How to Build a Solid Compensation Framework

A well-structured compensation framework is the foundation of a good compensation plan for promoting a motivated and engaged workforce. Ensuring that your employees are compensated fairly and transparently can help enhance their performance and align their efforts with the broader goals of your organization.

With over 70 years of compensation and total rewards experience, Salary.com's Compensation Consulting Services can help you build a solid compensation structure that reflects your mission, values, and promotes pay equity across all job codes and positions.

What is a compensation framework?

A compensation framework is a structured system for determining how employees are paid within an organization. It includes guidelines for setting salaries, bonuses, and employee benefits.

Compensation structures allow human resources teams to review and adjust salaries to ensure that employees are paid fairly and similarly for comparable roles. It also supports an equitable work culture where compensation practices align with the company's goals and employee expectations that promote fairness and equality.

Compensation and Benefits Program Design can help you improve the value of your pay structures and create benefit packages that make you stand out in the market while keeping your company budget manageable.

What's included in a compensation framework?

A compensation framework should include these five core components:

1. Compensation philosophy

   Establish a clear compensation philosophy that reflects the company's values and goals to ensure transparency in how pay is determined.

   With Total Rewards Strategy, you can improve your compensation philosophy and assess whether your rewards programs are competitive with the market and fair within your organization.

2. Job framework

   Create a structured job leveling framework that outlines roles and responsibilities to support management in setting appropriate salary levels.

3. Level framework

   Design a level framework to categorize job positions that facilitates consistent and fair pay across different levels of the organization.

4. Location framework

   Integrate a location framework that adjusts compensation based on the geographic cost of living to ensure equitable pay across various regions.

5. Salary bands

   Develop salary bands that clearly define pay ranges for different roles to provide transparency and guide salary decisions.

Factors that determine a compensation framework

Here are the crucial factors you need to consider in determining a compensation framework:

• Job position: Determine pay by evaluating the specific responsibilities and importance of each position within the organization.

• Performance: Reward individuals and teams based on their outcomes and progress in company projects.

• External data: Base compensation decisions on research and data by considering market trends.

• Internal data: Regularly review and adjust compensation based on feedback from leaders and employees.

• Future growth: Create a framework that considers future company growth and the potential for employees' advancement.

The importance of a compensation framework

A well-defined compensation structure is crucial as it ensures pay equity within your company. Human resources must offer competitive compensation through a transparent framework as 55% of employees value fair compensation and rewards.

Competitive Pay Assessment can help your organization assess the market competitiveness of your pay and benefits programs.

Benefits of a compensation framework

Organizations that build a solid compensation framework can expect the following benefits:

• Supports human resources in managing salaries by providing a clear framework that aligns with company goals.

• Facilitates pay equity that ensures all salaries are fair across job positions and departments.

• Improves the recruitment process by offering a competitive pay range that attracts high-quality candidates.

• Promotes transparency by offering a compensation structure that is openly reviewed and explained to all employees.

• Improves team performance and retains employees by linking pay to outcomes and rewarding top performers.

• Ensures ongoing development by regularly reviewing and updating the compensation plan to meet future needs.

Types of compensation frameworks

Compensation frameworks can vary widely as they reflect the diverse needs and goals of every organization. Here are the common types of compensation frameworks that you can apply in your company:

1. Base salary framework

   Establishes fixed salaries based on job roles, experience, and market research to ensure consistency across the company.

2. Performance-based framework

   Links compensation to individual or team performance that includes bonuses and incentives tied to specific goals or results.

3. Skill-based framework

   Rewards employees for acquiring and applying specific skills or certifications that contribute to the company's objectives.

4. Market-based framework

   Sets salaries based on competitive research and industry standards to attract and retain talent.

5. Equity-based framework

   Grants employees stock options or shares that enable them to benefit directly from the company’s financial growth and success.

6. Commission-based framework

   Offers compensation mainly through commissions on sales or project success often used in sales and marketing roles.

How to build a solid compensation framework

Follow these 7 simple steps on how to build a solid compensation framework:

1. Step 1: Define clear compensation goals

   Identify the specific outcomes you want to achieve with your compensation framework, such as promoting professional development or improving the team. Match these goals with your company’s overall objectives and budget. This is to ensure that your pay structure drives the desired outcomes and supports organizational success.

2. Step 2: Choose compensation components wisely

   Identify the key components of compensation, such as base salary, bonuses, benefits, and equity options. Evaluate each component's relevance to your organization's goals and employee needs before finalizing your choices. This is to ensure that your compensation elements incentivize desired behaviors and match with the organization's values and desires.

3. Step 3: Analyze market data

   Gather and evaluate compensation data from industry benchmarks, competitor salaries, and regional pay scales. Understand the market status by using this information. This ensures your compensation framework is competitive and attractive to current and potential employees.

4. Step 4: Develop performance metrics

   Identify key performance indicators (KPIs) that align with your project goals and objectives. Establish a system for regularly tracking and analyzing these metrics to assess progress. This provides measurable insights that help you determine the effectiveness of your compensation strategies, guide your decision-making process, and ensure accountability throughout the project lifecycle.

   With HR Metrics & Analytics, you can review current metrics, establish benchmarks, and provide a model for measuring effectiveness over time.

5. Step 5: Implement a structured framework

   Design a detailed compensation framework that includes salary ranges, bonus structures, and benefits. Clearly outline eligibility criteria, payout schedules, and processes. This is to facilitate effective implementation and maintain consistency across the company.

   For instance, let's consider that you chose a performance-based framework to calculate an employee's compensation based on their performance relative to predefined targets.

   The formula is: Performance-based pay = base salary × (1 + performance percentage)

   If an employee has a base annual salary of $50,000 ($4,166 monthly) and achieves a performance percentage of 10% based on performance metrics for August, their performance-based pay is calculated as:

   Performance-based pay = $4,166 × (1 + 0.10) = $4,166 × 1.10 = $4,583.60

   In this case, the employee's total performance-based compensation for the month of August would be $4,583.60

6. Step 6: Ensure legal compliance

   Review all compensation practices to ensure adherence to local, state, and federal labor laws. Consult with legal experts to confirm that your compensation framework meets all legal requirements. This protects the company from potential lawsuits and promotes a fair and just workplace environment.

7. Step 7: Review and adjust regularly

   Evaluate the effectiveness of your compensation practices by gathering employee feedback, analyzing market trends, and considering legal compliance. Make adjustments as needed to keep the framework aligned with industry standards and responsive to both company and employee needs.

Organizations can transform themselves into an employer of choice by implementing a solid compensation framework that supports team development and aligns with the company's goals. Begin building a structured system that considers individual and team performance, marketing strategies, and gender equity. With Salary.com's Compensation Consulting Services, you can create a compensation structure that empowers all employees at every level and drives your company toward sustainable growth.