What is compensation planning? Benefits & actionable steps

A solid compensation plan is key to holding on to your standout employees, especially during a time when more talented professionals are looking to stay put rather than seek other opportunities. Recent turnover data from the U.S. Bureau of Labor Statistics shows that quit rates are now the lowest they’ve been since 2018,* likely in response to the fewer job openings and mass layoffs we saw in 2023.

While more workers opting to hold on to their jobs seems like an advantage to companies, think again: It also means the external talent pipeline is drying up, making it harder for companies to find great new hires.

In this current era, losing top talent not only costs more time and money than it has in prior years; it also means missing out on potential leaders, innovative thinkers, and problem solvers. To avoid losing top performers to industry competitors, more companies need to create a transparent, fair compensation plan as part of their attraction and retention strategy.

Whether you’re starting compensation planning from scratch or updating your process, this guide is here to help. We’ll cover:

• What a compensation plan is
• Why compensation planning is essential for growth-oriented companies
• The steps every business should follow to develop and implement compensation plans

* U.S. Bureau of Labor Statistics, 2023
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What is a compensation plan? Compensation plan meaning & components

A compensation plan is a competitive pay and benefits strategy businesses create to attract, motivate, and retain the best talent. Well-crafted compensation plans aren’t only about salary ranges — they also outline variable compensation, healthcare benefits, paid holidays, and other perks while upholding company culture, values, and long-term business objectives.

Compensation and benefits plans encompass many elements that companies should consider to deliver fair and competitive remuneration packages that align with their budgets and industries.

Common elements of an employee compensation plan include:

• Annual salary
• Incentives (i.e., bonuses)
• Equity
• Insurance
• Healthcare
• Lifestyle and remote work stipends
• Paid leave
• Sick leave
• Professional development opportunities

Compensation management strategies also account for: 

• Current employee salaries vs. market benchmarks
• When employees are eligible for pay raises or bonuses
• What giving out pay raises or bonuses should look like 
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Why compensation planning is important

‍Compensation is the first thing over 76% of employees consider when accepting a job offer. And direct compensation also has a big impact on how existing employees perform; low pay often results in reduced productivity, poor employee engagement, and a lack of motivation. In contrast, well-paid employees are often happy with their jobs and likely to stick around. 

The best compensation plans contribute to improved business outcomes like:  

• Increased performance & productivity
• Improved employee engagement
• Higher retention rate
• Top talent recruitment

In a turbulent economy, compensation plans also help keep company leaders’ attention trained on what matters most — their team members. “Having a formal benefits strategy in place can help keep employers focused on addressing employee needs and company-specific cost increases while reducing the temptation to explore the ‘solution du jour’ or the latest buzzy benefits offerings,” says benefits administration expert Kim Buckey in a piece for SHRM.

Let’s explore the benefits of developing compensation plans in more detail.
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Today’s compensation management software allows you to automate your compensation review cycles while giving you access to industry benchmarks and company-wide performance data. 

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Increased performance & productivity

Employees who aren’t paid fairly can feel unmotivated and are likely to move on when a better opportunity comes. Still, even when employees do stay with their company despite poor pay practices, they likely won’t work efficiently or feel invested in their performance — and may even grow resentful. 

On the other hand, employees who are satisfied with their company compensation plan tend to feel 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.
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Improved employee engagement

Employee engagement refers to how committed staff members are to their work, how passionate they feel about what they’re doing, and how aligned they feel with the company’s values.

High employee engagement is essential for individuals and their employers to thrive. People are generally much happier, motivated, and fulfilled when they’re connected to their work. On the other hand, companies with engaged employees enjoy more productivity, a richer company culture, and fantastic retention rates. 

Over 73% of companies believe compensation is crucial to employee engagement. Of course, a competitive compensation plan can provide job satisfaction and happiness, but it also goes further than that.

Effective compensation plans ensure employees know they play critical roles in your organization and feel that their ideas and contributions have a meaningful impact on company growth.

When employees know their managers want to help them excel and see leadership putting together career progression frameworks to make professional road mapping easier, they feel more connected to their workplaces and excited about what they can achieve — leading to higher engagement.
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Higher retention rate

Employee retention is still a significant concern for companies despite reduced quit rates. According to the Eagle Hill Employee Retention Index, the first six months of 2024 could usher in more employees quitting than in previous years. “This is largely driven by dips in employee confidence in their organization’s future and leadership, as well as how they experience their organization’s culture,” says Eagle Hill Consulting president and CEO Melissa Jezior for Continuity Insights.

What’s more, rising Inflation has been a central concern over the past two years, meaning employees are likely to look for new opportunities if their jobs don’t cover their expenses and allow them to pursue their personal interests.

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 and more likely to stick around.
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Top talent recruitment

Even though the sweeping layoffs of 2023 are still carrying into 2024, companies are always looking for talented individuals.

In this highly competitive labor market, organizations must fairly compensate all employees — not just new hires. Otherwise, they might take a better offer from one of your competitors.

Remember: Pay plans and benefits aren’t just about salaries. You can build a robust, competitive compensation plan by including incentives like equity, healthcare, paid leave, and development opportunities.
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Leapsome’s compensation management tool helps businesses build scalable, collaborative, and fair compensation plans.

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6 steps to developing & implementing a compensation plan

Implementing your compensation plan the right way is just as important as building and scaling it. That’s why we break down these six steps in designing compensation plans companies must follow to make fairer, more employee-centric decisions around pay. They are:

1. Defining your company’s compensation philosophy 
2. Outlining compensation goals & breaking them down into objectives 
3. Researching & gathering relevant data
4. Appointing a compensation manager
5. Building a career progression framework
6. Approving & implementing your compensation plan
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1. Define your company’s compensation philosophy 

When creating a compensation plan, start by considering your people’s wants and needs. What you’re offering should be attractive enough to recruit top talent, fair enough to motivate current staff to stick around, and reasonable enough to fit your budget. To that end, the first step is to define your company’s compensation philosophy.

Suppose you want to set US$70,000 as the 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:

• How to compensate employees in different departments and seniority levels.‍

• What people need to achieve to get a raise or promotion — and how often they should happen. Tools like Leapsome’s promotion management software can help you create streamlined, effective promotion processes.

• How your salaries compare with industry benchmarks, and at what range you want to be in your industry. Say, for example, you want to be in the top 25%. ‍

• How your compensation plan stacks up when you compare it with those of competitors.

Here are a few additional factors to keep in mind when building your company’s compensation philosophy:

• Industry type
• Company size
• Budget and financial considerations
• Company goals
• Compensation packages offered by competitors

Once you’ve established your company’s compensation philosophy, you can use it to build, analyze, and optimize your compensation plan.
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2. Outline compensation goals & break them down into objectives

Once you’ve figured out your company’s compensation philosophy, the next step is choosing related goals and breaking them down into specific, measurable objectives. 

Some of the broader goals often associated with compensation planning are: 

• Attracting top talent
• Retaining and rewarding your people
• Increasing motivation

Let’s say your primary goal this quarter is to retain at least 85% of your people. Here’s how you’d break that down into measurable objectives that could help you reach your goal: 

• Send out an employee engagement survey and assess how employees feel about their compensation
• Gather regular employee feedback with monthly employee pulse surveys
• Carry out exit surveys when team members leave to identify improvement opportunities for your company

As you outline goals and break them down into objectives, you’ll find it easier to develop and implement a well-balanced compensation strategy.
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3. Research benchmarks & gather relevant data

While creating your compensation plan, research what your competitors offer and familiarize yourself with market trends. Suppose other companies in your industry pay senior Java developers US$100,000/year, but your yearly compensation package for the same position is US$70,000. In that case, you’ll find it difficult to attract and retain talent with this specific kind of technical expertise.

Thankfully, using platforms like Leapsome make gathering external data simpler. With our Compensation module, HR teams have access to detailed compensation and benchmark data powered by a seamless integration with Mercer.

When researching, ensure your sources are credible; inaccurate data can result in companies:

• Looking unprofessional
• Offering unattractive compensation packages
• Losing top talent
• Building a toxic workplace culture

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Leapsome’s compensation framework, powered by Mercer data, supports you in creating a fair, equitable, and strategic compensation structure at your organization.

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4. Appoint a compensation manager

Hiring a compensation manager with proven experience developing compensation plans makes creating a pay strategy much simpler for companies. These professionals are responsible for:

• Gathering and researching compensation data
• Making sure their company’s compensation plan is in line with pay equity best practices
• Aligning compensation with DEI best practices‍
• Managing the program’s development, implementation, and admin
• Ensuring compliance with compensation laws and regulations

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: 

• Collaborate with current HR/People Ops managers
• Hire an HR freelancer or consultant
• Bring someone on board on a part-time basis
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5. Build a career progression framework

Once you’ve built the foundation of your compensation plan, the next step is creating a career progression framework (also known as a development framework) for every department in your company — that is, if you don’t have one yet.

Let’s consider a company’s marketing department at three seniority levels:

Entry-level roles

• Content Marketing Associate
• Performance Marketing Associate
• Social Media Associate‍

Senior roles

• Senior Content Marketing Manager
• Senior Performance Marketing Manager
• Senior Social Media Manager

Expert-level roles

• Content Marketing Lead
• Performance Marketing Lead
• Social Media Lead

With your completed career progression framework, compare your role-based compensation packages with the research conducted in step three. It’s important to compare what you’re paying your employees now against industry benchmarks and employee expectations so you can develop a compensation and benefits plan that’s both effective and logical. 
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🚀 Wondering how to build a career progression framework?

Our step-by-step guide walks you through creating clear professional roadmaps for every employee within your company.

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6. Approve & implement your compensation plan

Verify your company compensation plan to make sure it’s compliant with state, local, and federal compensation laws and regulations before reviewing your plan with upper management and C-level executives for approval. 

Afterward, communicate it to all employees to obtain buy-in, ensure transparency, and build engagement around your new processes. 

A word of warning: Implementing a compensation plan may reveal that some employees are underpaid or missing out on key benefits. In this case, communicate how you’ll approach raises and promotions to each affected individual. 

As the labor market evolves, regularly reviewing and modifying your plan is critical, keeping your pay structure updated so that your people remain satisfied with their compensation packages.
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Create a competitive & fair compensation strategy with Leapsome

What sets top compensation plans apart is that they guarantee employees receive fair pay while factoring in industry pay benchmarks, benefits, and company budgets. Building and implementing a compensation strategy won’t just help you figure out how much to pay your employees — it’ll also help you attract and retain top talent. 

‍ It may seem daunting, but companies can simplify the compensation planning process with people enablement platforms like Leapsome. 

Using Leapsome’s Compensation module, company decision-makers can access reusable templates, automated workflows, and collaboration tools for conducting compensation reviews, allowing them to build streamlined compensation processes with key stakeholders. It’s also integrated with our Reviews and Surveys modules, giving leaders and managers holistic data to make better promotion decisions. 

Organizations that utilize Leapsome for compensation management will find that it’s central to providing pay equity and an ideal platform for boosting motivation, reducing turnover, and cultivating a healthy workplace. 
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⭐️ Want to build a transparent compensation plan your employees appreciate?

Leapsome’s Compensation module offers personalized, customizable templates — and Mercer-powered benchmarking data — to help you conduct compensation reviews and update pay strategies as needed.

👉 Book a demo