Compensation Planning Guide

Compensation planning is a core element of human resource management. It allows for a well-measured approach to payment of people in the workforce. For the human resource manager, compensation is necessary with all their functions including recruitment, job satisfaction, and performance appraisal. On the surface, compensation seems relatively straightforward. However, it is a strategic process that requires excellent planning. The compensation plan ties into both the short term and long-term goals of the organization, especially with revenue projections. Also, it is through this plan that a company can determine the best ways to recruit and retain employees, as well as to elevate morale within the organization. Furthermore, these plans are crucial for ensuring that companies operate at peak performance. Compensation falls within two essential categories. First is direct compensation, which includes the wages or salary that an employee earns. The second is indirect compensation which provides for health insurance and medical benefits, travel allowances and more.

How to Create a Compensation Plan

Compensation plans allow for clarity and transparency in any compensation model in use by a company. It should include the following: -
  • Wages, salaries, and benefits.
  • Payment of commissions to employees.
  • What workers need to do to receive a salary increase or bonus
  • The incentives available for employees
  • Scheduled raises or compensation increases after specific years of service
When coming up with compensation structures, market data needs consideration. Part of the process of creating these structures is known as compensation marketing pricing. From market data, one can determine the career path that employees are to follow and offer them direction. For employees, this can be a deciding factor for whether they will work within a company or not. During the creation of the structure, the HR team needs to create compensation packages with competitive rates fitting within what is happening within the market.  Various compensation planning tools can be chosen, including online options and software.

Steps in Compensation Planning

Compensation planning requires various steps. The first one would be to have a total budget in mind for compensation. From this, it becomes possible to determine how many people will be working in the organization and their job titles. With this in place, the job descriptions should then have a clear outline. Next is the more challenging part of determining the right amount to compensate for each position, as well as any incentives that need to under consideration. Also, for employees that may work overtime, a budget needs to be set aside to cater to that cost. Once this element of compensation is in place, a look at the budget will reveal how much is available for additional benefits to elevate motivation. Being a key component affecting the finances of an organization, using compensation planning tools is a recommendation for HR managers. These tools ensure that payrolls can act as a reference in case an audit is necessary, and also make it easier to identify and correct any errors. In the long run, compensation planning protects the company from incurring high costs.