How to Develop a Compensation Plan

Three Parts:Creating a Basic Compensation StructureDetermining Pay and Bonus LevelsAdding In Other Benefits

A compensation plan should be an incentive for the employee to fulfill company's goals. It should also benefit the employer. Therefore, a compensation plan is typically a win-win for all parties involved. If you are looking for steps to develop a compensation plan, consider the following recommendations.

Part 1
Creating a Basic Compensation Structure

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    Determine your company's vision and how your compensation and benefits package can reflect this. Your compensation plan should be designed to further the future of the company and its goals. Look at the company's short term and long term goals. Is the goal to raise profits now or grow the company by accessing new markets over several years? Determine how this vision will be achieved. The compensation plan should then reflect these actions and drive employees to complete them.[1]
    • For example, if you are an employee-orientated business that wants to nurture staff in order to keep them for many years, then your compensation plan should reflect this. A strong retirement plan with a generous matching system would entice employees to stay.
    • In addition, base pay can be set at certain levels to further company goals. For example, if you wanted to attract the best talent, you could pay above-market pay to your employees.
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    Set incentives plans in line with company goals. Your incentive plans (bonuses) should also be awarded in such a way that they drive the company's goals. Bonuses should be awarded to those employees that contribute to the company's growth and strategy in direct ways. For example, a salesman could be measured not on how they increase sales, but on how they increase profit. That is, how well they can create new business without spending a lot of the company's money to get it. Offering this incentive over a purely sales-based incentive plan will help in increasing profitability.
    • The same is true for customer attraction and retention. Rewarding employees for keeping customers will result in them working to do so. Similarly, providing incentive to find new customers will achieve that end.[2]
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    Figure out how incentives will be paid. You have several options when it comes to providing incentives. You can pay them in cash or in stock shares. You can provide then at different tiers based on achievement and other factors, or you can tie them directly to a performance metric like sales generated. Deciding which type of incentives to use will depend on your company's goals and culture.
    • For example, if you want to give employees more "ownership" in the company and motivate long-term work, paying them in stock shares might further these goals.
    • Alternately, if you have short-term goals to achieve, paying employees frequent, cash-based bonuses can help keep them focused and working hard on immediate goals.[3]
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    Make sure your compensation complies with federal and state laws. In all aspects of your compensation plan, you should make sure to adhere to state and federal laws and regulations. These include overtime compensation laws, required benefits like health insurance and worker's compensation, independent contractor regulations, minimum wage laws, and any other state or federal laws relevant to compensation and/or the company's specific industry. Your best option here is to hire legal counsel when designing employee compensation to make sure that you are adhering to all required laws and regulations.[4]

Part 2
Determining Pay and Bonus Levels

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    Fit your compensation into your budget. Recognize that your compensation plan needs to fit into your budget, especially if you are a start-up business. Even if your business is doing well currently, your compensation plan needs to stay consistent, even during the off years. At the same time, you don't want to offer a meager compensation plan if profits are high, simply because profit may not be high one year. Work with the company's CFO (if there is one) to figure out a responsible compensation budget.
    • With your compensation budget cleared, start outlaying money to various positions by starting with the most critical or essential positions first.
    • This way, you can make sure these employees are well-compensated before taking care of less critical roles.[5]
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    Research market rates for each position. Research within your industry to figure out the market pay rate for each position. This information can be found through websites that track salaries, like Glassdoor or Payscale, or through the Bureau of Labor Statistics (BLS). When looking through for salary figures, determine a range to use. For example, you can use the median (50th percentile) or a range, like 25th to 75th percentile. This range or middle-point will serve as the basis for determining your own pay ranges.[6]
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    Adjust pay based on work quality and/or expectations. After you have a market "standard" compensation rate or range, you need to gauge the employee's results and experience to the standard to adjust their pay accordingly. If any employee is not providing great results for the company or is inexperienced for their position, you could adjust pay down from the 50th percentile rate. The opposite goes for exceptional employees or those who are more experienced than others in their position.[7]
    • For example, imagine that you determine the market pay for a revenue analyst in your industry is $50,000. Your entry-level marketing analysts are still learning their craft and have little experience, so you could adjust their pay down, maybe to $40,000 or $45,000.
    • Higher pay relative to the market can also be used to attract high-level talent.
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    Set incentive levels. Your incentives like bonuses and benefit packages should also be set according to the market. Just like with base compensation, there are generally market rates for incentive pay. For example, salespeople in a certain industry may typically earn a standard 5 percent of sales that they close as a bonus. You can adjust the percentage up or down to fit with your company's structure and goals.
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    Revise pay levels regularly. The job market changes constantly, with some jobs becoming more competitive or valuable, or less so, over time. Make an effort to revisit your compensation levels every few years to make sure that you remain competitive in attracting new talent. You can also use information from other industries to gauge your pay levels for certain employees.[8]

Part 3
Adding In Other Benefits

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    Research the options. There are many benefits that you can include in your compensation plan in addition to bonuses and other merit-based incentives. Examples include required benefits, like worker's compensation and health insurance, along with optional benefits, like various other types of insurance (health, life, or disability), vacation time, sick days, and stock options. Again, study which benefits are commonly offered to this type of employee in your industry. Revise benefit offerings according to your company goals.[9]
    • For example, a company with great benefits like paid time off, long maternity leave, and good stock options might help a company retain employees more easily.
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    Offer a compensation plan that includes a mix of benefits. Include both short and long term options in your compensation plan. Ideally, your plan should have benefits that reward employees in the short run, such as bonuses and commissions. It should also have long term benefits, such as healthy retirement plans. Provide a health plan and possibly a dental plan, if it's in the budget. You may also want to include a flexible spending benefit.
    • Consider opportunities to excel with tuition reimbursement or promotions and pay raises.
    • Provide family orientated benefits, such as an onsite childcare or daycare reimbursement.[10]
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    Only include benefits you can afford. If your business does not do well or temporarily goes through hard times, you will likely have to pull expenses from your benefits, and this may cause resentment among your staff. It is always easier to add a benefit then take one away. So be realistic when designing your benefits offerings. You can always increase benefits over time to reward loyal employees.
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    Be clear when putting your benefits plan into your company policy book. You may want to involve your lawyer to ensure that nothing is left vague. When hiring new employees, you may want to go over your benefits plan so that if there are any questions, the new employee can have you address them immediately.
    • The same is true for all incentive plans. These must be clearly stated in writing.[11]

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Categories: Business | Accounting and Regulations