What is the Compensation Model and How to Create One

Having the right compensation model allows companies to not just pay their employees right but also provide them with mental incentives that can help the company grow further than ever before.

Studies back this up as well, as several studies have pointed out that 68% of workers that are compensated fairly or higher than the average market rate are a lot more productive compared to those who aren’t.

Continue reading to learn more about compensation models, the different types of models that companies can use for their financial compensation, the help that it can provide for companies to help hire top talent, as well as some frequently asked questions for companies that are willing to try this system out.

What is the compensation model?

A compensation management system is a framework that outlines every employee’s compensation practices for their company. It will comprise everything from employees wages to their benefits packages, allowances, and overall pay structure to name a few. A good compensation model can help companies attract and retain top talent, while keeping productivity relatively high and ensuring better employee satisfaction moving forward.

For most companies, they can start creating their own competitive compensation plan with the help of compensation analysis software that’s specifically designed to help companies create better pay models and price their employees above the competitive rate.

The different types of compensation models

The different types of compensation models that companies can choose from are listed below and can help them motivate their employees better moving forward.

1. Direct and indirect compensation

   One of the most basic forms of compensation, companies can use either direct or indirect compensation as their primary financial compensation model. Direct compensation refers to the monetary compensation that an employee receives from their employers and includes items like base pay, commissions, and hourly wage whereas indirect compensation or variable compensation refers to non-monetary compensation like benefits and health incentives that a company pushes for their employees.

2. Location-agnostic pay

   Location-agnostic pay refers to the compensation strategy where employees are paid the same, regardless of their location. This is the usual employee compensation model for companies with employees abroad or in smaller areas.

3. Localized compensation

   Although it’s similar to location-agnostic pay, localized compensation is a compensation plan where companies will adjust their employees’ salaries depending on their employee’s locale.

4. Performance-based compensation

   As its name suggests, performance-based compensation is an employee compensation strategy where companies pay their employees based on their achievements. It varies in form, but the most common examples are bonuses, commissions, or stock options. Keep in mind that this compensation model depends on company performance.

How can the compensation model help companies?

A good compensation can help companies by providing them with a more competitive way to compensate their employees and provide them with better payroll administration. This is because a well-done model allows companies to develop better guidelines for not just their compensation structure but also helps motivate their employees further for better job satisfaction.

Financial compensation models aim to provide companies with a better understanding of their current employee compensation and find out areas they can improve in. Pair this discovery with a reliable compensation analysis software on top of compensation surveys and companies can easily adjust their compensation strategies to help with pay equity among employees while helping boost productivity.

Basic components of a compensation model

The basic components of a compensation model are the following:

1. Base salary

   Base salary is the money that an employee will receive for doing their role within the company. This varies depending on the role and seniority of the employee as well as their location.

2. Bonuses

   Bonuses are extra incentives that are given away to employees after either reaching certain goals or another specific criterion. These incentives may range from monetary bonuses to ones that can help promote better work-life balance like leave dates.

3. Benefits

   Benefits are non-monetary forms of employee benefits that employers can add that can directly impact an employee’s well-being. Some examples of it include health insurance, paid time offs, retirement contributions, disability insurance, dental insurance, vision insurance, and retirement plans to name a few.

4. Equity

   Equity based compensation allows employees to own a part of the company that they’re working at through stock options, restricted stock options (RSOs), employee stock purchase plans, and direct stock grants.

5. Perks

   Perks are convenience-oriented additional offerings that companies can provide to their employees that can elevate their experience. Some examples of these include office perks like free food and game rooms, to a more wellness-oriented approach like gym access and mental health initiatives.

FAQs

Below are the frequently asked questions about the compensation model.

What are the 3 P’s of compensation?

The 3 P’s of compensation are listed below:

• Pay equity

• Pay structure

• Pay competitiveness

What is a volume-based compensation model?

A volume-based financial compensation system is mostly used in hospitals and are tiered rebate agreements. For example, if a customer buys $50 worth of items, they may receive $1 per unit sold.

What is the 3 x 3 compensation approach when it comes to compensation?

The 3x3 total compensation approach, or the 3P compensation approach, is a compensation package framework that involves paying employees based on their position, person, and performance.