The 2024 guide to compensation planning and management

Why do we go to work? First and foremost, our employment is a transaction – we complete work for our employer, and receive compensation for it in return. That compensation always includes a salary or wage, which allows us to finance our lives, but a compensation package can include a number of additional benefits that makes going to work a worthwhile endeavour.

If you’re an employer, it’s important that you’ve carefully considered the type of compensation you offer your employees. Just as the world evolves, so too must your compensation packages – whether it’s a performance bonus at the end of the year or offering flexible work arrangements, the employers who maintain and grow successful teams are the ones who are compensating their people well.

To have a productive and happy team requires an equitable transactional relationship, one where employees feel fairly compensated for the work they put in. Here’s how you can effectively plan and manage your compensation package.

What is compensation management and planning?

Compensation management and planning involves developing a strategy for adequate compensation that will support your business and meet your employee needs. That strategy isn’t just cutting a percentage of the budget for salaries – compensation management should be an integral part of your overall business planning and the strategy should be revisited regularly.

Take a moment – as a business owner, what do you currently offer your employees in return for their work? A salary is a legal requirement but where does it place against your market competitors? Do you offer employees additional benefits that they’re happy to use? Is there anything that your team is clamouring for?

Like building any strategy, compensation management is a process that involves research from the ground level up. You need to have a keen ear for what your employees are looking for, and understand what makes you an appealing employer. Importantly, you should also know what potential candidates in the wider job market are looking for, for those inevitable times when you find yourself looking for new team members.

Once you’ve got that research down, it’s time to use those learnings and build a compensation package that no one could possibly turn down. It’s easier than it sounds, we promise. This guide will take you through the whole compensation management process.

What are the benefits of compensation management?

There’s a reason that compensation management in a business is an imperative – four reasons, in fact. If you’re on the fence about investing time into compensation planning, here’s why you should get started.

1. Improved employee engagement

A happy team is a productive team. Investing time and effort into employee engagement is a move worth making – an engaged team is one with increased performance, improved relationships, higher employee retention and dynamic teamwork. Providing a competitive compensation package can go a long way towards improving and maintaining positive employee engagement levels. After all, employees will be much more motivated and personally invested in your company if they feel like they’re adequately compensated for the work they’re doing.

We understand that it’s a particularly tough time right now, with sky-high inflation and the increasing cost of living placing pressure on everyone. However, employers can’t simply sweep salaries and benefits under the rug until things improve.

According to Employment Hero’s Talent Insights Report, 57% of employees believe their current pay does not meet rising cost of living pressures. That’s a lot of people who are unsatisfied with their compensation, and employers should have that top of mind. Now is the time to take action – at the very least, you can be fairly confident that you’ll be strides ahead of your competitors.

2. Becoming an employer of choice

Every employer dreams of top talent crowding their inbox, keenly awaiting the next available vacancy. Imagine how much money and time you’d save on job boards and hiring! Plus, in a talent market where the employee can often find themselves in the driving seat, employers could get more say and choice in who they hire.

However, to get to that point takes an established employer brand, and a positive reputation shared by past and present employees. It’s the type of credentials that takes time and investment to achieve.

Competitive compensation can be an important part of forming a strong employer brand, and can often be the deciding point for many sought-for candidates when juggling job offers. In our Talent Insights Report, over half (51%) said that a higher salary would encourage them to accept a role in another company.

We know that for small businesses, competitive compensation can be a challenge too. Recruiters were surveyed for the State of Recruitment Report, and 92% said that challenges experienced in the hiring process were due to their inability to match the offered salary by large organisations. However, with effective compensation management, creative use of benefits and salary benchmarking, SMEs can hold their own in a tough talent market – in turn becoming an employer of choice.

Hero Tip: A market-leading compensation package is a great way to get new talent through the door, but it’s just one piece of the puzzle. If you want to dominate the war for talent, Employment Hero’s innovative tool SmartMatch could be your secret weapon.

SmartMatch directly connects great talent to your business by pairing the best candidates on the market with roles in your business. Next time you need to hire, you can simply peruse a ready pipeline of potential new employees and choose from the best. They’re ready to hear from you.

Find out more about SmartMatch here.

3. Greater visibility into your team

The most successful employers are the ones who listen to their teams. There’s a good reason for this – those in tune with their employees are able to identify any discontentment or culture issues and retain employees before it grows into a larger issue of employee disengagement. No one wants to lose an excellent team member (or multiple team members) over something that could have been easily remedied.

Actively managing compensation and effectively planning involves listening to what your employees are saying, and taking action as a result. Employers can only benefit from this process – not only will they be able to find new ways to improve employee engagement, but they demonstrate that they are a supportive employer who is willing to listen. Navigating compensation conversations can be challenging, but our manager’s guide to compensation conversations can help you handle these discussions like a pro.

Remember that it’s not simply about running annual reviews, and deciding who has been lucky enough to earn a salary raise. Of course, performance can (and should) come into compensation, but it is just one part of the process. If your criteria for getting a salary increase (or even a raise in line with inflation) gets tougher and narrower every year with the economy, your team is likely to start looking for greener pastures, and more generous employers.

Use the compensation management process as a way to build a culture of listening and two-way communication. You’ll be glad you did when you can spot any potential issues well in advance.

4. Your budget can go further

Yes, we know this sounds like a contradiction – potentially increasing compensation packages doesn’t seem like a way to stick to your budget when it’s already tight.

However, effective compensation management is just a part of good business budgeting. By being across the money that you’re spending on your team, it’s easier to see where improvements can be made and how priorities can be shifted. In a time where employees are calling for better compensation to match a tough economy, it helps to know exactly where your money and time can be spent – instead of just saying “no” and risking the consequences on employee engagement.

You can also make your budget go further by being creative in your compensation management. Rather than just splitting out a chunk of your budget on salaries and super and calling it a day, you could also look at adding on different benefits to your compensation package that don’t break the bank. Luckily there’s plenty of options out there.

The different types of employee compensation

There are two main types of compensation that you can use to make up a comprehensive package – direct and indirect compensation, plus an additional type related specifically to performance management.

Direct compensation

Direct compensation is what most people think of when they consider compensation as a whole. It’s the financial or monetary compensation you give your employee for the time they work, and can come in the form of a base salary, wage, overtime pay, bonuses and commissions.

How you directly compensate your employees can make a significant difference to your employees’ happiness and engagement, as well as potential talent that are considering joining your team. To be an effective employer, it’s really important that you take the time to ensure that your direct compensation is competitive in the market. That could include salary benchmarking and additional research for each role in your business.

For your consideration, direct compensation as a whole is growing year-on-year – likely to match inflation and industry demands. In our May 2024 SME Index, median hourly wages increased +8.0% in the last year (May 2023). However, there was also a month-on-month decrease between April and May 2024 of -1.4%.

Indirect compensation

Indirect compensation is non-monetary payments provided to an employee, commonly known as employee benefits. Some of this compensation type is compulsory by law, while others are not usually legal obligations for employers, but can go a long way when it comes to supporting employees and bolstering their employer brand.

Examples of compulsory indirect compensation includes:

• Annual leave
• Long service leave
• Maternity/paternity leave
• Personal/sick leave

Please note that employee eligibility criteria may affect which employees are entitled to these. Make sure as an employer, you’re across legal requirements.

Non-compulsory indirect compensation may include things like:

• Health insurance
• Additional superannuation contributions
• Additional leave on top of statutory requirements
• Education programs or subsidies
• Company cars
• Flexible working arrangements
• Childcare benefits
• Workplace meals
• Wellness classes
• Working from home set-up allowance
• Co-working space passes

For many employers, offering additional, non-compulsory compensation can greatly bolster their compensation packages. They can also make effective selling points when recruiting talent in a competitive market.

Bonus compensation – aka incentives

This type of compensation doesn’t fit neatly in the above categories but incentives can be a great addition to your compensation package. Incentives are distributed based on employee performance – for example, a reward on the completion of a big project. The incentive may be in the form of cash, another type of monetary award or even items like merchandise.

This isn’t just a nice benefit for employees. Previously a staple for sales teams, the benefits of incentives have been proven for all teams in a business. Research from Cornell University has shown that immediate rewards can increase intrinsic motivation, which is pretty handy when you’re building a high performance culture in your company.

How to design a compensation management strategy:

So you’re ready to design a compensation package that will keep your current employees happy and encourage great talent to knock on the door – where to start? We’ll take you through the steps of a typical compensation planning process, from beginning to end.

1. Define your objectives

Every good plan starts with top level objectives. Spend a little time on the ‘why’, before you get into the ‘how’ and ‘what’.

Understand what you want to achieve

To effectively manage compensation, you have to know what you’re aiming to get from the package you put in place. For many employers, top of their list of priorities will be how compensation affects performance and if it will drive enough motivation to encourage a successful team. For others, they may be identifying a need in their employees and growing dissatisfaction with the current benefits on offer. Some may also have noticed that they’re getting interviewees through the door, but losing them to competitors after discussing the benefits on offer.

Whatever your priorities are, use them to form a compensation philosophy with those goals in mind. It’ll make it easier to track success further down the line.

Align your goals with the wider business OKRs

When it comes to your business goals, consider how you’ll achieve them with the aid of a compensation plan. For example, if you have a number of short term goals, you might want to consider adding in quick incentives that will drive your team to deliver at speed. Or, if your team will need to travel regularly to deliver on your goals, consider bringing in company cars that will get your name out on the road.

You may also have some goals that require your team to be well ahead of the market in terms of specific knowledge – bringing in education programs or subsidies could support them in their roles.

Get across the baseline requirements

It seems obvious, but it’s still worth stating – make sure you’re across what you’re legally required to offer as part of the compensation package. That isn’t just paying minimum wage or above, but paying superannuation and enabling leave entitlements.

On a more general note, you also have a requirement as an employer to ensure your compensation is fair. That means that any benefits are applied equitably and there’s no unfair discrimination in the process of assigning rewards or additional compensation. If you’re offering any compensation beyond the legal requirements, it’s important to back it up with clear policies that outline how the compensation will be delivered and how any decisions on benefits such as flexible work arrangements will be made.

2. Analyse internal and external factors

It’s time to get into the weeds and do some research. Step two is all about finding out what your team wants and what will make your compensation package competitive in the wider market.

Research and benchmark against competitors

Put your detective hat on and research what your competitors are offering – both in terms of salaries and the benefits they offer. Their company websites may offer clues about specific additional benefits, as well as any current job advertisements they have up. We’ve also got a specific Salary Benchmarking tool which can help, with data taken from industry averages.

Ask your team for their feedback

There’s no point in offering specific benefits or making changes to compensation if you don’t know what your team is looking for. After all, offering compensation that they’re happy with can really increase employee engagement and satisfaction at work.

With that in mind, take the time to find out what your employees want, both through formal channels of feedback like anonymous surveys, as well as informal conversations between managers and reports. Consider everything – you’re unlikely to meet all their wishes, but you might find some inventive suggestions you hadn’t even considered.

Consider economic conditions and pressures

All economies go through tough times, and the last few months have been no exception. Whenever you do your compensation planning, take some time to consider the wider effects of the economy on your business and your team – just as you would with your wider business strategy. That includes both the budget that you have available to spend on compensation, as well as the needs of your employees if economic pressures are biting.

You might find that depending on how the wider economy looks, you’ll have to adjust your compensation plans in turn.

3. Develop a compensation structure

Now to the exciting stuff – creating a compensation package to make you the employer of choice.

Create pay grades and salary ranges across the company

First of all, focus on your current salaries and check them role by role. Recognise any potential imbalances and create pay grades and salary ranges company-wide, that ensure that everyone is paid fairly. After all, a pay gap is not a good look, and employees will talk to each other.

That’s where pay structures, and company policies around how pay is decided, are such an important part of ensuring equitable compensation plans. Plus, if employees know what performance is expected of them to be eligible for pay raises, annual reviews don’t need to be an awkward conversation for them, or for their manager.

And don’t forget to use that competitor research at this point. Benchmarking the salaries you offer against competitors will give you an idea of where you should be aiming for when it comes to setting pay grades, which Employment Hero can help you with.

Settle on additional benefits

To stand out from the crowd, offer your employees additional benefits that really make a difference. Use that feedback you’ve garnered in the research stage and assess what you can and can’t implement in the company. Don’t be put off if you’re working with a tight budget once direct compensation has been decided – there are plenty of options out there that don’t break the bank, or even require costs at all.

For example, in our Talent Insights Report, flexible working was named by a number of employees as an initiative that would encourage them to stay in an organisation, or to accept a role in another organisation.

Source: Talent Insights Report

Design incentive plans

If you’re looking to build a high performing team, having a set incentive plan in place can be a great addition to your compensation package. You may decide on a budget for the year, with a new selection of incentives offered every few months, or have a pre-set list of rewards in place permanently. Whatever you do, ensure that the incentives are something that employees will strive for, and that they’re awarded fairly through measurable performance targets.

4. Implement and communicate your new compensation strategy

With your compensation plan in place, it’s time to get the word out in your company.

Share the exciting news

Introducing a refreshed compensation package can be a big step for a company. Share the news through your chosen internal communication channels and allow for any feedback that you may receive. If your changes are quite large, it can be helpful to set up a shared FAQs resource or document, so that you’ve covered any commonly-asked questions before you have to address them directly.

Train your team

Remember that as with any changes in a business, you can’t simply roll something out through a single announcement. Take the time to ensure your team, and importantly, managers, are familiar with the compensation plans at hand. This will allow them to answer reports confidently about any questions they may have. If any managers are hiring for a new team member, it will also enable them to talk to top candidates about the compensation package and really sell them on the benefits.

Establish clear policies and procedures

As already mentioned, any compensation packages should be assigned fairly. That doesn’t mean that people at all levels in the company get the same compensation package – in fact, it’s unlikely – but it’s key that company leaders establish clear policies around how they are distributed.

For example, if an employee moves to a manager role, their compensation package may evolve with their changing role. With set policies in place, all employees making that specific move in the company would receive the same changes to their compensation.

5. Set regular reviews and improve when needed

The compensation management process isn’t over yet – instead, compensation planning should be an ongoing endeavour. No business stays the same forever and neither should your compensation plans.

Evaluate success through feedback loops and research

Set regular times to check in and assess the success of your compensation packages. That could include running employee surveys to get their thoughts on any benefits, or benchmarking salaries as the market changes. Treat compensation planning as you would any other element of your business strategy, and give it the time and attention it needs to stay competitive.

Be honest about what’s working

Say it’s been six months, and no one has signed up to that flashy gym membership you introduced. The reality is that sometimes, a benefit just won’t prove itself to be as useful as you had thought. Be honest with yourself and your team if there’s a benefit that’s not panning out.

However, word of warning – before you cut off the glossy classes and workout rooms, make sure and check in with your employees first. You might find that there’s a specific blocker that’s stopping them from using the benefits, such as a lack of parking or subpar facilities. If that’s the case, it might just be a case of switching up the benefit to a different provider.

Create a market-leading compensation package with Employment Hero

If you’re ready to get started with effective compensation management, reach out to our team at Employment Hero. Our platform offers a heap of benefits and features that enable you to create an appealing compensation package for your team. With our employee engagement tools, you can also create productive feedback loops for your team, so that every benefit you bring to the table is one that will really make a difference.

And if you’re looking for top talent with the right fit for your business, check out SmartMatch by Employment Hero. You could save up to 80% on hiring costs.