Compensation planning is the process of designing and budgeting an organisation's total reward structure, including base salaries, bonuses, commissions, equity, benefits, and employer-side statutory costs. For FP&A teams, compensation planning is critical because people costs are typically the largest single expense category.
In Depth
Compensation planning ensures the organisation can attract and retain talent while maintaining cost discipline. It balances competitiveness (paying enough to hire and keep good people) with affordability (staying within the financial plan).
The key components of compensation planning include: base salary structures (pay bands, market benchmarking), variable compensation (bonuses, commissions, profit sharing), equity compensation (share options, restricted stock), benefits (health insurance, pension, perks), and statutory costs (employer NI, pension auto-enrolment, apprenticeship levy).
FP&A teams typically model compensation at several levels. Individual-level models calculate the fully loaded cost of each employee. Department-level models aggregate individual costs and add department-level allocations. Company-level models consolidate all departments and add company-wide compensation elements (company-wide bonus pools, equity programmes).
Annual pay review cycles are a critical moment in compensation planning. FP&A teams model the impact of proposed salary increases (typically 3-5% in normal years), the cost of market adjustments for underpaid roles, and the budget for promotions. A 4% average pay increase across a £10M salary bill adds £400K in annual cost — significant for most businesses.
For UK companies, compensation planning must incorporate: employer NI at 13.8%, auto-enrolment pension contributions, the tax implications of benefits-in-kind (company cars, private medical insurance), and the specific rules around share option schemes (EMI, CSOP, SIP). The EMI scheme is particularly valuable for startups, allowing tax-efficient equity compensation up to £250,000 per employee.
Real-World Example
A 100-person UK company budgets for its annual compensation review. Current salary bill is £6.2M. The FP&A team models: 3.5% general increase (£217K), 15 market adjustments averaging £5K each (£75K), 8 promotions averaging £8K each (£64K). Total salary increase: £356K (5.7%). Employer NI on the increase: £49K. Pension on the increase: £10.7K. Total incremental compensation cost: £415.7K. The FP&A team presents this to the board alongside retention data showing that losing and replacing the 15 under-market employees would cost approximately £600K in recruitment and productivity loss.
Related Terms
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