Compensation and Benefits: Best Practices for 2025

Compensation is the top challenge for HR pros in 2025, with nearly half (44%) of employers reporting it as their primary concern, according to a recent study by Payscale. 

In its 2025 Compensation Best Practices Report, Payscale determined that organizations plan to give a 3.5% pay increase in base salary in 2025, down slightly from last year’s 3.8%, with smaller organizations leading with higher raises.

Moreover, nearly one-third of organizations (31%) identified unfair pay as the primary reason for losing talent – a stat that brings home the damaging impact of pay inequity.

“We’re anticipating a ‘Year of Contention,’ as 2025 could bring a clash between employers tightening budgets and employees advocating for fair pay and better working conditions,” Payscale’s Chief People Officer Lexi Clarke said in a press release. “In this environment, listening to employees and leading with fairness isn’t just the right thing to do – it’s a competitive advantage. A cooling labor market, rising pay transparency and the potential for an economic rebound could reignite the battle for top talent. Companies that invest in compensation strategy and prioritize equitable practices will be best positioned to attract, retain, and empower their workforce.”

The good news is that with a strategic approach, HR leaders can design compensation and benefits programs that support business goals and meet employee needs.

6 Data-Driven Best Practices for Compensation

This article outlines best practices to help you build effective total compensation packages. Let’s explore key practices that HR professionals can adopt to make data-driven compensation decisions.

1. Align Compensation with Business Goals

To build a sustainable and effective total rewards strategy, compensation plans should reflect organizational objectives and drive desired behaviors. For instance, if a company is prioritizing customer satisfaction, compensation could be tied to customer service metrics to incentivize employees directly contributing to that goal.

When compensation reflects business priorities – such as growth, innovation or customer satisfaction – it motivates employees to focus on the outcomes that matter most. 

Start by evaluating your current compensation structure. Does it support the behaviors and performance you want to see? For example, a company aiming to scale quickly might offer performance-based incentives or team bonuses to encourage collaboration and output. If innovation is a priority, consider implementing skills-based pay to reward employees who develop high-demand capabilities. 

Another best practice is to involve key stakeholders – like finance, leadership and department heads – in your compensation planning process. This helps HR get a seat at the table and ensures that compensation strategies are equitable, financially sustainable and aligned with broader business goals. 

2. Benchmarking to Stay Competitive

Staying competitive in the labor market involves more than relying on instincts – it benefits from a thoughtful, data-driven approach to decision-making. Compensation benchmarking can be a key tool for HR professionals aiming to attract and retain top talent. 

Consider leveraging compensation benchmarking tools and salary surveys to understand how your pay stacks up against industry standards.

Use credible sources like government databases, compensation consultants or third-party platforms specializing in real-time market data. These resources can help you pinpoint gaps, identify trends and adjust your pay ranges to remain competitive.

According to Payscale’s findings, the top five sources used to obtain market data this year were:

1. Free or open online data (52%, up from 48% last year)
2. Salary survey data from traditional publishers (52%, up from 49% last year)
3. HR-reported aggregate market data in compensation software (49%, up from 45% last year)
4. Salary data from job board postings (29%, up from 26% last year), and
5. Closed-network HR-reported salary data (27%, up from 25% last year).

In addition to salary surveys, consider leveraging predictive analytics to forecast market shifts and adjust your compensation strategies in advance. For example, Google uses predictive analytics to assess turnover rates and employee satisfaction scores, which in turn allows the company to adjust compensation packages to retain top talent. Using a proactive approach like this can help ensure your organization stays ahead of the curve on compensation planning. 

It’s also important to take a total rewards strategy approach. Don’t just look at base pay – consider the full compensation package, including bonuses, stock options, benefits and non-monetary perks. This broader view ensures you’re offering a compelling value proposition because top talent will always have options. 

When reviewing your data, break it down by role, location and skill level to get a more accurate picture. With compensation benchmarking as a foundation, HR compensation strategies can be more precise, fair and aligned with both employee expectations and business needs. 

Benchmarking is an ongoing process and should be part of your regular compensation review cycle. Stack your offerings against competitors and adjust to remain competitive in the marketplace. If you notice that certain benefits, like remote work options or mental health support, are gaining popularity in your industry, it might be time to introduce or expand these programs in your company. 

3. Embrace Pay Transparency and Equity

Pay transparency and pay equity are a must. With more new laws taking effect across the country and employees expecting equal pay, HR needs to stay on top of things. It’s about compliance and culture.

But in reality, how is evolving pay transparency legislation affecting companies? According to Payscale, employers are: 

• Communicating more about compensation practices (31%)
• Investing more in compensation data (24%), and 
• Changing compensation strategies and structures (22%).

To adopt pay transparency at your company, start by conducting a pay equity audit to identify disparities across gender, race and other protected classes. Use data analytics tools to assess compensation gaps and ensure consistency in pay practices. This goes beyond compliance; it’s about building trust and showing your commitment to fair treatment. 

Next, consider your approach to salary transparency. You don’t need to publish every salary, but offering clear pay ranges, communicating how compensation decisions are made and training managers to discuss pay openly can go a long way toward increasing employee confidence and satisfaction. 

Transparency also helps set realistic expectations and reduces the risk of legal challenges. 

When employees understand your compensation philosophy and see that it’s applied consistently, they’re more likely to stay engaged and loyal. Incorporating pay transparency and equity into your total rewards strategy enhances your employer brand, strengthens retention and supports a culture of accountability – all while helping you stay ahead of evolving compensation laws.

4. Offer a Well-Rounded Benefits Package

Benefits are getting more expensive, and some organizations are pulling back on some traditional offerings, the Payscale report found. The biggest cut was fixed holidays, with 45.1% of employers offering the benefit to all or most of the workforce, down 5.5% from last year when just over half (50.6%) of employers paid holidays to all or most of the workforce.

On the flip side, some employers are offering new benefits, according to Payscale. The biggest increases were for menopause leave (up 0.8% from last year), work-from-home stipends (up 0.5% from last year), and menstrual leave (up 0.4% from last year). 

Of course, offering a competitive employee benefits package is one of the most effective ways to boost employee satisfaction and retention. A holistic approach to benefits ensures you’re meeting the diverse needs of your workforce while supporting a broader total rewards strategy. 

Core Benefits and Perks

Evaluate the core components of your benefits program – health insurance, dental and vision coverage, and retirement plans – and then look for opportunities to personalize and expand. To improve your benefits strategy, consider adding flexible benefits like lifestyle spending accounts, gym reimbursements or pet insurance. These non-monetary perks can enhance the employee experience without significantly increasing costs. 

In addition to traditional benefits, consider offering innovative perks such as flexible workspaces, mental health days, or access to financial planning services. These offerings cater to a diverse workforce and signal that the organization values employee well-being beyond the basics.

Consider Employees’ Unique Needs

Another best practice is to align benefits offerings with workforce demographics. For example, student loan repayment assistance may appeal to younger employees, while elder care resources may be more relevant for mid-career professionals. Understanding these preferences allows HR leaders to design a more inclusive and responsive benefits program. 

In fact, some employers are using personalized benefit stipends to allow employees to make decisions about the benefits they want most. On a recent Voices of HR episode, Amy Spurling, the founder and CEO of Compt, used the example of a gym membership to explain. She pointed out that employees might sign up for a free gym membership, but that doesn’t guarantee they’ll actually go to the gym. By providing a wellness stipend instead of a gym membership, the employer lets each worker choose the wellness benefit they need or want most. Some may choose a gym membership. But others might prefer nutrition counseling. Or something else. The point is that flexibility boosts utilization rates and makes benefits more valuable to employees, Spurling said.  

Ultimately, how to create a competitive employee benefits package comes down to choice, flexibility and communication. When employees feel their needs are understood and supported, they’re more likely to stay engaged and loyal – making your benefits strategy a powerful tool for talent retention.

Address Financial Wellness

In a recent study by FinFit, 60% of employees said they experienced stress and anxiety when thinking about their finances. Incorporating financial wellness programs into your benefits offering can be a valuable addition to your compensation strategy. 

Consider providing tools and resources that help employees plan for the future, such as retirement planning workshops or access to financial advisors. Offering these benefits can help reduce financial stress and improve overall job satisfaction and engagement. 

To further optimize your financial wellness strategy, consider offering budgeting tools or financial literacy programs to help employees make informed financial decisions. These benefits go a long way in showing that the company cares about its employees’ financial well-being. 

To learn more about financial wellness and pay literacy programs, join our upcoming free webinar, “Your Workforce’s Key to Financial Wellness? Pay Literacy!” on Wednesday, April 16, to learn more about integrating financial wellness into your total rewards strategy. 

5. Communicate Clearly and Regularly

Effective communication is a cornerstone of any successful benefits and compensation strategy.

The good news is, 59% of companies train managers on how to have pay conversations with employees, according to Payscale’s data. That’s up from 51% last year.  

No matter how competitive or comprehensive your offerings are, if employees don’t fully understand their benefits, the impact will be limited. Clear and consistent communication ensures that employees are aware of their total rewards package, feel valued and can make the most of their benefits. 

For example, a mobile app or dedicated portal can help employees easily access and track their benefits. Regular video updates or gamified experiences can also make benefits communication more engaging and accessible. In one instance, a California company used HR technology to help employees track their pay, meal breaks and benefits.

You might also use regular webinars, workshops or Q&A sessions to answer questions and clarify any complex topics, such as health insurance coverage or retirement contributions. 

In addition, schedule regular check-ins to discuss compensation and benefits during performance reviews. This is an opportunity to not only explain any updates or changes but also reinforce the connection between pay and performance, showing employees how their contributions are rewarded. Personalized communication during reviews can improve engagement and make employees feel more invested in the company’s success. 

Furthermore, be transparent about the reasoning behind your compensation and benefits decisions. Employees are more likely to trust and appreciate their total rewards package if they understand how decisions are made, such as the methodology behind salary adjustments or changes to benefits offerings. This transparency builds loyalty and helps to foster a culture of fairness and inclusion. 

When you prioritize clear and regular communication about compensation and benefits, you’re not just informing employees – you’re empowering them to take full advantage of the resources available to them, which leads to higher employee engagement and satisfaction.

6. Measure Your Efforts and Optimize Regularly

Most organizations (60%) are either fairly confident or very confident that their pay increases are competitive for retaining and engaging talent, according to the Payscale data.

Even so, an effective total rewards strategy requires ongoing measurement, analysis and optimization. Regularly evaluating the effectiveness of your total rewards strategy ensures that your offerings remain competitive, aligned with employee needs and in compliance with changing regulations. 

Start by tracking key metrics, such as employee satisfaction with benefits, participation rates in wellness programs and turnover related to compensation issues. 

Employee satisfaction surveys and feedback tools can be invaluable for gauging employee engagement and understanding which benefits are most valued. This data can guide adjustments to your offerings, ensuring they remain relevant and impactful. 

Another important aspect of optimization is ROI analysis. Calculate the return on investment for each component of your compensation and benefits package to determine which programs are driving the most value for both employees and the organization. For example, if your wellness programs lead to fewer sick days or improved productivity, that’s a clear indicator of success. 

By identifying these high-impact areas, you can allocate resources more effectively. 

Key Takeaways: 6 HR Compensation Strategies 

1. Align compensation with business goals. A strategic approach ensures pay structures support company objectives while staying competitive.
2. Use compensation benchmarking tools regularly. Market data helps maintain competitive salaries and benefits.
3. Prioritize pay transparency and equity. Clear, fair compensation practices build trust and engagement.
4. Offer a well-rounded benefits package. Consider healthcare, financial wellness and other perks that matter to employees.
5. Communicate consistently. Regular, clear messaging helps employees understand and appreciate their total rewards.
6. Measure and adjust. Continuously assess and refine benefits and compensation to meet evolving workforce needs.

A strong total rewards strategy not only enhances retention and engagement but also drives long-term business success.