How to Create a Desirable Compensation Plan

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Written By Obaid Ur Rehman

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In order to attract and retain top talent, you need to have a competitive Desirable Compensation Plan in place.

  • Salary, hourly pay, commissions, and bonuses are the four main direct payment methods.
  • In addition to direct compensation, your plan should also include indirect compensation like perks and equity-based initiatives.
  • Research is important before launching a compensation programme, and it’s also important to follow all necessary procedures without omitting any.
  • This article is for small company owners and employee supervisors who are interested in finding out more about what goes into a compensation scheme and how to properly execute it.

Also read: How to Create a Biweekly Pay Schedule

What is a compensation plan?

A compensation plan, sometimes known as a “total compensation plan,” includes all of the elements of a company’s strategy that are intended to reward employees, including their wages, salaries, perks, and overall conditions of payment. Plans for employee remuneration also cover increase schedules, all fringe benefits, any union privileges, and vendor discounts supplied by the firm.

A carefully crafted pay philosophy that is maintained current, pertinent, and compliant with employment rules helps the following critical areas of your company:

  • Strategic plans
  • Budgeting and business goals
  • Industry-competitive challenges
  • Operating needs
  • Total reward strategies that support retention of the company’s top talent

The following are some further justifications provided by the Society for Human Resource Management (SHRM) for the necessity of keeping an adaptive and strategic pay plan:

  • It explains how your company’s pay and compensation philosophies complement your business strategy, industry competitiveness, operational goals, and employee demands.
  • It aids in luring capable applicants to work for your company.
  • Employees are strongly motivated by it to perform at high levels and surpass targets.
  • In terms of basic pay, incentives, total compensation, and benefit options, it aids in maintaining your company’s competitiveness in the market.

Why do companies need a compensation plan?

For businesses to maintain their competitiveness in their sector and to draw and keep top employees, they require a sensible pay structure. Employers who just pay their staff what they believe they should be paid will gradually fall behind their rivals in the competition for talent. Additionally, leading a team of employees without a set budget is insane. Compensation plans make budgeting and planning dependable and regular.

Companies are having a harder difficulty than ever recruiting (and maintaining) enough competent labour to satisfy all of their demands, according to PayScale’s 2020 Compensation Best Practices study. More businesses are putting their efforts into developing “an employer brand, which involves a more deliberate approach to salary and career pathing as well as greater perks and more diverse and rewarding methods to reward achievement” in order to recruit and keep the top talent they want.

What is direct and indirect compensation?

The most fundamental forms of pay are either “direct” forms, like salaries, hourly wages, commissions, or bonuses, or “indirect” forms, such different perks.

The 4 types of direct compensation

Although any of the four methods might be used to pay employees for their labour, most businesses pick one and stay with it. The exception is bonus pay, which is intended to be a supplement to regular salary and is dependent on performance by the person or the firm.


The most common type of salary is a sum of money distributed throughout a year. The frequency of salary payments is one more component of the compensation plan, however most organizations pay their staff every two weeks.

The most typical form of direct remuneration for exempt personnel is a salary. An exempt worker is not entitled to overtime compensation. Employers give exempt workers a base income for the work they do rather than an hourly rate, so they are compensated for the work they do rather than the number of hours they put in.

Hourly pay

Non-exempt workers often get hourly compensation, are entitled to overtime pay, and are required to be paid at least the minimum wage. An employer is required to pay overtime when an employee clocks in for more than 40 hours in a workweek.

A specified financial amount is often paid each hour of work at an hourly rate. Nonexempt workers often get hourly wages rather than salaries. To start and conclude their work shift, employees often retain a timecard or use a clock-in/clock-out device. Nonexempt employees could not work as many hours as they did in prior weeks if there is slow or reduced employment, or if the company’s budget changes. Therefore, a regular number of hours performed every pay period is not guaranteed.


This is a commission where payment is determined by volume, production, or a specific degree of performance. “Piecework” and “piecemeal” are other terms for this kind of payment.

There are two approaches that are most frequently used and referred to as paid commission. One calculation is based on the quantity of goods or services produced. The second form’s layout is based on sales volume. A real estate broker is an example of a worker who receives this kind of pay: They get paid when they sell a home. The only thing that matters is that the house was sold, regardless of how long it took or what tasks were involved.

Bonus pays

Bonuses are given to employees in order to boost morale or performance in general. This is a variable way of remuneration that is frequently connected to sales professionals, who typically work as exempt or salaried employees. For instance, a sales professional gets a bonus if, according to a predefined matrix, she surpasses her quarterly objective by a specified monetary amount.

Bonuses may also be given for good business performance or when candidates with particular or in-demand qualifications are hired for positions that are hard to fill.

Types of indirect compensation

Any fringe benefit that a company offers might be considered indirect compensation. Most frequently, it alludes to the different insurance plans that companies provide, such as health, vision, and dental, as well as life and short- and long-term disability. 401(k) plans and other employee retirement schemes are examples of prevalent indirect compensation structures.

Another kind of remuneration is equity-based programmes, albeit small businesses don’t frequently provide them. Equity-based pay often consists of stock or shares in the firm.

Other instances of indirect remuneration include the following:

  • Disability income protection
  • Vacation days or paid time off (PTO)
  • Paid holidays
  • Flexible working hours or scheduling
  • Other forms of retirement benefits
  • Opportunities for advancement
  • Student loan assistance
  • Educational benefits
  • Assistance with child care expenses
  • Relocation benefits
  • Company car
  • Company equipment (laptops, mobile phones, etc.)

The most typical methods that businesses reward both their top workers and all of their staff are revealed by PayScale’s 2020 survey:

How to develop and implement a compensation plan

Consider the difficulty of creating a pay strategy more in terms of what’s best for your team and less in terms of “right way and wrong way.” Here are some tips to help you in your journey.

Create an outline.

Establish a programme goal and specific goals. We also advise you to establish a basic budget for your staff and start with job descriptions for each role on the team.

Appoint a compensation manager.

This role, which is often held by a human resources employee, coordinates the programme and does market research on the salaries of various job categories, direct compensation options, and job categorization methodologies.

Create a compensation philosophy.

Determine how fiercely competitive the employment market in your industry will be. Would you rather provide low salary with excellent benefits or be the market leader in direct compensation?

Rank jobs and place them within a matrix.

Describe any pay levels that should be present in pay structures, such as those for CEOs and salespeople. Each job categorization should have possible levels identified.

Develop grades for seniority within each job classification.

Creating possibilities for job progression is crucial. Create tiers 1-3 of jobs, such as senior and entry-level positions, which may have an influence on the wage matrix but provide progression for personnel.

Settle on salaries and hourly rates of pay.

Assign rates of pay and a salary range for each role and job classification after you have an idea for your compensation platform. You should now adjust your organization’s budget.

Complete necessary policies.

A compensation plan may have an influence on a variety of payroll, fringe benefit, and other pay-related rules. Companies frequently have rules governing paid vacations, healthcare benefits, handling of payroll, and company-issued pay advances, all of which must be taken into account or at least be consistent with the company’s compensation policy. [Read related article: Startup Employee Handbooks]

Get approval or buy-in from your company’s other leaders.

When everything is ready, make sure that the whole leadership of your business continues to support the upcoming launch in full.

Develop a communication plan.

The compensation scheme should be introduced to all of your employees at the same time. To spread the strategy, use a variety of communication channels (e.g., email, group gatherings, social media, flyers in common areas, etc.). If English isn’t everyone’s first language, send out this communication in several different languages. There may likely be many questions for you. Every employee has to understand their pay package since total compensation is complex and not everyone can simply grasp it.

Monitor so you can adjust or evolve as needed.

Prepare yourself to adjust your remuneration. You’ll need to make changes over time in order to keep your legal compliance and competitiveness.

Ensuring equity, fairness, legality and competitiveness

Creating a pay plan includes making sure it is equitable for all of your employees. Although these factors play a role, they are not the only ones that apply to gender, culture, colour, ethnicity, and so on. We are also discussing the expertise and skill sets that new team members bring to your organization.

Before presenting your compensation plan to your organization, it must pass a quality test that is outlined by SHRM. The examination asks the following queries:

  • Are the initiatives outlined in the compensation philosophy and policy consistent with the law? Be aware of both state and federal laws, which may include PTO or vacation rules in some circumstances (such as the Affordable Care Act).
  • Is the entire programme equal, or fair to all employees?
  • Is the overall programme justifiable in the eyes of the staff? In this instance, reality is perception.
  • Is the program’s overall budget sensitive? In other words, can you continue to give benefits even if revenues fall for a quarter or two?
  • Can your company successfully convey to employees the philosophy, strategy, and overall programme?
  • Do the programmes follow your overall compensation philosophy and rules and are they fair and competitive?
  • Is the compensation structure fair? Will it assist your business entice and keep the best employees in your sector?

There are several justifications for updating or adjusting your compensation scheme. It can become outdated for your business or it might not adhere to current employment rules. Other driving forces to maintain the viability and applicability of your pay plan include retention and recruiting goals.

Each of these characteristics is essential to any compensation plan since it forms the basis of the connection between the business and each of its employees.

Compensation plan examples

We may provide a number of resources that have been successful for others, despite the fact that it is challenging to see other firms’ overall compensation systems (since many organizations withhold these facts from outsiders). The SHRM offers a wide range of compensation planning and design businesses as resources, including the following:

1.Culpepper and Associates Inc.

Services offered: Compensation surveys and services


Services offered: Talent management suite

3.CompensationCloud Inc.

Services offered: Employee compensation management software

4.Flex HR

Services offered: Full-service consulting

5.CRG emPerform

Services offered: All-inclusive employee performance management

Compensation plans may be used to firmly establish a company’s strategy for luring and keeping the top team members. Take the time required to create a thorough strategy and make sure that everyone on your team is aware of it.

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