What Is a Compensation Plan and How to Create One

Having a strong compensation plan is important if you want good people to join and stick with your team. A smart pay strategy includes more than just salary, as it also considers factors like flexibility, benefits, and paid time off.

This article delves deeper into the various elements of a compensation plan, emphasizing how to develop a competitive framework that draws in and keeps skilled employees.

What Is a Compensation Plan?

Total compensation plans are a comprehensive approach used by companies to pay their employees through various methods. These methods include wage and salary structures, provided benefits, and payment terms. The employee compensation plan also incorporates details about when and how pay raises are granted,  as well as additional benefits like health coverage, special offerings from unions, and discounts from company partners.

A good compensation plan does more than how employees are compensated (compensation bands). It also provides data on different jobs, ranks, and performance metrics of employees, showing if they are doing an excellent job. The best thing is when a compensation plan is part of a bigger rewards plan. This bigger plan lists your compensation plan and other benefits and rewards you give to your employees.

Why Do Companies Need a Compensation Plan?

Companies need a well-thought-out compensation plan to stay competitive in their field and bring in and keep the best employees. Businesses making salaries and rewards plans without researching industry standards may end up losing talented employees. Managing a workforce without a set budget can also be risky for the organization. That said, compensation plans help companies in planning and budgeting employee pay in a steady and predictable way.

According to the report called "Payscale’s 2023 Compensation Best Practices Report," the current job market gives job seekers an advantage. To attract and retain top employees, companies are concentrating on designing compensation plans that enable them to hire the best-fit employees.

Understanding the Different Types of Compensation Plans

There are primarily three main types of compensation plans: salary, hourly, and commission-based plans.

• Salary Compensation Plan

  Salaries are a fundamental component of your company's compensation plan. They can align with local labor costs or reflect the pay rates for comparable positions across the country. When determining salaries, try considering factors such as location, job duties, living expenses, and data from the broader job market.

• Hourly Compensation Plan

  Employees receive a set amount for each hour they work as part of their hourly compensation plan. Additionally, they receive additional pay when they work beyond 40 hours in a week. To accurately record their work hours, hourly employees utilize timecards or automated systems.

  These employees are occasionally referred to as "non-exempt," and they earn at least a specified minimum wage per hour. They do not receive the identical benefits as salaried employees.

• Commission-Based Compensation Plan

  Commission is a way of getting paid linked to the work you finish or accomplish. It is also known as "piecework" or "piecemeal." Commissions are usually earned by offering services or selling products. For example, when a real estate agent sells a house, they receive a portion of that sale as part of their compensation plan. The time they spent selling the house or the tasks they did will not change their payment; they get compensated because the sale happened.

How to Make a Compensation Plan

Managers play a crucial role in designing fair and competitive compensation plans  that are capable of motivating employees to excel in their work. However, there is no "one-size-fits-all" solution for the compensation plan. Each company requires a tailored approach.

Here are the key steps for creating an effective and customized compensation plan:

• Formulate Your Pay Philosophy

  The first thing to do when making a compensation plan is to set up the ideas and plans you want to use for rewarding your employees. These ideas are known as a compensation philosophy. A good pay philosophy helps how the company works, sets it apart from others, and supports the company’s overall goal.

• Collect Information from Different Places

  When creating a compensation plan, it is important to gather enough data. This helps you understand what is happening in the job market right now and figure out where your company fits. The kind and amount of data you need depend on how big your company is, how much time you have, and if you are making a new plan or fixing up an old one.

• Write Job Descriptions for Every Role

  Create a comprehensive description of the tasks and responsibilities associated with each job. Examine job descriptions for similar roles in the job market, along with their corresponding compensation plans. If certain jobs share similarities, try to consider grouping them. Assign appropriate job titles to each position, considering both industry standards and your company's preferences.

• Create Career Levels for Each Job Type

  Creating opportunities for career advancement is crucial. For instance, establishing a compensation plan with various levels or stages for both experienced and new employees can be beneficial. This plan influences how pay is determined and offers employees the chance to progress in their careers.

• Decide on Pay Amounts for the Compensation Plan

  Once you have planned out the compensation plan for your employees, figure out the exact pay for each type of job. This is when you will adjust your company's budget to make sure everything works.

• Put the Compensation Plan in Action and Regularly Review It

  Start using the compensation plan you made. It is also a good idea to tell managers and workers about the plan so everyone knows how it works. When people know how payment works, it is easier to make decisions that are fair for everyone.

  It is important to regularly monitor your compensation plan. The job market evolves, and your plan may require adjustments as well. For instance, if there is a high demand for skilled workers, you may need to raise their pay. Also, ensure that your plan adheres to the government's rules and regulations.

Effective Compensation Plan Build Strong Teams

A strong compensation plan is important for getting and keeping the best people in your company. There are lots of ways to give your employees a good pay program that fits what your company needs and budget. Spend enough time to make a detailed compensation plan tailored to your company’s requirements and communicate it to your whole team. When done effectively, this can lead to increased employee satisfaction and greater employee retention.