it’s no surprise that compensation plays a key role in company culture.

Compensation policies reflect the culture at the organization. Employers who pay fairly for competitive positions and foster open dialogue around pay will build more trusting relationships with their employees that, in turn, will impact the bottom line.

Mike Metzger, President & CEO @ PayScale

Plus, that positive company culture can catch the eye of potential applicants. More on that below.

It attracts top talent

An appealing compensation plan is an opportunity for companies to improve their perception and help them recruit high performers.

A compensation plan is an indicator of how a company treats its employees. So an organization with a reputation of offering competitive salaries and benefits can attract the best talent, as well as hire them.

The most common reason candidates decline job offers is because the base salary and benefits don’t align with their expectations, so when those expectations are met — or exceeded — through strategic compensation planning, it’s easier to welcome a new member to the team.

You can get ahead of this by opting to transparently share compensation ranges on job postings. That way, there are no surprises when you deliver the offer, and applicants will decide from the jump whether they are comfortable with the designated pay.

It combats discrimination

A compensation planning strategy reduces wage gaps that exist among different [demographics](/platform/dei/, including, race, gender, and age.

Unconscious bias may still exist in the workplace, but a structured, transparent compensation plan that’s based on skills, performance, and years of experience helps companies more fairly hire and promote workers.

With ChartHop, it’s easy for human resources departments to visualize data related to diversity, empowering HR to identify problems and take action. It also lets leadership set compensation bands and transparently share pay ranges for each band or department.

ChartHop org chart filter by ethnicity

ChartHop's org chart allows you to filter your org by ethnicity, department, gender, and more!

Plus, salary transparency establishes trust between the organization and its workers and applicants, enabling the company to attract and retain a diverse workforce.

Earn employee trust: Communicate your compensation plan early and often

Strategic compensation planning is a vital part of a successful company; it’s why 70% of organizations have a formal compensation strategy in place.

But you don’t need to just establish your plan — you also need to effectively communicate it to employees, which is another challenge entirely. In fact, only 37% of organizations feel confident in their ability to explain pay decisions.

“[M]anagers aren’t doing a good job of explaining pay to their reports, and they don’t realize that they’re not doing a good job,” said Lydia Frank, PayScale’s former vice president of content strategy.

Part of the problem is that HR managers themselves may have difficulty understanding and visualizing the compensation plan, but ChartHop makes it easy to centralize and manage this data, set up compensation guidelines and benchmarks, and more.

When you're ready to start your compensation plans, keep equality top of mind by following ChartHop's guide to setting fair, equitable compensation!


Blog Author

Written by Rafael Fernández

Senior Customer Success Manager

Best Practices

See it in action!
Request a demo now.