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Being a human resource manager or a compensation professional, the exercise of doing a compensation planning every year is a tedious task. With companies keeping their merit increase budget same year-on-year, it has become a challenge to reward and engage the right employee, more so, when the economy has been hit the hardest with COVID. Sluggish growth, low revenues and decrease in business activity have put a brake on expansion plans, salary increments and improvisation in compensation budgets.

However, in an already uncertain environment, keeping your crème employees happy and motivated require the companies to keep their annual planning process transparent. For your department to hold the prime seat at the strategic planning table, it is essential to approach the annual planning process as an opportunity to take highly informed pay-management decisions that the executives value the most. Unfortunately, most companies and startups struggle to create a strategic compensation plan which despite keeping the employees happy doesn’t burn a hole in the pocket.

To do the same, here is a step-by-step guide which can assist in planning the future compensation structure and help navigate the tough COVID times.

Analyze the current financial landscape

The first and foremost measure before jumping to preparing a compensation plan for the next year is the look back and assess the current financial situation of the company. Is it undergoing unexpected windfalls due to COVID or is fortunate enough to experience significant increase in business? What has been the impact of these windfalls and improvements financially. These are some of the key questions that the management and the HR professional need to answer. Having a 360-degree view of the financial position will be a key deciding factor in whether the existing compensation planning will make room for incentives or for salary cuts.

For organizations experiencing increase in business, incentive compensation proves rewarding for retaining the valuable talent. In case of losses, a well thought off plan needs to be in place after making the required adjustments and clear communication with the employees.

Take holistic view & seek multiple perspectives

To develop a sound budget for compensation planning and create effective pay strategies, the organization need to develop an understanding of the various elements that impact it. For instance, for a startup, pay-strategies need to be targeted, data driven and drawn by taking holistic view of the multiple perspectives.

These perspectives are of the company, the employee and the external environment. While the company’s perspective is relatively easier to understand as it mainly internal and involves consideration of exiting financial standing and the business environment, the perspective of employees requires a careful and consistent effort. Organizing annual employee townhalls to get an insight into their fears and concerns is one of the ways to get their perspective.

Further, the external perspective is the one which needs a thorough peer-group benchmarking exercise to determine how peers and competitors are planning their market strategies and executive compensation. The benchmarking exercise would also help differentiate between departments that may be misaligned and need an overhaul thus impacting the budget.

Review the current base pay structure

Existing data plays a key role and a foundation for planning the next compensation plan. Determine when the last compensation plan was updated and fetching that data to develop the underlying base pay program would help. It is critical to understand the existing hourly wage rate of each job role and how it was deduced. However, incase such data is not available data on the existing pay structures can be collated based on each job role. Further, annual or hourly wage rates can be calculated to create a model and understand the trend along with the various business cycles.

As the businesses return to work post COVID, some might follow the pay cut structures to sustain and retain employees that are good. To create such pay cut structures, having an understanding of the annual salary range would come handy. Post COVID, for those employees who have significant amount of their compensation paid in the form of annual incentives, employers need to revisit and recreate their compensation plans

Talent assessment exercise

One strategy does not suit all. This proverb even applies to pay scales and appraisals as it has been proved by organizations which have a mix of employee pool. The shortage of a good employee is a major impediment for a company’s growth and therefore at a time when company is struggling to manage financing, screening of employees provides a key insight. By understanding the contribution of individual employee and knowing who stood by the company in turbulent times and who didn’t would help create distinction as to who deserves a raise in tough times. Conducting talent assessment exercise which could either be a survey or a tick-box exercise my managers would help determine who performed better. According the budget planning and incentive compensation plan can be prepared.

Budget approval and Communication

If the HR prepares a budget where every employee is expected to get a raise, the same needs to be presented to the financial management department for approval. The key here is not just present one budget option but multiple ways for your proposed compensation plan. One of the plans would be the one that you don’t want. However, before the HR even begin to talk to finance, think through the scenario where one has to consider if underpaid employees are worth retaining. Options such as choosing between bonuses or other attractive medical plans can also be presented.

Whichever compensation plan is approved, the same needs to be communicated with the employees. Even if the budget lays out salary cut measures the employee has the right to know what the leaders are thinking and how the future scenario will pan out.

Move from Budgets to Strategies

Creating a well-planned compensation plan by either tweaking the existing one to suit the ongoing market condition is just as critical as making a new one. Move from mere budgeting to creating an employee-friendly strategy, one that will help build trust and navigate through the uncertain COVID times. Tap the skills of experts and business advisors such as consultants to analyze the current pay structure and existing hourly wages, the going rates to determine if you are under paying or overpaying. With a focused approved and informed decision due existing data compensation planning would be a cake walk.



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Peter Davidson

Peter Davidson

Business Consultant

Self Employed

Member since

13 Dec 2018


New York

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This post is from a series of posts in the group:

Financial Transformation

The pace of evolution for many corporate finance and accounting functions is accelerating. The mandate of the CFO is expanding and the challenges they face accumulating. This blog is an exploration of these topics.

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