For most companies, the last two quarters of the fiscal year are dedicated to compensation planning, also known as merit planning. During this time, organizations evaluate employees’ current pay levels against their compensation philosophies and market benchmarks to uncover where they need to adjust. This includes base salaries, bonuses, and equity.  

This article outlines the key steps to support anyone involved in the compensation planning process. If you’re still working through it, these steps can help you stay focused. And if you’ve already finished, they’re a chance to pause, reflect on what went well, and consider what you might refine next year.  

The 3 Core Elements of Compensation Planning 

The compensation planning process starts with these foundational steps: 

  • Review your compensation philosophy: Your compensation philosophy defines your company’s approach to paying and rewarding its employees. Revisit it and look at whether it still supports your goals for your total rewards program and reflects the culture you’re aiming to build.  
  • Assess the current state of your compensation program: You have a vision, but how is your compensation program functioning in practice? Does it meet your original goals, or do you need to make changes?   
  • Take stock of your initial budget constraints: What can your organization afford to spend on compensation adjustments? Understanding your constraints helps build financial alignment and sets the stage for detailed planning later in the process.  

Once these building blocks are clear, here are the next key steps for an effective compensation planning cycle.  

Market Benchmarking: Finding the Right Approach 

Market benchmarking will help you understand whether your compensation philosophy is still aligned with the market and if your pay levels are competitive. Here’s how to approach it: 

Gather external market data 

  • Partner with business leaders and HR partners to understand the talent market and the roles you’re benchmarking.  
  • Use reliable compensation survey data that includes companies comparable to yours. Look at factors like size, industry, and funding stage.

Incorporate internal data 

  • Examine your headcount trends to reveal areas of strength (departments with high engagement and low turnover) and potential vulnerabilities (departments with low engagement and high turnover).   
  • Incorporate insights from employee engagement surveys and internal job changes based on business needs.  
  • Work with business leaders and HR partners to validate the trends suggested by your benchmarking data.  

Key questions to consider: 

  • Do you need to make larger budget adjustments at certain levels? If so, what are the potential consequences? 
  • Do your employees’ pay levels still align with your compensation philosophy? 
  • Do you need to target a higher market percentile for critical roles? And do you need to adjust your compensation philosophy to support that? 

Budget Planning: Aligning Costs with Strategy 

Once you’ve benchmarked the market and gathered internal insights, move into detailed budget planning. This stage involves balancing market competitiveness with internal equity and cost constraints. You don’t want to be too conservative and fall behind the competition, but you also want to avoid overspending. The more data you can provide to support the budget planning process, the more likely the company leadership and board will approve your plan.

Key questions to consider:    

  • Will compensation programs be funded consistently across teams? 
  • Who will be eligible for raises, bonuses, equity awards? 
  • How will proration be applied, if at all? 
  • What actors will be used to determine individual allocations? 
  • How much discretion will leaders have to make compensation decision for their teams? 
  • How much budget flexibility will be tolerated? 

Best Practices for Executing Your Compensation Plan 

Once your plan and budget are settled, here are best practices for bringing everything to life through the merit cycle process: 

  • Create a framework that links pay to performance: Use consistent criteria to ensure equitable performance reviews.  
  • Hold a calibration session: Gather HR leaders, managers, and other decision-makers to ensure equity and parity for how people are rated across teams.  
  • Create a training and communication plan: Help managers and employees have more productive conversations about compensation by providing training, announcements, FAQs, and talking points.  

Technology’s Role in Compensation Planning 

Moving from spreadsheets to automated systems that can help you easily manage the tactical elements of compensation planning can reduce errors and free up time for strategic activities. Here are some things to look for in a solution: 

Stores and manages compensation data

  •  Integrates with your HRIS to store active employee job and pay information 
  • Shows accurate pay ranges based on job levels and location. 
  • Calculates the cost to bridge pay gaps. 

Provides decision-making tools for leaders 

  • Gives managers information on compensation and pay ranges information for team members. 
  • Calculates leader-specific budgets, enabling them to make allocation decisions. 
  • Shows leaders what they’re spending compared to their budget.  

Tracks comments, changes, and approvals

  • Records allocation decisions for an employee.  
  • Records comments around decisions and can generate a report of changes.  
  • Routes and tracks approvals.  

Generates and shares compensation statements  

  • Translates compensation adjustments and awards into clear statements for employees.  
  • Allows easy distribution of statements to managers and employees. 

Reflect and Plan for the Next Cycle

Compensation planning is both art and science. By reflecting on what worked and what didn’t, you can continue to refine your approach so your compensation programs continue to support your business goals and attract top talent.  

How Sequoia Can Help 

Sequoia’s compensation advisors have both the expertise and access to powerful analytics to help you design a compensation plan that’s right for your organization. To learn more, connect with one of our advisors.