How To Put Together a Compensation Plan

A compensation plan is designed to attract and retain employees. Build your compensation plan to ensure pay equity while balancing the needs of your small business and delivering value to customers.

Pay competitively relative to companies similar to yours in size and industry in your region. Compensation can tie in directly to regional compensation data, how employees are performing in their roles and where they are relative to the next level above them.

Set a philosophy on where you want your overall compensation to fall compared with the ranges in your market. By setting ranges, you assess your employees within a framework based on market data, so you can be transparent with them. Your criteria can mix technical skills with the soft skills you consider important across your organization, and that will aid in conversations about growth and how employees can get promoted to the next level. Workers are more likely to stay in a role where they anticipate salary growth and the development path to get there. This creates more predictability for the finance team.

Consider all the moving parts
A basic compensation package consists of salary or wages. A more comprehensive compensation package includes additional benefits: bonuses, perks, commission, health insurance and retirement plans. For employees, a sense of belonging imbues job satisfaction, engagement and effort. The right compensation strengthens self-direction, interconnectedness and success.

Compensation plans offer fair and competitive payments that align with the company budget and promote business success. Structure a competitive compensation program with direct and indirect components.
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Direct compensation refers to the financial payments — salaries, bonuses and equity — in exchange for time worked or results obtained. Salary is the bedrock of your company's compensation plan. When calculating wages, consider the following important factors:

• Geography.
• Job responsibilities.
• Cost of living.
• External market data.

When calculating bonuses used to reward team members for high performance, consider these three questions:

• Who's eligible for a bonus?
• Which targets should they hit to earn a bonus?
• What should the payment structure look like?

Equity compensation offers a stake or partial ownership in the company to encourage high performance. Team members get the message that when the company succeeds, everyone succeeds.

Look at the big picture
Holistic, people-driven strategies work to improve company culture by attracting and retaining talent. Competitive salaries help, but they are rarely enough anymore. Today's indirect compensation elements include:

• Medical insurance.
• Dental and vision coverage.
• Retirement benefits.
• Wellness benefits like gym memberships.
• Educational incentives.
• Mental health services like therapy or counseling.
• Volunteer opportunities.
• Flexible spending accounts.
• Hybrid working arrangements.
• Paid time off.
• Disability insurance.
• Paid holidays.
• Child care initiatives.
• Relocation stipends or housing options.
• Reimbursement for work-from-home costs.
• Commuter benefits.

Compensation packages that adequately reward employees for their hard work can drive business profit. An effective compensation plan illustrates company integrity and transparency, assists in attracting and retaining top talent, boosts employee motivation and loyalty, and reduces turnover and hiring expenses.

Base your program on external market analysis and internal company data. Benchmark with similar organizations to create an appealing payment package.

Take the long view
By outlining your company's underlying approach to compensation, you place the program in context, promoting alignment with your company's objectives and values. A good compensation plan includes a pay-for-performance strategy, for example, that helps retain employees.

Explain the program to employees, communicating the components to demonstrate integrity and nurture trust. When your team understands your compensation philosophy, it can feel confident investing effort in the work.

A clear employment contract — aligned with state and federal laws — shows respect for employee-employer relations and helps prevent disagreements and legal misconduct. Pay is personal — it's how employees measure their worth to their employers and fund and build their lives. When you get compensation right, it positively impacts your workers and lets them better focus on the work.

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