There are many ways to show respect for your employees. However, the clearest indication of an organization’s respect for its workers is the transparency and effectiveness of its compensation plan.
Workers need to know how much their hard work is worth. And when the pay is good, employees are willing to stick with an organization for the long term, saving organizations up to 21% of their annual budget through watertight employee retention.
Compensation planning is crucial to an organization’s strategic planning and management. The glue keeps an organization strong, adaptable, and profitable. This straightforward guide explores the impact compensation planning has on your organization.
What is a compensation plan?
A compensation plan is how an organization pays and rewards its workforce. They are employee-facing documents that inform the worker how they get paid, how much, and their benefits.
When signing their contract with the employer, compensation plans determine whether an employee receives a salary or an hourly wage, bonuses, commissions, or benefits eligibility.
Compensation plans empower talent within the organization and attract new talent with compelling offers. Because compensation plans pertain to human capital, they typically function within human resources departments. Compensation plans are also a critical part of talent management strategies.
Importance of compensation planning for organizations
Effective compensation plans keep organizations solid and competitive in two key ways.
Firstly, compensation plans are a crucial component of talent acquisition and talent management. An organization is only as strong as its workforce. If an organization packages an attractive compensation plan with lucrative pay and compelling benefits, top talent will choose you over your competitors. Competitive compensation plans make for a competitive organization.
A compensation plan’s effect on hiring isn’t theoretical. Payscale’s 2023 Compensation Best Practices Report identifies the importance of competitive compensation plans for talent acquisition, especially in a tight labor market.
Secondly, compensation plans give the necessary structure to an organization’s labor budget. Talent managers need to strike a balance between competitive compensation and the limitations of their budget. Conscientious strategies for organizational compensation plans help talent managers square the circle when balancing their budget and bringing on talented folks.
Types of compensation and compensation plan components
Compensation plans serve a crucial role in many organizational strategies.
But what does a compensation plan look like? To give you a clearer idea of the types of compensation plans available, let’s examine the types of compensation that are possible and their constituent components.
There are two distinct types of compensation: direct compensation and indirect compensation.
Direct compensation refers to compensation methods that put money directly into an employee’s pocket. These compensation components are the ones most people already know: salary, hourly pay, commission, and bonus pay are all types of direct compensation.
Indirect compensation refers to incentives that are more roundabout but no less critical. While not cash-based, indirect compensation components make all the difference in a compensation package, offering employees financially valuable incentives like benefits and career development opportunities.
Let’s look closer at direct and indirect compensation components to see their value for yourself.
Types of direct compensation
- Salary
- Hourly pay
- Commission
- Bonus pay
Salaries are fixed payments typically issued to employees on a biweekly basis. Employees’ salaries are in job descriptions. Employees on salary appreciate the fixed status of their payment; they know what to expect every two weeks.
Hourly pay is a compensation method where employees are paid an hourly wage based on how many hours they work within a given week. Pay periods vary in an hourly wage compensation plan, typically weekly or biweekly.
Federal law mandates that employees who exceed 40 hours a week need to get paid overtime, set at time and a half of their hourly wage. Schedulers for hourly workers must be aware of overtime hours.
Commission pay is typically issued to employees who work in a sales environment. Commission payments are a percentage of a project or sale the employee completes. For instance, if an employee makes a sale, they are paid a commission as a percentage of that sale.
The commission allotted to employees per project depends on the agreement. Commissions typically range from twenty to thirty percent of the sale; straight commission means that the employee earns one hundred percent of the earnings from the sale.
Bonus pay refers to direct compensation given as a reward for good work. Many organizations provide bonuses to employees who have done a stellar job or distribute organization-wide bonuses during holidays like Christmas.
Types of indirect compensation
- Employees’ welfare
- Rewards and benefits
- Career development and growth opportunities
- Employee appreciation and recognition
Employee welfare refers to the investments that create a positive company culture for employees. That sometimes includes services that ensure employees have the resources they need to achieve sufficient levels of wellness.
Employer-paid gym memberships, mental health services, and in-office wellness resources are just a few examples of indirect compensation packages under employee welfare.
Benefits are a massive part of indirect compensation. Benefits refer to healthcare insurance, life insurance, or retirement plans like 401ks. Compelling benefits and rewards packages enormously impact attracting top talent. While benefits are indirect, non-cash rewards, new and veteran talent recognize their financial value.
Investments in employee growth and development are an excellent means of indirect compensation. Career growth and development opportunities refer to employee training modules or subsidizing an employee’s pursuit of higher education.
Not only do these kinds of indirect compensation attract top talent, but they also nurture better employees.
Promoting an employee’s sense that they are appreciated is an effective use of indirect compensation. For instance, employers sometimes host events celebrating their workforce, like organization-led retreats or office parties. Letting employees know that they are valued promotes higher rates of retention
What are the goals of a compensation plan?
A good compensation plan follows a clear path forward. That way, employers know whether their compensation plan is working.
When you put together your compensation plan, you aim to:
- Reduce employee turnover; increase retention
- Promote employee engagement
- Drive higher standards in talent acquisition
- Increase workforce productivity
- Boost organizational profitability
4 benefits of compensation planning
Employees appreciate a good compensation plan. But employers must too. Compensation plans have clear benefits for employers. Here are four benefits to expect from a competitive compensation plan.
1. Increases motivation
Well-paid employees work hard—it’s as simple as that. When the workforce knows their hard work gets rewarded, they feel incentivized to work hard. Good pay is a clear-cut motivator. And when the workforce is motivated, they’ll drive productivity to new heights.
2. Improves employee retention
Turnover is costly for employers. Effective compensation plans increase turnover by increasing retention; employees want to stay with their organization if paid adequately. A good compensation plan often has high costs upfront, but they reduce liabilities like turnover that wreak havoc on annual budgets in the long term.
3. Strengthens a human-centered culture
People want to work for an organization that respects them. Team members, whether they’re new or existing employees, know whether their salary range and pay structure line up with your professed company values.
Compensation plans reaffirm organizations’ commitment to their people by paying them well. As the labor force increasingly places more value on wellness at the workplace, competitive compensation plans provide solutions employees and employers appreciate.
4. Counteracts discrimination
Compensation plans codify pay equity in an organization’s payment schemes—everyone gets paid what they deserve. Historically neglected groups have voiced valid concerns about systemic underpayment.
With a closely monitored compensation plan, organizations ensure that all of their employees, regardless of background, are treated with dignity and respect.
Benefits of using HRMS compensation planning software
Putting together a compelling compensation plan is one thing; rolling it out with one hundred percent efficacy is another. Tailoring a compensation plan up to scale is often a massive undertaking for organizations, regardless of size.
HRMS—human resources management software—significantly benefits organizations struggling to draft attractive compensation plans. HRMS compiles vast amounts of compensation data and synthesizes it into actionable insights.
Furthermore, HRMS provides crucial data analysis to help human resource managers create more competitive plans that don’t exceed the budget.
8 steps for designing effective compensation plans
1. Set up or re-visit the company’s remuneration philosophy
Step one of designing compensation plans is a comprehensive look at an organization’s values.
These values provide the foundation for the organization’s compensation plan. Assess or reassess the organization’s compensation philosophy, and use those principles to build a better plan.
2. Perform an industry/market study
Any organization has plenty of peers to reference when building a competitive plan. Analyze compensation metrics in your industry to see their pay practices. These analyses provide critical insights on how to stand out against your peers and attract top talent.
3. Realign planning with business objectives
With a clear view of organizational values and the general competition amongst industry peers, HR managers begin to realign their compensation strategy based on business objectives.
The compensation plan must have specific goals. Growth is the chief objective of any business strategy. Compensation decisions must empower business strategy, not hinder it.
4. Designate a compensation manager
When the time comes to draft the compensation plan outright, choose a qualified compensation manager. Compensation managers must comprehensively understand current trends and best practices for a plan. Designating a compensation professional is essential to the compensation planning process.
5. Set up pay ranges and pay grades
Labor budgets limit compensation plans. Establishing explicit pay ranges and pay grades for employee compensation helps managers find the best balance between competitive pay and budgetary constraints for the compensation program at large.
6. Create seniority grades within each job description
Specificity within job descriptions gives more nuance to a compensation plan. Seniority grades serve employers and employees alike. They allow for a broader range of compensation based on seniority—good for the budget—while giving employees a roadmap to higher pay.
7. Manage the compensation allocation budget
Compensation plans require routine updates, particularly in the area of allocation budgets. The allocation budget is the source drawn on by a compensation plan by actively managing the budget. Managers benchmark when necessary and ensure that the plan funding gets sustained.
8. Track planning execution and make adjustments
Any plan needs adjustments as circumstances change. After the compensation plan rolls out, track its progress: does it attract new hires? Future adjustments then grow the plan’s effectiveness and create a stronger organization.
What is an example of a compensation plan?
Creating an effective compensation plan is often a multi-stepped process. In contrast, compensation plans themselves are pretty simple. Compensation plans range from basic (just wages or salary) to complex (a complete outline of benefits,
Here’s a standard compensation plan example template:
Basic information:
Organization name and address: ExampleCorp 123 Fake Street
Employee name and ID number: Jane Doe 12345
Position: Marketing coordinator
Department: Marketing
Direct compensation:
Base salary: 90,000
Overtime: Based on salary
Commission: No
Sign-on bonus: 3,000
Performance bonus: Up 7% by the end of the fiscal calendar
Benefits:
401(k): Traditional 401(k); employer matches 100% of contributions up to 4% of salary after three years.
Profit-sharing: No
Health insurance: Independent Health Gold
Health insurance cost: Employer covers total health insurance cost
Dental insurance: No
Life insurance: Employer covers up to 50,000
Worker’s comp: ¾ of biweekly pay for the duration of recovery
Disability: Short-term and long-term disability coverage available
Medical leave: Paid medical leave up to 3 weeks; unpaid medical leave up to
Parental leave:
Vacation time: 14 paid vacation days after the first year; 18 after three years; 20 after five years
Sick days: 14 sick days a year
Holidays: All federally-recognized holidays are paid time off
PTO: Unpaid time off for personal days
Tuition reimbursement: 2,000 per year for courses or programs associated with the position
Remote options: Yes
Impacting businesses with compensation planning
Effective compensation planning creates a happier, more productive organization. Compensation managers find the right balance and appeal to employees and employers alike. The organization becomes enriched with more substantial levels of engagement and a team spirit that make the sky the limit.
Payscale’s software, data management, and compensation services empower workforces worldwide. Find the right compensation balance for your organization with our proven toolkits.
