Creating a Compensation Plan

Let’s explore how the key components of the compensation and total rewards planning process come together to create a comprehensive compensation plan for your organization.

In the article, the follow questions will be answered:

• How do you write a compensation plan?
• What should be included in a compensation plan?
• What makes a good compensation plan?
• What are the goals of a compensation plan?

How Do You Write a Compensation Plan?

You will need to complete a considerable amount of upfront work before writing formal administrative guidelines for your compensation plan. To get started, you’ll need to:

• Develop a compensation philosophy that serves as a compass to guide your decision-making.
• Design compensation strategies inclusive of programs, tactics, and tools to support your philosophy.
• Gain buy-in from organization leadership.
• Develop compensation policies that address day-to-day program administration.

Once you have completed this preparation, you’ll be able to link together your compensation philosophy, compensation strategy, and compensation policies into a strategic comp plan for your organization.

Different Types of Compensation Plans

You may need many different types of compensation plans, depending on the positions in your organization and the programs you establish to compensate employees. For example, if you have some employees that are bonus eligible, you may need a variable compensation plan or a compensation bonus plan for those groups. If you offer a profit sharing program, you may need a profit sharing bonus plan. If you have sales staff, you may need a separate sales commission plan. The different types of compensation plans you offer will depend on your corporate pay philosophy and strategy.

With all types of compensation plans, it is important to conduct regular reviews to ensure they are aligned with current business priorities and are compliant with applicable laws. If you adjust or update your compensation philosophy, strategy, or policies, you should also revisit your compensation plans to ensure they remain in alignment with your goals.

Administer Your Compensation Plan

Once the upfront work is complete, formal written guidelines can help you administer your compensation plan from the HR perspective. They can also benefit managers during pay discussions with employees, outlining the pay packages and plans that employees are eligible for. The guidelines should contain both high-level direction, such as an explanation of your comp philosophy, as well as practical direction for carrying out day-to-day comp decisions.

Another valuable element to include in a compensation plan template is a description of how the plan will be communicated with employees. By communicating your philosophy and strategy clearly and consistently, you’ll be providing valuable insight to employees into the “why” of the decisions made that directly impact their compensation.

View all articles in this series:

• Part 1: The Role of Strategy in a Compensation Plan
• Part 2: The Role of Compensation Policy in a Compensation Plan
• Part 3: Creating a Compensation Plan

For additional assistance with compensation planning, consider partnering with an experienced consultant. Schedule a free consultation today.