A Guide to Creating a Strong Compensation Plan

Every year, companies put in so much effort to budget for the next year. With a lot spending to consider, they need to do this process carefully. One of many portions of a company’s budget goes to human capital cost. And it is without a doubt that worker’s compensation of a vital aspect of any business.

But this process is not as easy as adding a certain fraction to the previous year’s budget. This takes careful analysis of data from reliable sources. As a result, companies can create a strong compensation plan they can use for the coming year.

What is a Compensation Plan?

This is a company’s official file that shows their strategy of how to pay or reward its workers. This plan differs from one firm to another. It depends on the firm’s pay philosophy and market trends.

Without it, a company will not have a reliable basis on how to pay its workers. This can result in ineffective management and high staff turnover. A compensation plan creates a balance between the firm’s plans and the industry’s practices. This can result in a fair allotment of rewards for workers.

Types of Compensation Plans

Before creating a compensation plan, it is best to understand the two types of compensation. A company may pay its workers direct or indirect compensation.

Direct

This type is where workers receive monetary payment. It is the wages and salaries they receive for the work they perform. This includes base pay, variable pay, and differential pay.

1. Base Pay

This is the pay workers receive without other pay or incentives. This can be a worker’s hourly pay or annual earnings. Base pay increase over time depending on a worker's performance.

2. Variable Pay

This type of pay depends on various aspects for reaching a certain outcome. An example is a worker’s or the team’s overall performance. It could also be on a company-wide basis. Firms offer this to urge workers to achieve a favorable result.

3. Differential Pay

Most companies refer to this as premium pay. They offer this to workers that accept unwanted shifts. In addition, they offer it to workers with jobs under harsh conditions.

Indirect

These are non-cash payments that workers receive. They often come as benefits for workers. These include health insurance, retirement plans, wellness plans, paid vacation time, and more.

Questions Relevant to Creating a Compensation Plan

With the knowledge of the types of compensation, most people will still have many questions. Creating a compensation plan is not an easy task. It is normal to have various queries and to know more about it. Here are some usual questions to ask when creating a compensation plan.

1. How much budget does the company have?

2. Is the company offering good pay externally?

3. Does the company have a fair pay scheme?

4. Is the strategy strong enough to keep current workers and attract new ones?

5. Are the pay schemes legally compliant?

Steps in Creating a Compensation Plan

With those questions in mind, a company can go ahead with creating a compensation plan.

1. Create a compensation philosophy.

This step is critical to creating a compensation plan. A firm will not have a realistic way of finding out the value of a worker with the correct compensation philosophy. This is a formal statement on the company’s view about workers’ pay.

2. Gather data from reliable sources.

Firms need to gather reliable data in creating the plan. To ensure that data is reliable, this must be from credible sources. Else, bad data can affect the validity of findings. This can result in bad decisions when it comes to the pay structure.

3. Conduct analysis to benchmark job positions.

After gathering enough data, firms must conduct data analysis. This is critical to benchmark job roles within the company. At the same time, they use it to benchmark external positions.

4. Create pay ranges for job positions.

The next step is to create pay ranges for every job position. This comes after a company conducts data analysis on job roles, externally and internally. This helps companies produce more accurate pay ranges. This should also include potential pay changes for each position.

5. Find out the cost of the entire pay structure.

The entire pay structure affects a company’s financial stand. For this reason, it is critical to find out the cost of the entire pay structure. There should be a balance between a firm’s current and future needs without compromising its financial position.

6. Communicate the compensation plan.

Companies need to remain open and clear about their compensation plan. After forming the entire plan, it next is to relay it to the whole company. Company leaders need to explain how it works. Also, they need to tell workers how this plan helps them.

7. Monitor and evaluate its effectiveness.

Finally, like other processes, companies need to always check and evaluate their compensation plan. This will give them an idea if the plan is effective. They can also check if the plan helps achieve their goals. This will also help if the plan needs changes depending on the workers’ feedback.

A compensation plan is critical to every business. This helps them have a concrete view of how to fairly reward workers. It also helps workers to know how much the company puts value on them.