How To Create a Compensation Plan

“Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat.” -Sun Tzu

Compensation plans are essential for nearly every enterprise. By crafting a comprehensive plan with competitive benefits, employers can attract better talent and boost morale. Compensation plans detail salaries, raise schedules, fringe benefits, union perks, employer-provided vendor discounts, and details about bonuses, incentives and commissions for employees.

How do you develop and implement a compensation program?

• List all the positions in your organization, and set standards for pay. To stay competitive, you may want to research how much similar companies are paying for the same positions.
• Rank jobs and place them in a matrix to show the tiered pay structures for each department.
• Develop grades for seniority and opportunities for career advancement.
• Assign rates of pay and a salary range for each position and job classification. Fine-tune your organizational budget, settling on salaries and hourly rates of pay. If some employees have to work overtime, realize that this can affect your bottom line.
• Decide what benefits you will offer. Benefits can include medical, dental and life insurance, as well as disability, paid time off, holidays, child care, education, and more.
• Do you plan to offer commissions? Decide how you’ll implement a commissions plan for sales personnel.
• Put all the details in one document to share when employees are hired.
• Before implementing your plan, seek consultation from a Professional Employer Organization, to make sure your plan is compliant with the law.

Direct vs. Indirect Compensation

Salary, commissions, and bonuses are known as direct compensation. Indirect compensation includes benefits and equity-based programs. Any plan must take into account both exempt and nonexempt workers — the latter being entitled to overtime when they meet certain thresholds. Sales staff may be paid partly or entirely by commission. Besides the basics of pay and essential benefits, a strategically designed compensation plan includes incentives to motivate your workforce to meet sales targets.

According to the Society for Human Resource Management, maintaining a dynamic and strategic compensation program has three main purposes:

• To demonstrate how compensation supports your business strategy, competitiveness within your industry, operating objectives and staff needs.
• To attract qualified candidates to join your company.
• To maintain high morale and motivate success.

A compensation plan is more than just a document. It’s a reflection of company culture, and outlines how employees will be rewarded. A solid plan requires consistency, but also some level of flexibility to reflect changing market conditions. If there’s a shortage of skilled workers, you may need to adjust compensation rates to find the right candidates.

Ensure your compensation plan is fair for all employees, compliant with state and federal laws and regulations, and fiscally sensitive. Foster a culture of transparency and trust, and make sure your rewards strategy aligns with your business goals.

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