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Creating a Compensation Plan That Works
A well-designed compensation plan is key to attracting top talent, retaining your best people, and staying competitive in a dynamic job market. Here's a quick overview of what to consider:
What is a Compensation Plan?
It’s a formal written document outlining what, why, and how employees are paid—which generally includes pay, bonuses, benefits, and perks. A strong plan aligns with business goals, keeps you competitive, and boosts employee satisfaction.
Types of Compensation
- Direct: Base pay, performance bonuses, commissions, and premium/differential pay.
- Indirect: Health insurance, retirement plans, paid time off, education support, and more.
Building Your Plan—8 Key Steps
- Start with your compensation philosophy – It is your company’s moral position on pay and benefits based on your company values.
- Set clear goals – Know what talent you need and what behaviors you want to encourage.
- Analyze job roles – Understand duties, skill levels, and value to the business.
- Benchmark salaries – Use tools and research to determine market rates.
- Choose benefits wisely – Balance employee needs with your budget.
- Use incentives strategically – Align incentives with performance.
- Stick to your budget – Plan ahead for raises, hiring, and benefit costs.
- Stay compliant – Factor in federal, state, and local compensation-related laws.
Special Considerations
Tailor plans for executives and sales teams based on unique goals and incentive structures. And if budget is tight? Get creative—flexible schedules, growth opportunities, and culture perks can add major value.
Evaluate Regularly
Review your compensation strategy at least once a year—more often if turnover is high or you’re losing candidates to better offers. Look at total compensation (pay + benefits + perks) and don’t underestimate the appeal of flexible work.
A strong compensation plan isn’t just about numbers—it’s about aligning your pay strategy with your values, market trends, and your team’s needs.
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