Compensation and Benefits: Best Practices for 2025

Compensation is the top challenge for employers in 2025, with nearly half (44%) 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.

Lexi Clarke, Payscale’s Chief People Officer, anticipates a “Year of Contention,” predicting a clash between employers tightening budgets and employees pushing for fair pay and better working conditions. 

“Listening to employees and leading with fairness isn’t just the right thing to do – it’s a competitive advantage,” Clarke said in a press release. She said companies investing in compensation strategies and equitable practices will be in the best spot to attract, retain and empower their employees.

6 Data-Driven Strategies to Optimize Compensation Planning

This article outlines essential strategies for designing effective total compensation packages. We’ll explore data-driven approaches that finance professionals can use to make informed, strategic compensation decisions.

1. Align Compensation Strategy with Business Objectives

To build a sustainable and effective total rewards strategy, compensation plans should reflect organizational objectives and drive desired behaviors. For instance, if a company prioritizes customer satisfaction, then 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 HR, leadership and department heads – in your compensation planning process. This helps to ensure that compensation strategies are equitable, financially sustainable and aligned with broader business goals. 

For example, work closely with HR to ensure that total rewards strategies drive the outcomes finance cares about: productivity, innovation and customer satisfaction. Whether the goal is expansion or stabilization, compensation levers, like incentives and bonuses, can be used to support strategic priorities.

2. Budgeting for Competitive Pay Requires Real-Time Market Data

Staying competitive in the labor market involves more than relying on instincts – it benefits from a thoughtful, data-driven approach to decision-making. 

With base pay increases averaging 3.5% in 2025 and small organizations leading with even higher raises, finance might find it helpful to factor in accurate, up-to-date benchmarks when building compensation budgets. 

Partner with HR to use predictive analytics and external data sources to plan for labor costs more precisely – and avoid costly turnover tied to pay dissatisfaction.

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, your compensation strategies can be more precise, fair and aligned with both employee expectations and business needs. 

3. Pay Inequity Is a Financial Risk 

In Payscale’s report, nearly one-third of organizations cited unfair pay as a top driver of attrition. That’s a measurable business risk.

With more new pay transparency laws taking effect across the country, pay equity is becoming a growing area of financial focus. How much so? In Payscale’s report, 57% of respondents said pay equity analysis is a planned or current initiative for their organization.

Moreover, according to Payscale, employers are already taking the following steps to comply with evolving pay transparency legislation:

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

Finance plays a key role in a company’s adoption of pay equity. For starters, consider supporting pay equity audits and advocating for transparent pay structures – not just for compliance but to mitigate the high cost of replacing talent and avoid reputational harm.

4. Benefits Strategy Affects Retention and Cost Management

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 and getting a solid return on the investment.

Core Benefits and Perks

Evaluate the core components of your benefits program – health insurance, dental and vision coverage, and retirement plans – and team up with HR to consider potential opportunities to personalize and expand. To improve your benefits strategy, you may want to invest in 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 investing in innovative perks like 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 Employee 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. Team up with HR to understand these preferences and then invest in benefits to meet employees’ needs. 

Some employers use personalized benefit stipends to allow employees to make decisions about what 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, flexibility boosts utilization rates, which means the benefits become more valuable to employees and more cost-effective for employers, Spurling pointed out.  

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 valued 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 the 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. 

The bottom line: Finance leaders are the experts at measuring ROI. As traditional benefits shift and emerging options, like those mentioned above, gain ground, help assess which benefits deliver the most value per dollar spent and explore options like personalization or stipends to manage costs while boosting employee satisfaction.

5. Compensation Communication Impacts Financial Outcomes

Poor communication can reduce the perceived value of costly compensation programs. 

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.  

But 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. Benefits portals and compensation dashboards can improve transparency and employee understanding, so investments in technology often pay off in the form of higher utilization and retention rates.

6. Track ROI and Performance of Total Rewards Programs

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, are aligned with employee needs and comply with changing regulations. 

Instead of simply greenlighting spending, consider measuring its impact. Partner with HR to track program participation, connect wellness and financial benefits with productivity and absenteeism data, and evaluate ROI. This data-driven approach helps refine current initiatives and supports future investments.

Key Insights for Finance 

1. Align your pay strategy with your business goals. Ensure that total rewards support key outcomes like productivity and innovation. Work with HR to keep compensation levers aligned with strategic goals.
2. Competitive pay budgets need real-time market data. Accurate, current benchmarks are essential, given 2025’s rising base pay trends. Collaborate with HR and leverage predictive analytics for valuable insights before creating compensation budgets. 
3. Addressing pay inequity can reduce financial risk. Finance can play a key role in supporting equal pay by advocating for pay equity audits and transparent compensation practices.
4. A strong benefits strategy helps with retention and managing costs. By understanding benefits changes, finance can identify high-value programs and explore cost-effective options like personalization or stipends to increase satisfaction.
5. Clear compensation communication drives financial outcomes. Ineffective communication about pay and benefits misses the chance to highlight the value of total rewards. Investing in technology can bridge this gap and help employees better understand their compensation package.
6. Track the ROI and performance of rewards programs. Work with HR to track participation, connect benefits to productivity and calculate ROI for continuous improvement and informed future investments.