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Compensation Planning 101 for Growth Businesses

, | Oct 11, 2022 4:59:00 PM | By

In the latest episode of High Growth Matters, Julia Dow, VP of Compensation Advisory at OpenComp, joined to discuss bridging the gap between HR and finance when working together on compensation planning. Julia gave us an inside look at the compensation planning process and shared some of her top tips for tackling complex topics like Pay-for-Performance and how to discover pay inequities.

This blog is adapted from that conversation and covers:

  • Compensation planning and why is it so important
  • How to make adjustments when pay inequities are discovered
  • How to handle Pay-for-Performance within your organization

To hear the full episode, visit this page, or subscribe to the show on your favorite podcast player, such as Apple Podcasts or Spotify.

Don’t miss the full episode: Compensation Planning 101 for Growth Businesses


Why compensation planning is it so important

Employees' pay influences their motivation and is intricately tied to many HR functions like performance ratings, calibration, promotions, and more. Understanding how compensation planning is established and how it affects your team and role can bring clarity to many responsibilities, which allows you to better shape how employees work.

According to Julia, “compensation planning is really the process of understanding how you're going to award bonus payouts for the previous year and planning for the next year.”

Common areas of oversight in budgeting and compensation review processes

While compensation planning is crucial across the organization, a few common mistakes still occur throughout the yearly process. According to Julia, two cardinal mistakes are waiting too long to plan or to bring in key stakeholders.

Budgeting and planning requires a significant time investment and a large volume of data analysis. The way that a budget is spent needs to be considered on every level: across each team and each individual employee.

Successful compensation planning also requires the early involvement of many people.

“You're coordinating across a lot of people,” Julia explains. “Whether it's business leaders, who need to plan for their employees, or finance, which needs to plan for the company's resources and HR roles that are going to help move the process along.”

Julia suggests a top-down, bottom-up approach where stakeholders consider the market, thoroughly analyze salary payments, and meet with the key stakeholders who provide or decide the budget.

Steps to creating salary bands

Before establishing salary bands ideal for your organization, you need to understand the market. Complete a market analysis with a compensation philosophy perspective to ensure you understand where you currently fall in the market and where you ideally want to align. If done correctly, this analysis will reveal the basis of where your salary bands should begin.

Once you have the necessary information, you can begin to group it in a way that makes sense for your business. For example, salary bands can be set using a traditional job catalog, where each category of positions has its own range. Or you may opt for a waterfall methodology, wherein there are various grades of compensation encompassing all the roles ranked within them. There are also more formal systems that require group roles with similar market values to be grouped together and ranked.

Regardless of the system your company chooses, it’s important to consider which makes the most sense for your organization within the distinct industry. This process is necessary for strong compensation planning but may expose pay inequities in the organization.

 

How to make adjustments when pay inequities are discovered

According to Julia, there are several ways that companies can make adjustments once inequities are found, each depending on budget. However, she stresses that, while inequities should be corrected, there are often limiting factors that influence how quickly an organization can adjust compensation.

Ideally, the budget should allow for immediate adjustment, but some changes take more time and investment. Often, you’ll want to approach adjustments gradually, increasing pay in increments every six months, or opt to increase monthly.

Regardless of how inequities are addressed, it’s important that they are not ignored. Transparency and collaboration are vital aspects to achieving organizational equity.

 

How to handle pay-for-performance within your organization

Pay-for-performance is often an important factor in compensation planning and must be customized for your organization. Some companies identify and plan a compensation increase based on very clearly defined achievements. Others choose a more indirect approach, whereby guidelines may be informal, with performance being based solely on the judgment of management. Pay-for-performance can also come in the form of equity grants, Julie adds.

“Companies must balance proficiency and performance,” Julia says. “Someone could perform really well but still have a lot to learn. So, you may not want to put them high in the range because there’s still proficiency to develop over time.”

 

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