The 4 Phases of Compensation Design

The 4 Phases of Compensation Design

Following a prescribed compensation design process can help an organization achieve a balanced and successful pay plan. While each company may need to tweak their methodology slightly to align with their own specific requirements, this sample method may be useful in helping you establish a solid framework:

Phase 1: Internal Assessment

This initial analysis helps compensation professionals develop a clear understanding of business goals and ensures all parties, including key stakeholders, are in agreement about how compensation decisions will be made. Use the following steps to perform an internal assessment:

  • Conduct management interviews
  • Review roles and responsibilities
  • Analyze current compensation practices
  • Analyze the performance management program
  • Identify the competitive marketplace
  • Develop a communications strategy/transparency
  • Compile a feedback report

Phase 2: External Assessment

This phase requires organizations to analyze external factors through the following steps:

  • Select external benchmark jobs
  • Conduct competitive analysis
  • Determine the compensation structure
  • Compare employees’ compensation levels

Phase 3: Design of Incentive Plans (Short & Long Term)

In order for this phase to be executed properly, companies should have a system for tracking performance, as well as the effectiveness of their incentive plans. That way, they can verify that the plans they’ve developed are actually supporting the business strategy as intended. Here are suggested steps for Phase 3:

  • Determine appropriate levels of incentive awards
  • Select performance measures
  • Determine the incentive formula
  • Present alternatives for consideration

Phase 4: Communication Plans

The final phase involves two steps for developing plans so the compensation plan can be effectively communicated to the workforce:

  • Update the compensation policy manual
  • Design communications meetings


For many organizations, lack of information breeds mistrust among employees. By designing your compensation strategy in a way that balances company goals and industry shifts, you will have a defensible basis which can be used to explain why compensation decisions are made. While employees may not always agree with every pay decision that is made, becoming more transparent with a balanced and standardized approach to compensation is a powerful way to earn the trust and respect of the workforce.


HRsoft is the trusted global leader in compensation management software whose COMPview solution is proven to control and simplify the full process and allocation of merit, bonus and equity awards to drive manager and employee engagement.

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