How to Build an Annual Employee Compensation Plan
I always get excited once February comes to a close and March rears its lovely face. I begin to notice the abundance of daylight, talk of spring break plans, and even look forward to daylight savings time (despite that one sweet hour of sleep disappearance).
Around this time, I also reflect on the work accomplished during January and February, turning my focus to critical goals that still need to be met for the year.
Over the course of my career in compensation and consulting, I've learned to slow down, identify the annual key objectives, and then focus on manageable outcomes for each quarter in an effort to prioritize my work, achieve goals, and maintain my cool.
Since we are on the eve of the dawning of a new season, I want to take this opportunity to share the essential compensation planning measures to focus on throughout the year. Knowing what to anticipate and how to plan, will lead to an impactful compensation practice and most importantly, a successful business.
A Quarterly Review of Annual Compensation Plan Priorities
Q1 Compensation Objectives
For most HR or Compensation professionals, the first quarter of the fiscal year can be quite stressful. I have always referred to Q1 as ‘game time’ for compensation professionals.
- Performance Management and Merit: For many of our clients, the first quarter of the year encompasses rewarding the prior year's company and individual performance. In order for the rewards process to effectively take place, there must be a convergence of efforts from HR, HRIS, Compensation, Finance, Payroll, IT, and participation from all levels of employees. The efforts put forth by the executive team, HR, and Compensation are essential in ensuring employees receive performance-related feedback and corresponding merit or incentive rewards.
- Incentive Plan Payouts: Simultaneously, HR and/or Compensation professionals need to be thinking about the communication plan for any short or long-term incentive plan changes. As business needs shift, so should the incentive goals and targets of any variable pay plans currently in place. Plan participants need to know this information as early as possible so they know where to focus their efforts as it relates to their defined performance goals.
- Incentive Forecasting: Next, towards the end of the quarter, HR or Compensation leaders should work with Finance (or any other plan stakeholder) to understand business results and year-to-date company performance in order to project the incentive spend. Providing your executive team and leaders with this information is critical. Taking such measures enables effective financial planning and management, and enables the team to course correct when/if performance is lacking.
Q2 Compensation Objectives
- Reconnect with the Business and your Team: Now that Q1 has ended (and you are back from a well-deserved mini-vacation), get back to 'business as usual'. It is important you shift back into your typical role because while you were off calculating incentives, running reports, and auditing the results of the pay process, significant events might have occurred. While you reconnect, meet with Talent Acquisition, HR and OD to see if any systemic issues have cropped up that need addressing.
- Participate in Compensation Surveys: Once you are up to speed, the inevitable must take place in order for your organization to have a market-competitive compensation structure. Yes, I am referring to the completion and submission of compensation survey information. No matter how many surveys you choose to participate in, this process is never quick and easy. Yet, it is paramount to ensuring your organization remains market competitive with its pay approach.
- Incentive Forecasting: The end of Q2 should serve as a moment for pause. Half of the fiscal year is over, and you should have a very strong idea of how well the business is performing. Like Q1, you should close out Q2 by forecasting the potential incentive expense. Again, this allows leadership to communicate year-to-date results with their team and make any necessary corrections to ensure incentive goals are on-trend.
Q3 Compensation Objectives
- Compensation Training: Halfway through the year, you should have a fairly good assessment on what you should focus on to enhance the compensation practice at your place of business. Take this opportunity to attend local seminars, conferences, and networking events that will help to grow your compensation skillset if you haven't already.
- Incentive Plan Review and Design: Now it's time to review the incentive plans with various stakeholders to evaluate the current design effectiveness and begin any plan design changes for the coming year. Take this quarter to work through any material changes and plan to achieve executive buy-in during Q4.
- Job Description Review: Next, you should initiate the job description review process. Working with HR and managers, ensure all job descriptions reflect the current duties and responsibilities for each unique and defined role. This will come in handy during the last quarter of the year.hr
- Merit and Performance Management Preparation: Before you close out Q3, performance management and merit planning should be at the forefront of your mind. Make it a point to connect with Talent Acquisition/HR so they fully understand the merit and incentive eligibility cut-off dates for new hires and soon-to-be promoted employees.
- Incentive Forecasting: Like all quarters, Q3 should conclude with yet another incentive expense projection. Running the numbers should give leadership a clear picture of organizational performance, and encourage them to motivate their teams to achieve their goals.
Q4 Compensation Objectives
- Market Pricing Refresh: Experienced compensation professionals know the last quarter of the year rivals the chaos experienced during the first quarter of the year. Smart planning and consistent execution are a must during these three critical months. Remember those surveys you labored over during Q2 and those revised job descriptions from Q3? The survey results should be delivered during the early part of Q4 enabling the market price refresh for all of your defined roles. Again, ensuring your organization takes a market competitive approach on pay will ensure future victories when it comes to the new hire process and employee retention.
- Salary Planning: Next, your focus should turn to salary planning for the coming year. Depending on the surveys you participated in, you should be able to locate the salary increase trends for your respective industry amongst all of the survey data. Educate Finance leaders on pay trends, balanced with business goals, and the pool of money available for reinvestment back into the organization. This process involves the budgeting for projected new hires, promotions and equity adjustments for employees paid below market.
- Incentive Plan Finalization: Then in November, you should sit with the incentive design stakeholders and Compensation Committee to finalize the plans, the plan documentation, and update your tools in preparation for the coming plan year.
- Incentive Forecasting: The following initiative to address, which should be executed on a weekly basis, are the financial and incentive plan forecasts. You and Finance should be tied at the hip at this point with forecasting the final plan results and projected payout based on company and individual performance. The executive team should be well aware of how the organization is tracking against budget and the type of rewards season they should expect. As a reminder, all of your forecasts should be ready moving into Q1.
- Define and Communicate Performance Management Cycle: Lastly, you should be working with HRIS and IT teams to ensure the performance management and merit systems are ready to go for the approaching year-end or rewards process. Once your applications are in order, it is time to bring the rest of HR up to speed on the process, communicate the critical milestones to management, and hold on tight because Q1 is just around the corner and the biggest compensation event of the year is on the horizon….again.
As you can see, there are several components and moving parts that comprise a successfully run compensation practice. Getting it all done can be a daunting task; however having a plan in place and taking it one day and quarter at a time will result in impactful and momentous results for the entire organization.
I realize this is a lot of information to take in and plan for. However, I find clients that have an established performance management process, a defined compensation structure, incentive plans that align to the company strategy, and a compensation philosophy that ties everything together are widely successful!