Making Compensation Future-Ready: A Self-Assessment and Playbook for Leaders

Plenty of things get better with age—wine, cheese, denim. But compensation strategies aren’t one of them. If you haven’t revamped your pay structure or updated policies in the last 12 months, your compensation plan needs a refresh.

Maybe pay decisions are becoming increasingly ad hoc. Maybe you’re seeing a troubling trend of employees jumping ship for higher salaries. And maybe the numbers simply aren’t adding up with modern labor costs.

Your current compensation plan isn’t necessarily broken, it’s just outdated for today’s workforce and markets. With expanding pay transparency laws, rising costs, and a complicated talent landscape, you need a future-oriented compensation strategy.

We’re here to help. Use this guide to self-diagnose where you are, move forward with an actionable playbook, and learn from the trends reshaping pay today.

Why compensation plans need a refresh right now

Leaders in 2026 can’t afford to ignore the strategic importance of compensation. In SHRM’s list of top five workplace policy issues for 2026, three touch on compensation, including rising benefits costs, workforce shortages and talent gaps, and rapidly changing compliance laws.

Political and economic winds are changing how compensation works, and the pressures are coming from every direction. Here are just some of the factors reshaping compensation right now:

• Pay transparency laws are expanding. More and more local and national governments are instituting requirements to share pay ranges and equity reports. Organizations that aren’t already being transparent about their compensation practices are scrambling to get compliant.

• Merit increase budgets are tighter. The average salary increase in 2025 was 4.8%, compared to 6.2% in 2022. Employees may be expecting the higher pay raises they received a few years ago, but merit pools are shrinking.

• Employee expectations have shifted. Today’s workers want to be paid what they’re worth—and they’re comparing notes. 78% of employees would consider leaving their current role for higher pay, nearly half (49%) of people have disclosed their salary to a coworker, and more than 1 in 4 workers (27%) report having negative feelings about their compensation.

• AI-powered tools are changing the game. Platforms that once required expensive consultants to run benchmarking analyses are now accessible to lean HR teams. Organizations adopting these tools can benchmark faster, flag inequities earlier, and model pay scenarios with much less manual effort. That raises the competitive bar for everyone.

A neglected pay strategy isn’t just a matter of losing a few candidates to better offers. An outdated compensation model breeds financial pressure, legal exposure, lost trust, and exponential turnover rates.

Self-assessment: How to tell if your compensation plan needs work

Before you can improve your compensation plan, you need an honest read on where it currently stands. The maturity model below is designed to help you do exactly that.

Most organizations aren't at a single stage across the board—you might have strong benchmarking practices but weak manager readiness, or solid transparency efforts alongside outdated pay structures. That's normal. The goal is to identify where the gaps are so you can focus your energy where it’s most needed.

Use the table below to assess where your organization falls across seven key areas.

A few diagnostic questions to help you assess your compensation plan:

• When a manager asks why two employees in the same role are paid differently, do you have a clear, documented answer?
• How long has it been since you last updated your salary bands?
• If an employee asked how your company decides pay, could you point them to something written down?
• Do your managers feel confident having compensation conversations, or do they tend to avoid or deflect them?

If these questions bring up some uncertainty, you're in the right place.

A 5-step playbook to improve your compensation plan

Step 1: Audit what you have today

You can't improve what you haven't honestly evaluated. A compensation audit doesn't have to be a months-long project, but it does require looking at your pay data across a few critical dimensions: role, level, tenure, gender, and where available, ethnicity.

What you're looking for:

• Pay compression: Are new hires being brought in at salaries close to or above longer-tenured employees in the same role? This can quietly erode morale, increase turnover risk, and feed pay inequity.
• Inconsistent pay practices: Are similar roles being paid differently without a clear rationale? Are there any apparent biases in your pay decisions (e.g., pay disparities correlating with race, gender, or social background)?
• Undocumented philosophy: Do you have a documented compensation philosophy? Without a written philosophy, the beliefs and values that shape compensation are left to the whims of various senior leaders, risking inconsistency across your organization.

Step 2: Benchmark—and benchmark again

To know where you stand, you need to look at what peer organizations are doing. Salary benchmarking gives you data on how much competitors pay for roles similar to the ones at your company. You can use that information to strategize your labor market position and adjust salary ranges accordingly.

If you’re looking for fresh benchmarking data, there are plenty of useful resources, such as:

• Mercer^® Compensation data
• Bureau of Labor Statistics (for US wage data)
• Aon Radford
• Willis Towers Watson

Salary benchmarking should be an ongoing project, not a one-time study. Labor dynamics are constantly shifting, and you need continuously updated data to inform your compensation strategy.

The optimal benchmarking cadence across your organization is at least once a year. Conduct benchmarking in sync with a performance cycle so you can give market raises alongside merit increases. For high-demand roles, you may want to conduct quarterly or bi-annual benchmarking to avoid falling behind the competition.

External vs. internal equity

External data compares your salaries to other organizations, while internal equity data compares salaries between similar roles within your company. It’s a good idea to conduct an internal equity analysis alongside external benchmarking—this gives you a fuller picture of how fair and competitive your pay structure is (or isn’t).

Use your judgment

Remember that external benchmarking gives you information, not instructions. Dominant compensation trends aren’t necessarily the strongest strategy for your org, and relying on benchmarking data alone to make pay decisions risks internal equity issues and stunted business growth. In other words: Be a leader, not a follower.

Step 3: Design or refresh your pay structure

A pay structure gives you a consistent framework for setting salaries and wages. If you don’t have a pay structure, now is the time to make one. If you already have a structure, but it just isn’t working how you want it to, take this as an opportunity to give your system a refresh.

Building the basics: Pay bands

A pay structure is typically made up of pay bands—salary or wage ranges assigned to roles and job levels. Defining pay ranges for each role enables more consistent compensation decisions. There are a few strategies you can apply when creating pay bands:

• Traditional pay bands set narrow ranges tied to specific roles or job levels. For example, in a company with traditional pay bands, all entry level assistant positions may have a pay band of $45,000–$55,000. To get a salary increase above that range, an entry-level assistant would need to be promoted into a role with a higher pay band.

• Broadbands are larger pay ranges that encompass many roles or job levels, allowing more flexibility around pay decisions. For instance, a company with broadbands may have a range of $45,000–$100,000 for all assistant roles, regardless of experience level. This enables an assistant to receive a significant merit increase without a job title change. Broadbanding can get messy (it’s a recipe for inconsistent decisions), but traditional pay bands can be too restrictive. Carefully consider factors like labor budget, organizational structure, and possible inequity risks as you set the widths of broadbands.

• Market pricing ties pay bands to market rates based on external benchmarking data. Market pricing is becoming increasingly common as pay transparency expectations rise and labor market competition intensifies.

Minimums, midpoints, and maximums: Find your numbers

Hypothetical pay ranges are all well and good, but how do you pick the actual numbers that form a pay band?

The simplest way to create a pay band is to start with the midpoint salary. If you’re using benchmarking data (and you should be), you can tie a midpoint salary to a specific market percentile. An effective practice is to set a midpoint salary at the 75th percentile—a salary that is higher than what 75% of competitors would offer for a similar role.

It’s okay if you can’t afford to lead the market in every role. If you’re facing budget constraints, prioritize leading the market for your most specialized, hard-to-fill positions. You can match the market (set midpoint salaries at the 50th percentile) for less competitive roles.

Once you have a midpoint salary, you can complete the pay band by setting minimum and maximum salaries. Most pay bands have a percentage range. For example, a pay band with a 40% spread would be +/-20% of the midpoint salary. You’d use the following equations to find the minimum and maximum salaries:

• Minimum salary = Midpoint - (20% x Midpoint)
• Maximum salary = Midpoint + (20% x Midpoint)

Narrow ranges work well for roles with a limited scope—these are roles where significant growth would necessitate a promotion. Wide ranges best serve complex or high-demand roles where skill levels can advance meaningfully within the role and you need more flexibility to keep up with market rates.

Mapping paths for progression

The final piece for creating your pay structure is defining the criteria for progression.

Essentially, the criteria for progression maps out how an employee can move up through a pay structure. Every role should have a documented description of what earns a merit increase within a pay band and what warrants a promotion to a higher job level.

When building criteria for merit increases into your pay structure, consider the following factors:

• Performance evaluations: What does a performance evaluation look like for an employee who has earned a merit increase?
• Performance goals: Are there quantitative performance goals tied to this role, such as sales quotas or customer satisfaction scores?
• Merit pools: How much discretion does a manager have for distributing merit increases across their team? What are the guidelines for deciding how merit pools should be apportioned?

For promotion criteria, stick closely to the job level descriptions. A promotion recommendation should come with evidence that the employee is capable of performing (or already has been performing) the responsibilities of a level above their current role.

Step 4: Communicate the plan clearly and consistently

No one likes when big financial decisions are left opaque. It doesn’t matter what numbers you put out there—if employees don’t understand where those amounts are coming from, they won’t trust your compensation offer.

If educating employees on the complex world of compensation strategy feels like too big of a job to tackle, don’t worry: You can break it down into three smaller tasks:

1. Provide total rewards statements. Give employees easy-to-read summaries of the full value of their compensation, including benefits, bonuses, and PTO. See below for an example.
2. Support managers. Prepare managers for compensation conversations by offering them talking points and FAQs to review ahead of time.
3. Prime employees. During onboarding and prior to a merit increase cycle, require employees to complete a training module on how compensation works at your organization. It can give a bird’s eye view on topics like pay equity, job levels and pay bands, and labor valuation. Dedicated training can address the most common questions in advance, support managers, and empower employees with more knowledge going into pay conversations.

Here’s an example of a simple total rewards statement you could provide an employee during a compensation conversation:

How transparent is “transparent enough”?

So how far should you take pay transparency? That depends on your organization. Factors like compensation philosophy, labor market, local laws, and company culture can all inform how much you share about your organization’s compensation strategy.

Some companies publish full salary bands internally or externally, while others share ranges only with managers or only upon request. What matters most is that employees know how pay decisions are made, not necessarily that every number is public. Transparency about process builds more trust than transparency about numbers alone, though both carry weight.

Step 5: Measure, audit, and adjust

A compensation plan that isn't measured will drift out of alignment over time. Here's how to stay on top of it.

Run a pay equity audit

Monitoring pay equity helps you to stay aware of retention risks and compliance issues before they become a major problem. A pay equity audit can be conducted in four simple steps:

1. Pull compensation data by role, level, tenure, gender, and ethnicity.
2. Control for legitimate factors (experience, performance, location) to isolate unexplained pay differences.
3. Identify gaps above a defined threshold (many organizations use a 5% difference between similar roles as a flag).
4. Develop a remediation plan with a timeline and budget—and follow through.

Pay equity audits are most valuable when they're conducted regularly and with consistent methodology, not as a one-time response to a complaint or legal inquiry. To keep processes streamlined, sync pay equity audits with performance cycles and benchmarking reviews so you can address pay disparities at the same time you give merit and market increases.

KPIs worth tracking

In addition to pay equity audits and salary benchmarking, there are a few other metrics you should be regularly tracking to measure the success of your compensation strategy.

• Regrettable turnover rate: Are the people you most wanted to keep leaving?
• Offer acceptance rate: Are candidates declining offers? At what stage?
• Internal pay ratio: How wide is the spread between your highest and lowest earners? Does this ratio align with your culture and values?
• Pay satisfaction scores: Are employees satisfied with their pay? Would they be willing to leave their roles for a higher offer?

You can track most of these KPIs through internal data analyses. To measure pay satisfaction, include a couple questions about pay in your employee satisfaction survey. (To track overall employee satisfaction, you should be conducting an anonymized survey at least once a year).

Create feedback loops

Compensation plans become outdated when there's no formal mechanism for flagging when something feels off. Create a communication process for managers to share with HR and finance the compensation-related questions they’re fielding the most from employees.

Additionally, use satisfaction surveys to collect qualitative responses on how employees feel about compensation. Anonymous employee feedback is often the strongest tool for spotting red flags.

Pay transparency laws: What HR leaders need to know now

In most regions, pay transparency is no longer optional—your company likely falls under the jurisdiction of a pay transparency law. Staying aware of new regulations is essential to keeping your business in compliance. Here’s just a few examples of recent requirements going into effect.

• European Union: Effective June 2026, the EU Pay Transparency Directive requires employers operating in the EU to include pay ranges in job postings, make pay information available to current employees, and conduct pay equity analyses.
• Canada
  • British Columbia: As of January 1, 2026, employers with 50+ employees are required to provide annual, publicly available pay transparency reports.
  • Ontario: As of January 1, 2026, employers must include pay ranges in job postings.
• United States
  • Delaware: Effective in 2027, employers will be required to include pay ranges and benefits descriptions in job postings.
  • Maine: Starting in July 2026, employers will need to include pay ranges in job postings and, upon request, disclose pay ranges to current employees.
  • Virginia: Effective July 2026, employers must share pay ranges for internal and external job postings.

Don’t wait on pay transparency

Keeping up with new laws is tricky, which is why it’s smart to stay ahead of the curve. Decide the level of pay transparency that works for your org and start implementing it today.

If you wait to be transparent until you have to, it’s not a good look as an employer and you’ll be struggling to play catch-up on the compliance front. Practicing greater pay transparency before it’s legally mandated helps you avoid liability issues down the road and earns you credibility with your employees.

Beyond base pay: Rethinking total rewards

Compensation involves more than base salary. 83% of employees wish their companies offered more benefits.

This doesn't mean pay doesn't matter—it does, especially when employees feel they're being underpaid. But it does mean the conversation about compensation needs to be broader.

Personalizing benefits by workforce segment is increasingly a best practice. Early-career employees often value student loan assistance, mentorship, and development stipends. Employees with caregiving responsibilities value flexibility and robust leave policies. Employees nearing retirement may prioritize retirement match contributions and phased transition options.

Communicating total rewards clearly is how you make non-salary compensation feel real to employees. A well-crafted total rewards statement—one that translates benefits into dollar values and paints a full picture—can shape how employees perceive their total compensation, even when the base salary number hasn't changed.

Trends shaping compensation in 2026 and beyond

A few shifts worth paying attention to as you modernize your compensation approach:

• Pay transparency is becoming a cultural expectation, not just a legal one. Even in states without transparency laws, employees are increasingly comparing notes and using tools like Glassdoor and LinkedIn Salary to benchmark themselves. The question is no longer whether to be transparent about pay, but how much and in what ways.

• AI is changing how compensation planning works. Tools powered by AI can now analyze market data, flag internal inequities, and model compensation scenarios much faster than traditional methods. HR teams that adopt these tools can move from reactive to proactive in their compensation management.

• Skills-based pay is gaining traction. Rather than paying for job titles, more organizations are exploring compensation models that reward specific skills and capabilities. This is particularly relevant as roles evolve faster than job descriptions can keep up with, and as employees increasingly hold portfolios of skills that don't fit neatly into traditional job levels.

• Continuous compensation planning is replacing the annual cycle. The once-a-year merit review process is increasingly out of step with how quickly labor markets, roles, and employee expectations are changing. Organizations moving toward more frequent reviews—quarterly check-ins on market alignment, mid-year equity reviews—are better positioned to respond in real time.

• Pay equity is becoming an employer brand issue. Employees and candidates are paying attention to how organizations talk about equity. Companies that can speak credibly about their pay equity practices—and back them up with data—have a meaningful recruiting and retention advantage.

Where to start this quarter

You don't have to overhaul everything at once. Use the maturity model to identify where your biggest gaps are, and focus there first.

If you're at Stage 1 (Ad hoc): Start by documenting your compensation philosophy—even a one-page summary of how pay decisions are made at your company is a meaningful foundation. Pair that with pulling together your current compensation data so you know what you're actually working with.

If you're at Stage 2 (Reactive): Your most impactful move may be establishing a regular benchmarking cadence. Pick one trusted source, run a market comparison for your highest-volume roles, and commit to revisiting it on a defined schedule.

If you're at Stage 3 (Proactive): Bring your key stakeholders together (C-suite, finance, and HR) to look at how compensation aligns with broader company goals. How can you take compensation from a well-oiled machine to a strategic lever?

If you're at Stage 4 (Strategic): Focus on continuous improvement: tighter feedback loops, skills-based pay exploration, and ensuring your transparency practices are staying ahead of what's legally and culturally expected.

Wherever you're starting, the goal is the same: a compensation plan that's fair, competitive, defensible, clearly communicated, and built to take your organization into the future.