As organizations gear up for the year 2024, the topic of pay increases has never been more crucial. When observing trends between 2022 and 2023, we see a notable rise in organizations adjusting pay twice annually. This surge could be attributed to various market factors, including the white-hot labor market, the phenomenon of the “Great Resignation,” and ongoing economic fluctuations.
As we continue to delve into the complexities of compensation, it’s evident that compensation planning is an essential part of any HR strategy. The frequency and percentage of pay increases is shifting away from annual to twice-yearly or even quarterly adjustments, meaning that compensation planning is no longer a once-a-year endeavor — it’s an ongoing process that is top of mind for compensation and HR professionals. Understanding the key elements shaping pay adjustments today is crucial in navigating the ever-evolving landscape of talent and market demands.
Comp planning is a journey, not a destination
Over the last few years, the employer-employee dynamic has changed dramatically. Inflation, the Great Resignation, and trends like “act your wage” and the anti-work movement have all contributed to a shifting perception of employment and the employee-employer relationship. While compensation still plays a significant role in job departures, other elements such as managerial relationships, company culture, and financial stability are gaining importance. A strategic compensation planning process accounts for all these factors.
Continuous iteration is key in the ever-evolving HR space. The focus is now on a continuous journey of improvement and adaptation, ensuring that strategies are timely and relevant. Business as usual is no longer the norm, as the external market continuously influences conversations, particularly concerning compensation.
These following nine steps are part of a cycle that will help you maintain a proactive approach.
Step 1: Weighing considerations for planning
As you embark on the planning cycle, it’s essential to assess whether your organization is experiencing “business as usual” or requires adjustments from previous cycles. Delving into the talent landscape — from both recruitment and retention standpoints — and understanding who you compete with for talent is crucial.
Step 2: Planning and aligning with executives
To ensure alignment and avoid wasted efforts, it’s vital to engage with executives early in the process. Understanding their top priorities and concerns — especially regarding compensation — will lay the foundation for a successful planning cycle.
Step 3: Conducting deep market analysis and employee reviews
Conduct a comprehensive market analysis and review to understand the compensation landscape thoroughly. This step may involve multiple iterations throughout the year to capture relevant data and respond to employee questions effectively.
Step 4: Mapping projected increases and focusing on the process
In this phase, you will start mapping out projected increases and focus on crucial aspects like training, enablement, and communication. Investing time in training managers and empowering leaders and employees during this phase can make or break the compensation planning process.
Step 5: Ensuring a repeatable cycle and a proactive approach
With a well-structured and repeatable cycle, you can prepare for future compensation planning proactively. Anticipating trends and strategically aligning compensation with organizational goals will allow for a more efficient and strategic planning process.
Step 6: Considering key questions
Key questions usually arise during the compensation planning process, such as those related to the talent landscape, internal and external factors influencing compensation decisions, and the optimization of compensation budgets while addressing pay equity, compression, and labor market trends. All should be considered in order to ensure success in this step.
Step 7: Focusing on data- and process-driven decision-making
Grounding decisions in comprehensive market data and understanding the organization’s unique needs will enable you to make more informed and impactful compensation choices. Engaging with finance teams and aligning with strategic initiatives will foster collaboration and mutual understanding.
Step 8: Emphasizing communication
Transparent communication with employees throughout the compensation planning cycle is essential. Addressing pay transparency, sharing the process, and being data-driven in explanations will lead to a more engaged and satisfied workforce.
Step 9: Ensuring all compensation factors are addressed
Beyond merit increases, carefully consider other aspects like promotions, market adjustments, pay equity, and remote pay strategy. Leaving no stone unturned will lead to a comprehensive and fair compensation plan for all employees.
People managers as comp planning partners
Managers play a crucial role in the compensation planning process, in part because they are responsible for communicating compensation decisions to their employees. At Payscale, our people managers not only work with HR to allocate budgets within their teams but also actively participate in the decision-making process. This involvement enables them to effectively communicate the reasoning behind compensation decisions, making conversations with employees easier and more transparent.
To ensure effective communication, people managers at Payscale follow a step-by-step process for compensation planning. First, managers engage in goal-setting conversations with their employees to establish clear expectations and objectives. Performance is then reviewed based on both the results achieved (the “what”) and the behaviors demonstrated (the “how”). This comprehensive review allows managers to identify high performers, low performers, and areas of improvement for each employee.
Next, managers consider their employees’ long-term career aspirations. Understanding an employee’s future goals helps align compensation decisions with individual growth and development plans. Additionally, managers use a “nine-box methodology” to assess employee performance and assign appropriate compensation adjustments based on performance ratings.
To support managers in this process, the HR team at Payscale provides a toolkit with various resources, such as technology, written documentation, and video content. This toolkit helps managers understand the compensation cycle, market data usage, and how market adjustments are made. Managers are also educated about salary ranges for their positions and their teams, enabling them to address questions about pay disparities.
The toolkit also includes best practices for compensation conversations, such as knowing when to address process-related questions and ensuring the communication aligns with the organization’s transparency policies. Training also equips managers to handle difficult scenarios, such as employees who may be dissatisfied with their compensation decisions, by guiding them toward improvement and growth opportunities for the following year.
By involving managers in the compensation planning process and providing them with the necessary tools and resources, organizations can foster a culture of transparency, fairness, and understanding. Effective communication between HR professionals, compensation experts, and people managers ensures that compensation decisions are well-informed, objective, and aligned with both individual employee aspirations and organizational goals. This collaborative approach contributes to a more engaged and motivated workforce, ultimately driving the success and growth of the organization.
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Compensation planning supported by technology
In the past, Payscale used spreadsheets and manual processes for compensation planning, resulting in a lengthy 90-day review cycle from January to April. Manual data entry and version control made accuracy and budget management challenging. Managers received individual spreadsheets, leading to spreadsheet chaos, and the process lacked efficiency.
However, the acquisition of Curo in the summer of 2021 brought a game-changing solution to Payscale’s compensation planning challenges. With Curo, Payscale gained access to a sophisticated compensation planning tool as well as a pay equity tool. The transition from manual spreadsheets to compensation planning software has revolutionized our process, and the improved accuracy, efficiency, transparency, and credibility have enhanced employee satisfaction and engagement.
Thanks to the new software, Payscale successfully reduced the compensation planning cycle to about 60 days, bringing it closer to the start of the year. This streamlined process allows the team to wrap up the entire compensation planning process by the end of February or the beginning of March. The software also facilitates budget allocation, and managers can now submit requests to move budget pools around, which enhances agility and flexibility in decision-making.
“The software’s impact on accuracy and data analytics has been remarkable,” says Lexi Clarke, Chief People Officer at Payscale. “Errors related to version control have been eliminated, and data consolidation is more seamless. With the software, our managers are empowered to make recommendations and adjust budgets with confidence. At the same time, as an HR team, we see those requests for changes and can ensure adherence to company protocol.”
One of the key benefits of using compensation planning software is the transparency it provides throughout the process. Beyond just accuracy and efficiency, compensation planning software bolsters credibility within the organization. Leaders have greater confidence in their decisions and can interact in a more informed way with the rest of the business. The software’s data-driven approach and calculations contribute to building trust in the compensation function.
Effective compensation planning plays a pivotal role in driving organizational success and employee satisfaction. By designing fair and competitive compensation packages, organizations can attract and retain top talent, foster a motivated workforce, and ultimately achieve sustainable growth. Striking the right balance between financial rewards, non-monetary incentives, and performance-based recognition ensures a harmonious work environment that will benefit the organization overall.
Ready to see what Payscale’s compensation planning software can do for you? Let’s talk!
