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Compensation Planning Made Easy in 8 Simple Steps

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According to a recent Gartner survey conducted in 2022, only 32% of employees felt they were fairly compensated. Additionally, just 38% of employees knew how their compensation was determined. Having a transparent and structured compensation planning process is key to retaining employees and keeping them happy.

In this article, we will provide insights into the compensation planning process and 8 easy steps to get started within your organization.

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What is Compensation Planning?

Compensation planning refers to the process of designing and managing an organization's approach to employee compensation. It involves developing a structured framework for determining how employees will be rewarded for their work, skills, and contributions to the organization.

Compensation planning aims to attract, motivate, and retain talented employees while ensuring the organization's financial sustainability.

Key Components of Compensation

When employees are part of an organization, their primary compensation should be their salary. But that’s not all. Team members are compensated in various ways, including:

  • Health insurance: covers the medical expenses for employees and, sometimes, their family members.
  • Retirement plans: employees save money throughout their working years to support themselves in retirement. Examples of retirement plans are 401(k)s, IRAs, and pension plans.
  • Time off: taking a break from work. Time off can include vacation days, sick leave, personal days, or mental health days.
  • Bonuses: rewards given to employees for exceptional performance. It is a way to recognize and appreciate employees' hard work and dedication. Bonuses can include cash incentives, stock options, gift cards, or extra time off.
  • Flexible work hours: employees can have a more adaptable schedule to work at different times or even from different locations. It can include telecommuting, part-time work, job sharing, and compressed workweeks.
  • Growth opportunities: offered by employers to help employees advance in their careers. Employees can take on new responsibilities and challenges. Another growth opportunity is to enroll in training programs provided by the company.
  • Personalized coaching: professional development where an employee receives one-on-one guidance and feedback from a senior to improve their skills and performance in their job.
  • On-site services: a range of benefits available to employees while they are on company premises. These services include on-site daycare, fitness centers, cafeterias, and massage treatments.
  • Subsidized transportation benefits: employers provide help to cover the cost of transportation for employees. This includes discounted public transit passes or subsidies for carpooling or ride-sharing services.
  • Fitness stipends: allowances provided to motivate employees to maintain a healthy lifestyle. The allowance can be used for gym memberships, fitness classes, sports, etc.
  • Equity: compensation employees receive in the form of company stock, stock options, or other forms of ownership in the company. These benefits provide employees with a stake in the success of the company.
  • Catered meals: compensation for meals offered to employees during office hours. Offering catered meals helps foster a sense of community in the workplace.

8 Easy Steps For Effective Compensation Planning

We now understand that developing a compensation plan is complex for any company. It involves more than just salary planning. 

To help you simplify this process, here are eight easy and actionable steps to kickstart your compensation planning cycle.

Step 1: Align on compensation budget and pay bands

Aligning compensation budgets across Finance and Leadership teams helps companies manage costs. It ensures they are spending their resources to stay competitive in today’s business environment.

Additionally, it's vital that your compensation planning process support your company's objectives. To achieve your mission and vision, you need to attract, motivate, and keep the right employees. With the right team, reaching your goals and fulfilling your company's purpose can be easier.

Step 2: Analyze your company’s compensation data

The next step is to conduct an analysis of your company’s compensation data to ensure it remains competitive. Insights from the analysis can be used to identify areas where necessary improvements in the compensation plan are needed.

Here are some easy steps to guide you through the process of analyzing your company's compensation data:

  1. Categorize data into relevant groups such as job roles, departments, experience levels, and performance metrics.
  2. Calculate key metrics such as average salary, salary ranges, and distribution of compensation.
  3. Benchmark against industry standards and market rates for similar roles and skills.
  4. Analyze pay equity to identify potential pay gaps or biases and ensure equal pay for equal work.

Step 3: Model out pay increases and changes in compensation

Modelling out pay increases should factor in several different assumptions such as:

  • Evaluating employee performance ratings and determine performance-based raises to recognize high-performing individuals. This will also encourage underperforming employees to work towards achieving their goals.
  • Reviewing existing employee salaries and assess the cost of living adjustments by location ensuring fairness and equality among team members.
  • Reviewing merit or promotion-based compensation increases to strengthen work ethic, keep employees, and increase loyalty

Step 4: Review final compensation changes 

It's crucial to ensure that all parties involved in final compensation changes are on the same page. These include department heads, Finance, and HR lead. It's equally important to provide clear reasoning behind the changes while maintaining a detailed record of all discussions. This will promote accountability and transparency.

It can be helpful for businesses to have a centralized system to monitor headcount changes. Agentnoon is designed to simplify the process by submitting and approving all compensation changes and requests. This will save company leaders time and headaches. Additionally, you can set up approval flows with multiple approvers from different departments.

via Agentnoon's workforce planning software


Step 5: Schedule one-on-ones with each employee

One-on-one meetings can provide a safe and confidential space for employees. They can discuss their concerns about any potential compensation changes in these meetings.

A quick note: Listen actively and provide clarity throughout the conversation. It will ensure that the employee feels heard and valued.

Step 6: Communicate the overall process of calculating compensation 

Transparency is the key! Be clear about the calculations and factors involved in compensation planning. This can help employees understand the rationale behind their new pay. Such transparent communication will make them feel confident they are being treated fairly.

Additionally, collecting employee feedback can give insights and identify areas for process improvement. 

Step 7: Negotiate and adjust compensation with specific high-potential employees

Retaining high-potential employees requires more than just offering a competitive salary. Negotiating compensation may involve stock options, performance bonuses, and flexible work arrangements.

Taking time to understand what motivates each employee is beneficial. It will help customize compensation packages according to their needs and goals.

Step 8: Update new pay in HR and payroll systems

 All changes made during the compensation planning process should be reflected in all critical systems, including HRIS and payroll systems, in a timely manner. This is to ensure that the new pay rates are accurately calculated and distributed in the next pay cycle.

 A reminder: Verify all information to prevent errors and delays.


The success of an organization heavily relies on having a solid compensation plan in place. It attracts and retains top talent and boosts employee morale and productivity.

Key points to keep in mind include aligning compensation with business goals, ensuring fairness and equity, and regularly reviewing and adjusting the plan.

By prioritizing responsible and effective compensation planning, companies can position themselves for long-term success.

Get in touch with us to learn more about how Agentnoon can help your company with effective compensation planning!


Shayan Amin

Shayan Amin

Growth @ Agentnoon


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