Employment contracts should benefit both employers and employees.
Companies benefit from their workers' skills and expertise, and employees should receive fair compensation for their efforts. Communicating a comprehensive compensation plan in the hiring and onboarding process ensures employees that companies recognize and value their contributions.
Crafting a plan that balances everyone’s needs isn’t simple. But if you get it right, a great compensation package attracts new talent, meets workforce expectations, and improves employee productivity and motivation.
What’s a compensation plan?
A compensation plan covers every item an employee receives from a company for their work, including a salary or hourly wages and indirect earnings like benefits, bonuses, and wellness perks.
If your company offers you health insurance, retirement options, and a stipend for fitness and wellness, they’re all part of the compensation plan.
Compensation models vary from company to company, role to role. More senior employees might receive higher bonuses and extra perks compared to interns, contractors, middle management, or entry-level employees.
Human resources managers design these packages to entice top talent and motivate existing employees to meet or exceed performance targets. Fair compensation plans improve productivity while boosting employee satisfaction, increasing the chances employees stay at a company long-term.
Types of compensation plans
Basic comp plans comprise two elements: base pay and variable pay.
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Base pay is the direct compensation received in exchange for an employee’s services. It usually takes the form of an hourly wage or salary paid to the employee weekly, monthly, or yearly.
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Variable pay covers commissions, bonuses, and performance incentives. The value of these payouts depends on the employee, team, or entire company meeting a target or reaching a milestone, so the amount could vary between pay periods. They might also coincide with work anniversaries or holidays.
These two elements, taken together, make up the monetary portion and form the backbone of a company's total plan.
But that's not enough for an employer who needs to stand out in a competitive labor market. Drawing top recruits requires incentives in the form of non-monetary perks and benefits in addition to monetary considerations.
Competitive packages might include:
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Equity: Having equity in a business means owning a portion of the company, usually through company shares. This perk benefits start-ups who might not be able to offer competitive salaries but can provide the promise of a substantial bonus for starting employees if the company goes public.
Equity also encourages talented people to become part owners. Employee stock options (ESOs) and restricted stock units (RSUs) are both forms of equity. You must purchase the former, and the latter are distributed to you over time.
Eligibility for stock options usually depends on how long you’ve worked for a company.
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Retirement services: Companies might provide access to retirement planning, benefits, pensions, and other deferred compensation plans.
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Parental leave: If companies want to diversify their workforce and support parents, this is a prime incentive.
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Childcare stipend: Candidates with kids or interested in family planning might not want to work somewhere where childcare isn’t prioritized. This is a critical benefit if a company wishes to attract talent motivated to commit to an organization for many years.
A competitive compensation plan example that drives better employee performance could include:
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Competitive annual salary
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Performance incentives
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Retirement savings plan
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Group health insurance
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Four weeks (or unlimited) PTO
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Technology stipend to create a work-from-home setup
Great compensation plans should also lay out requirements for wage increases, like merit raises, and provide the employee with guidance on how to internally advance their career.
Knowing what opportunities are available for advancement or promotion reassures talented workers that they have a future at the company.
The importance of compensation plans
Developing a competitive compensation plan helps both workers and employers in the following ways:
Increased motivation
Effective compensation planning delivers a roadmap for career advancement and encourages workers to push to achieve more. A company that ties employee compensation to specific targets motivates them to meet and exceed those goals.
And by encouraging employees’ professional success, a company guarantees its own.
Improved employee engagement
Employees who actively engage with their employer — investing their intellectual and emotional energy toward their work — drive a host of positive organizational outcomes, like improved productivity and profitability.
And generous compensation programs make employees feel valued and appreciated, fostering greater engagement.
Decreased staff turnover
Replacing staff is costly, and paying employees fairly makes them want to do better work for an organization and stick around longer.
Since losing an employee can cost a company between 100-300% of the employee's salary, it’s worthwhile to limit employee turnover and avoid higher replacement salaries or wasting onboarding resources.
Decreased wage disparity
Wage gaps exist between workplace demographics. One way to combat pay disparity and the unconscious bias that sometimes drives it is to create a transparent pay structure based on skills, performance, and years of experience.
This way, employees know they’re being compensated based on their qualifications rather than attributes that have nothing to do with their job performance.
A company that's transparent about its compensation policies contributes to a culture of trust and openness. Employees know where they stand with respect to their leaders and coworkers. And an open dialogue helps workers develop honest relationships at work, translating to improved coworker relations.
Energized recruitment profile
A generous compensation package bolsters a company's reputation and creates a positive impression among potential top candidates by demonstrating how deeply the company values its employees.
By being up-front about compensation at the beginning of the hiring process, companies avoid disappointing candidates if salary expectation doesn't align with the job offer.
How to create compensation plans: 7 steps
Given the far-reaching implications, like negatively impacted revenue or high turnover rates, embedding a fair compensation philosophy in your company culture is invaluable. Start by creating great compensation plans with these seven steps:
1. Start from square one
Start by evaluating your company’s business staffing needs to determine which roles are considered essential to the company’s day-to-day operations. When you know who you need working (and where), you can keep a list of crucial positions.
2. Establish job descriptions
Every role requires a complete job description, including qualifications, key responsibilities, and a base salary range. This profile should also incorporate performance metrics, benchmarks, and desired outcomes to know when employees exceed expectations.
Use this information to determine a compensation range for each role. Create an employee-facing, position-specific development plan, too, to help workers visualize their growth within the company.
3. Benchmark compensation levels
Have human resources investigate the competition to establish base compensation levels, standard benefits, and perks for every position. Research is key to creating a compelling, attractive offer that draws top talent to your company.
4. Create a budget
Management needs to consider every eventuality when establishing a position's compensation level, both for each role and at the company level.
Will you pay for overtime? Will you explore location-specific compensation ranges for different living costs or account for inflation? Can you afford annual raises, or will you reserve pay increases for promotions?
When it comes to specific roles, determine which are the most expensive. Can a junior software developer handle your company’s needs, or do you need a larger budget to hire someone with more experience?
5. Develop a list of benefits and incentives
In addition to basic benefits required by law, you’ll need to identify which perks and bonuses you’ll offer in pay packages. Consult with existing workers to determine which employee benefits options they prefer so you don’t wind up paying for services no one wants or needs.
6. Create compensation plan templates for each role
To make your life easier, compile your research and create templates for each role. When you’re sending a job offer, you can fill this role-specific template out and avoid wasting time sifting through your notes.
Make sure to adjust the template to reflect any location-specific information, like living costs, if necessary.
7. Share the results with employees
Pay transparency builds a sense of trust between workers and management. Once compensation planning is complete, provide ranges for each role to employees and be forthcoming about the process and decisions regarding salaries and benefits to avoid misunderstandings.
Stating salary ranges in job ads also helps show the possible variation within positions based on experience or location.
An executive’s compensation package will differ from an intern, so you may want to offer some insights into role-based compensation plans, like years of experience or education levels required for each plan.
Play fair with fair pay
A comprehensive compensation scheme says a lot about how a company values its employees. A generous pay range coupled with a desirable and complete set of benefits demonstrates a commitment to your staff that sets you apart from others in the industry.
And negotiating a fair salary can be uncomfortable and nerve-wracking for new hires. Having fair and transparent compensation plans makes employees feel like they don’t have to convince you they’re people who deserve financial security and have personal costs that matter.
They’ll also likely stick around longer, reducing staffing woes for management — so it’s a win-win for all.
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