A Complete Guide to Compensation Planning

I’ve worked with compensation plans in every form, from spreadsheets built in a rush to full-blown frameworks signed off by the board. Some work. Some fall short.

And with pay expectations, inflation, regulation and working practices all shifting at speed, getting compensation planning right isn’t optional, it’s business-critical.

In this guide, I’ll show you how to do it properly.

What is Compensation Planning?

Compensation planning is the process of designing and managing how you pay your people, including salary, bonuses, employee benefits and incentives. It helps ensure pay decisions are fair, competitive and aligned with business goals.

At its best, it aligns your reward strategy with your business strategy, market realities and employee expectations. At its worst, it’s a spreadsheet full of guesswork that erodes trust and burns company budget.

Types of Compensation

Most companies think compensation means salary. But in reality, it covers everything you offer in return for someone’s time, skills and effort. If you’re only focused on base pay, you’re missing half the picture.

Here’s how the different types of compensation typically break down:

Direct Compensation

This is the core of most compensation packages: the money employees see on their payslips.

• Base salary – Fixed annual or hourly pay
• Performance-based bonuses – Linked directly to group or individual performance
• Commission – Revenue- or target-based incentives, often used in sales roles
• Overtime pay – Additional pay for hours worked beyond contracted hours

Indirect Compensation

Indirect compensation covers everything outside of take-home pay: the extras that often make or break a compensation package.

• Pensions and retirement contributions
• Private health insurance
• Life assurance and income protection
• Company cars, travel allowances or subsidised transport
• Wellbeing benefits, e.g. gym memberships, therapy support
• Flexible or hybrid working arrangements
• Learning and development budgets

Equity and Long-Term Incentives

These are longer-range tools, typically used to align employees with business performance over time.

• Stock options or RSUs
• Profit-sharing schemes
• Long-term incentive plans (LTIPs)
• Equity grants

The right mix of different types of compensation will depend on your industry, budget and the roles you’re hiring for. But across every organisation I’ve worked with, one thing is clear: Total compensation is what matters, but too many employers focus only on base salary and forget everything else that makes a role competitive.

Companies often neglect to communicate or even recognise the full value of their total compensation offering, which undermines their strategy.

What are the Benefits of Compensation Planning?

Most companies treat compensation like a budget line until it starts costing them people. In reality, a strong compensation plan is one of the most effective tools HR has to attract and retain top talent, close gaps, and keep decision-makers aligned.

Here’s what it gets you:

1. You stop losing people over pay

If you’re constantly reacting to counter-offers or exit interviews, something’s broken. A thorough compensation plan gives you a clear, data-backed view of what the market’s doing, so you’re not making pay decisions in panic mode, and you’re keeping employees motivated.

2. You spot pay gaps before they explode

Most HR teams I speak to want fair pay – they just don’t have the visibility. Compensation planning gives you a structured way to spot internal inequity and deal with it. Quiet fixes today stop louder problems later.

3. You link rewards to what actually matters

Too many businesses hand out bonuses and raises with no connection to performance or progression. A good compensation plan forces clarity: 

• What are our company values?
• What do we reward?
• And how do we explain it?
• Which rewards tie directly to employee motivation?

4. You build trust by being transparent

People don’t need every figure on a spreadsheet. But they do want to know that decisions are fair, thought-through and not just based on who shouted loudest. Compensation planning brings consistency and with it credibility.

5. You take the heat out of pay reviews

Every HR team has been in a room where pay decisions get political, emotional or rushed. A well-built compensation plan changes the tone. You come in with a structure. You’ve got benchmarks. And you can push back when needed.

See our guide on conducting pay reviews here.

The Compensation Planning Process

Every organisation handles pay, but not every organisation has a compensation plan. Without structure, employee compensation can rely heavily on reactive decision-making. That’s when you start seeing inflated offers, internal pay drift and managers pushing for one-off exceptions.

A good compensation plan gives you a system – one that’s consistent, explainable and built to flex with change.

Here’s what that process should look like.

1. Define Your Compensation Philosophy

Start by deciding what you believe about pay. Ask yourself:

• Are you aiming to match the market, lead it or offer something more balanced?
• How do you approach performance, equity and progression? 
• What’s your view on transparency?

Without clear principles, you’ll end up making inconsistent decisions, and inconsistencies create confusion and dissatisfaction.

2. Conduct Job Analysis and Market Research

Before you begin salary benchmarking, get a solid understanding of the roles you’re evaluating. Ask yourself:

• What are the actual responsibilities? 
• How do they compare across teams? 
• Where do they sit in terms of seniority and impact?

Once you’ve done the groundwork internally, bring in live market data to do thorough market research. Traditional salary surveys can be useful, but they often fall short in fast-moving markets. Benchmarking against current job ads using salary benchmarking tools like HR Datahub helps you stay aligned with real-time expectations.

3. Develop a Pay Structure

With job data and market insight in hand, you can start shaping your salary bands and bonus ranges. Keep it simple: enough structure to guide decisions, but not so rigid that it becomes unusable.

The goal is to help line managers make consistent, defensible decisions. Without this, you can end up with two people doing the same role, on completely different pay, with no rationale behind it.

Benchmarking against live salary data gives you an easy way to set clear expectations for pay by role, skill, location or level without drowning in spreadsheets. And importantly, it will be market-aligned.

4. Determine Incentive Programmes

Incentives should reflect what you want people to focus on, not just what’s easy to measure. For some roles, such as sales, that’s clear targets, such as hitting sales targets or sales quotas. For others, it’s long-term outcomes or team performance.

Think carefully about how bonuses and variable pay align with behaviour. The best incentive schemes reinforce the company’s goals. The worst ones reward employees for the wrong things entirely.

Watch our free on-demand webinar to learn how to craft effective incentive programs.

5. Offer Non-Cash Benefits

Not all value sits in the payslip. Things like pensions, private health insurance, wellbeing budgets, flexibility and development opportunities often matter just as much, and sometimes more.

Rather than copying what others offer, focus on what your people actually care about. A competitive compensation package is only competitive if it reflects the needs of your workforce.

6. Communicate the Plan

If your managers can’t explain the compensation plan, it won’t land. You don’t need to share every detail, but you do need to be clear about:

• How pay decisions are made
• What people can expect
• How to raise questions

When employees understand the process, even tough decisions make more sense.

7. Review and Adjust Regularly

No compensation plan stays relevant forever. Markets shift. Roles evolve. Expectations change.

Review your compensation plan regularly, at least annually, and ideally more often during periods of change. Use feedback from managers and employees to improve it, and be ready to adjust if something’s no longer working. A good compensation plan should be stable, but never static.

Challenges with Compensation Planning

Even the best-designed compensation plans run into problems. Most of the challenges I see come down to one of three things: 

1. Inaccurate data
2. Internal inconsistency
3. Misalignment with business reality

Here’s where things often go wrong, and how to get ahead of them.

1. Outdated or Incomplete Data

Too many teams are still making pay decisions based on data that’s six months out of date or worse, based on last year’s assumptions. By the time traditional salary surveys are published, the market has already moved. That kind of lag leads to missed expectations, over- or under-paying and pay decisions that don’t hold up under scrutiny.

Solution: Use live, real-time benchmarking data that reflects what’s happening in the market today. With HR Datahub, you can benchmark roles instantly, filter by location or skill and make quick, precise decisions.

2. Internal Pay Disparities

One of the fastest ways to erode trust is to have people doing similar jobs on very different pay. It happens gradually, usually down to rushed hires, retention offers and legacy compensation packages, but over time, it builds resentment. And once people start talking, it’s hard to recover.

‍Solution: Build regular internal equity reviews into your compensation planning cycle. Don’t wait for problems to surface – use your compensation data to proactively spot gaps and address them. This includes understanding how gender pay gaps are calculated and ensuring your compensation planning actively works to mitigate these disparities.

3. Balancing Employee Expectations with Budget Reality

Leaders want to attract and retain top performers. Employees want meaningful increases. Finance wants to control spend. HR professionals often end up stuck in the middle. Without a clear compensation framework, these conversations become reactive, political and emotionally charged.

Solution: Compensation planning gives you structure, and structure gives you leverage. With the right data, you can back up recommendations, manage expectations and make decisions that hold up to pressure from every direction.

4. No Ownership or Accountability

In some organisations, compensation planning floats between HR, Finance and individual business units, which means nobody really owns it. That leads to inconsistent decisions, slow response times and missed opportunities to act strategically.

Solution: Appoint someone to lead the process, even if it's a small team. Clear ownership means clear accountability, and it keeps your compensation plan moving forward instead of falling into the gaps.

These challenges aren’t new, but they are becoming more visible. As pay becomes more transparent and employees get more informed, the cost of inaction rises. The good news? With the right tools and a bit of planning, most of these problems are fixable.

Steps in Formulating a Compensation Strategy

It’s important to be intentional with your strategy. Ask yourself:

• Why do you pay people the way you do? 
• What outcomes are you trying to drive? 
• How will your pay decisions support those goals over time?

A strong strategy connects the dots between business objectives, employee needs and market realities. 

Here’s how to build one from the ground up, even if you’re starting from scratch.

1. Set Your Strategic Objectives

Start by asking: What’s the real goal here? 

Your strategy should directly support the business’s priorities, whether that’s:

• Hiring faster
• Retaining key roles
• Reducing pay drift
• Preparing for growth

Make your objectives clear. For example:

• “Improve offer acceptance rate for tech roles by 20%”
• “Bring pay equity across business units within 18 months”
• “Support internal promotions by aligning pay bands with development tracks”

This gives your compensation work focus and a way to measure progress.

2. Establish or Refresh Your Compensation Philosophy

Document where you stand on key questions:

• Do we aim to lead, match or lag the market?
• What’s our stance on pay transparency?
• How do we balance fixed pay vs. incentives?
• How much weight do we place on internal equity vs. external competitiveness?

Keep it simple. One page is enough. 

Share it with senior leadership and test for alignment early. If they don’t back the compensation philosophy now, they’ll challenge the strategy later.

3. Benchmark Your Pay Using Real-Time Data

Before you set pay levels, you need to know where you stand. Use live salary benchmarking tools (like HR Datahub) to:

• Compare pay by job title, seniority and location
• Identify roles where you’re falling behind the market
• Spot salary inflation in competitive or high-turnover roles

You don’t need to benchmark every role at once. Start with critical roles or where attrition is highest, then expand from there. Capture your findings in a short internal doc – it’ll inform the structure you build next.

See our guide to salary benchmarking here.

4. Build Your Pay Structures

Turn market data into something usable:

• Group similar roles into job families
• Define salary bands (min, midpoint, max) by level
• Draft bonus or variable pay guidelines where relevant
• Include guidance on when exceptions are acceptable and who approves them

This is where most compensation plans fall down, because they’re either too rigid to use or too vague to enforce. Your structure should help managers make informed decisions without needing a spreadsheet and a prayer.

5. Layer In Internal Equity

Run a pay equity analysis across similar roles and levels. Look for:

• Outliers (someone significantly over or under the band)
• Unjustified differences between team members or business units
• Gaps that can’t be explained by experience, location or performance

Prioritise fixes. You won’t solve everything at once, but you’ll be able to show progress and make the case for further budget where needed.

A comprehensive analysis should also include diversity data to ensure your compensation structure is free from unintended bias and supports your organisation's inclusion goals.

6. Connect Compensation to Progression and Development

Map out how existing employees can grow into new pay levels:

• Align salary bands to career stages or job levels
• Define how performance or skill acquisition affects pay decisions
• Include compensation checkpoints in promotion or review processes

This gives employees clarity and managers something solid to base conversations on.

7. Sense-Check Against Company Culture and Business Reality

Gut-check your draft strategy:

• Does it reflect your company values? (e.g. are you rewarding individual performance in a team-first culture?)
• Can it scale as the business grows?
• Are the admin and tools in place to actually run it?

A compensation strategy can be technically sound and still fall flat if it clashes with how your organisation actually works. If you’re rewarding individual performance in a team-first company culture or pushing transparency in a company that’s never talked about pay, expect pushback. Better to catch that now than during rollout.

This isn’t a one-off project. Your strategy should evolve, but with these steps in place, you’ll have a working model that holds together under pressure, earns leadership buy-in and gives HR teams the confidence to make consistent, fair and competitive pay decisions.

How to Implement a Compensation Plan

Implementation is where strategy meets reality, where HR teams need to bring together data, comms, and decision-making under pressure.

Here’s how to roll out a compensation plan that people actually use and trust.

1. Run a Final Sense Check

Before you launch anything, test your compensation plan with a small group, ideally a mix of HR, line managers and business leaders. 

Aim to understand:

• Does your compensation plan make sense in the real world?
• Are the salary bands, incentives and policies clear enough to apply?
• Can managers explain this to their teams without extra help?

Use their feedback to refine the language, tighten any grey areas and sense-check the rollout plan. The earlier you do this, the fewer issues you’ll face later.

2. Pilot with a Specific Group

Start small. Choose a function, business unit or geography where you can test your compensation plan in practice.

Monitor how well the structure holds up:

• Do managers understand how to apply it?
• Are there bottlenecks in getting sign-offs or approvals?
• What’s the feedback from employees?

This gives you a chance to iron out friction before scaling. And it builds credibility when you go wider, as you’ll be seen as rolling out something tested, not theoretical.

3. Roll Out with Clear Communication

A compensation plan is only as strong as the comms around it. Focus on three things:

1. Consistency: Make sure all managers are giving the same answers to common questions.
2. Clarity: Use plain language to explain what’s changing, why and what it means for people’s roles or pay.
3. Support: Provide talking points, FAQs and escalation paths for tricky questions. Don’t expect everyone to interpret the strategy on their own.

You don’t need a full change campaign. But you do need to be intentional and proactive. If you don’t explain it, people will fill in the gaps.

4. Monitor, Track and Adapt

Once the compensation plan is live, it’s not finished; it’s running. And like any business system, it needs monitoring.

Set up regular check-ins to look at:

• Uptake: Are managers using the compensation plan?
• Exceptions: Where are you seeing workarounds or pressure to override it?
• Feedback: What’s coming up in reviews, exit interviews or employee surveys?

Use this intel to make improvements. A compensation plan that adapts beats a perfect one that breaks under pressure.

5. Keep the Compensation Plan Alive in Everyday Practice

Too often, comp plans get shelved between review cycles. Don’t let that happen.

• Bring the compensation plan into performance reviews, promotion cases and business planning.
• Reference it in hiring and retention decisions.
• Share wins where the compensation plan helped make a better decision, retain someone or spot a pay gap early.

Want to stress-test your strategy?

We’ve built a free Reward Toolkit to help you do exactly that. Whether you're reviewing salary bands, fixing pay drift or rethinking employee benefits, the toolkit gives you templates, checklists and practical guidance to take your compensation plan from theory to execution.

Download the Reward Toolkit

Compensation Trends

Compensation used to be fairly predictable – annual reviews, rigid salary bands and broad market surveys. Not anymore. Pay is now one of the fastest-moving parts of HR, and teams that treat it like a once-a-year admin task are falling behind.

Here are the trends shaping compensation planning in 2025 and what they mean in practice.

1. Building Pay Transparency into the System

Buffer has published its full salary formula in the open, including how roles, location and experience affect pay. Employees and candidates alike can see exactly how compensation is structured and where they stand.

What to take from it:
You don’t necessarily need to publish your salaries to the world (although you may need to, read more about EU Pay Transparency here). But building a formula-based approach, with clear levers and consistent logic, takes emotion out of pay decisions and builds internal trust. Transparency isn’t all-or-nothing, start by giving managers better tools to explain comp decisions.

2. Using AI to Personalise Benefits

Language app company Ling is using AI to offer employees a benefits experience tailored to their preferences, recommending benefits based on needs, habits and values. That means someone focused on family might see childcare perks up front, while others might lean into wellness benefits or travel.

What to take from it:

Customisation doesn’t always require more budget, just smarter targeting. Even small organisations can run annual benefits surveys or use data from existing platforms to offer perks that actually land. Personalised benefits signal that you’re paying attention, not just paying out.

3. Offering On-Demand Pay 

Some McDonald’s franchisees have introduced earned wage access (EWA), letting staff withdraw a portion of their earnings before payday. It’s been positioned as both a financial wellbeing initiative and an employee retention tool, especially in competitive hiring environments.

What to take from it:

For high-churn, hourly or frontline roles, EWA offers flexibility that can outcompete a £0.50/hr raise. If you’re struggling to attract or retain hourly staff, offering faster access to wages might do more than a traditional bonus scheme.

4. Tying Executive Compensation to Climate Goals

Danone links a portion of its company executives' pay to its climate transition targets, including emissions reduction, sustainable sourcing and energy use. These targets are part of its broader business goals and publicly reported annually.

What to take from it:

If ESG is part of your business strategy, it should be reflected in how people are rewarded. Even modest links, such as team bonuses tied to sustainability or DEI progress, send a clear internal signal. Comp is one of the strongest levers for aligning action with company values.

5. Moving Beyond the Annual Pay Review

Microsoft moved away from traditional annual performance reviews and numeric rankings. Instead, they now run a continuous feedback model, encouraging regular check-ins, coaching-style conversations and a focus on growth mindset rather than judgement.

Managers are asked to evaluate both results and behaviours, rewarding collaboration, curiosity and impact over time.

What to take from it:
Performance and compensation are deeply linked, and so is trust. If your reviews feel transactional or outdated, look at ways to build in more regular, human conversations. Even simple quarterly check-ins can surface issues early, guide development and lead to fairer pay decisions down the line.

Read our 2025 pay trends article to dive even deeper into the trends we’re seeing.

Compensation Plan FAQs

How often should compensation plans be reviewed?

At least once a year, but for fast-moving roles or volatile markets, twice. Pay data gets stale quickly. Reviewing more often means fewer retention surprises and better alignment with what the market’s actually doing. Build review checkpoints into your HR calendar, not just around performance cycles.

What are the most common mistakes in compensation planning?

• Relying on outdated data. 
• Ignoring internal equity. 
• Overcomplicating the plan. 
• Rolling out the plan without clear ownership. 

Most issues I see come down to two things: poor visibility and inconsistent decision-making. Fix those first, and the rest follows.

How do you balance company budget constraints with competitive compensation?

Prioritise. You can’t do everything, but you can protect pay for critical or hard-to-replace roles. Use market data to guide where to invest, and be transparent about trade-offs. Sometimes clarity matters more than cash.

Need better insight into what the market’s paying - right now?

HR Datahub gives you live salary benchmarking by role, location and level – no spreadsheets, no delays, no guesswork. It’s the fastest way to build a compensation strategy that reflects what’s happening today. If you’re ready to make pay decisions with confidence, get in touch or explore the platform’s features.