Compensation Planning: An Employers Guide
By: Chelsey Moore | HR Business Partner
The new year is upon us and with that comes employee reviews, organizational planning, and compensation planning and changes.
This article will give you insights and tools to use in your 2025 compensation planning for employees.
Compensation planning is a yearly process of creating and implementing a structured approach to determine how employees are paid and rewarded for their work within your organization. The goal is to align employee compensation with the organization's goals, the current labor market conditions, and their individual performance.
Before creating compensation plans for the new year, it is important to meet with your financial team to analyze organizational growth plans and organizational profit and loss estimates for the next 6 and 12 months. Once you have those numbers you will know how much the company can afford to increase employee’s compensation.
Prior to implementing plans, you should also keep in mind any federal or state compliance changes regarding employee compensation.
You can find a list of those changes here:
Compensation Tables
A compensation table is an editable document that contains all employee positions along with average salaries and actual salaries for each position. Ideally this table is updated every year based on job market trends. It is important to keep this table up to date with any added or adjusted positions. I’ll give you a personal example of why this is important. I worked for a company that grew from 84 employees to over 700 employees within two years. As you can imagine we added a lot of new positions during that time. Unfortunately, we did not keep a consistently updated compensation table and when we were given the instructions to update our table with current national salary data for each position it took several weeks to complete the task. If the company had been audited for any reason this could have been a really unpleasant situation.
Using your compensation table as a guide you can determine if there are any employees that need salary adjustments based on market trends prior to awarding merit-based raises. It is recommended that employees are compensated equal to labor market standards based on their job title, duties, and experience. Maintaining a competitive base of pay will allow you to retain employees and will minimize the costs of potential turnover and loss of organizational knowledge. Additionally, look at your current labor force. Are there any positions that will dramatically change in the next year? If so job titles and compensation should align with any new responsibilities that employees are taking on. Using software such as CompAnalyst or PayScale will help you identify average base pay for any current or new positions.
Pay Raises
If you are considering merit-based employee pay raises it is helpful to have a plan in place to ensure that all raises are equitable and objective. A performance management system or already defined review process is ideal in this situation. Having knowledge of national labor market compensation increases is also helpful. The average estimated wage increase is 3.5% according to PayScale.
To administer employee pay raises based on merit you will want to create a Standard Operating Procedure that includes review processes, key performance indicators or goals, and any other categories that employees will be graded on to receive their raises. This should be consistent across all departments to ensure equity.
Next up, coordinate with your payroll and finance team to determine when these raises can be put in place. Finally, you will need to create messaging around the raises and determine how you will share the news with the employees that are affected.
Determining Starting Salaries and Pay Transparency
Because pay laws can change with the new year it can be difficult to decide on starting salaries for newly opened positions. When pricing new positions keep in mind that market pay can vary throughout the year. You'll want to base your compensation for new positions on the expected skill set that the new employee will have, as well as the number of years of experience that this position will need. It is important to keep in mind that you may need to adjust current employee salaries with the same or similar positions as market data changes. However, be considerate when making these changes. While it feels good to be generous to our employees you need to make sure that new pay raises or new salaries that you post stay in line with your expected profits and losses for the year. It is better to give modest raises now than to be overzealous with salaries at the beginning of the year and need to compensate by laying off employees later.
As you post a new job, particularly in states with salary posting requirements, the idea of pay transparency may come up. There are varying views on this topic. While pay transparency is generally beneficial to organizations, it can cause issues especially when there are pay disparities. Pay transparency can promote equity in pay and can potentially lead to higher employee satisfaction. It has also been tied to cultures of openness and trust. On the other hand, employees can become disengaged if they learn that they are being paid less than their peers, it can lead to tension between colleagues and it can also restrict a company’s flexibility in tailoring compensation packages to new hires.
Total Rewards
Another major consideration when compensation planning is the benefits that your company offers. Total Rewards is a combination of all the benefits, perks, incentives, guidelines, processes, programs, and other types of rewards that an employer offers to its workers. When calculating an employee’s compensation, it is important to include any money that the employer is going to spend on health insurance, 401K matches, HSA, or FSA matches, and tuition reimbursements, as well as potential bonuses or commissions that the employee may be entitled to. These all count toward the employee’s total compensation. In some cases, an employee may be paid below the 50% market value of their position if they are receiving total health coverage and other 100% company paid benefits. This is not to say that you should underpay employees if you are providing them with these benefits, but certainly keep them in mind when doing your calculations.
Final Thoughts
An effective, efficient, and well thought out compensation program is essential to the longevity and success of your organization. We recommend that you use any tools that you have available to ensure that your employees are properly compensated and that your organization is set up for long-term success. Do not be afraid to double-check yourself and always be consistent and objective when engaging in employee reviews and raises as well as when posting new positions and salaries.
GOOD TO HAVES for compensation planning | MUST HAVES for compensation planning |
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Compensation Planning: An Employers Guide