How to Create a Desirable Compensation Plan

Table of contents.

business management compensation plan

A robust compensation plan is crucial for attracting and keeping a quality team. A successful compensation strategy incorporates multiple elements beyond salary, including flexibility, employee benefits, paid time off (PTO) and much more. 

We’ll detail compensation plan elements and explain how to develop and implement a competitive compensation plan that can boost recruitment and retention efforts while ensuring equity and fairness. 

What is a compensation plan?

A compensation plan, also called a “total compensation plan,” encompasses all of the compensatory components of a company’s strategy: employees’ wages, salaries, benefits and total payment terms. Employee compensation plans also include raise schedules, fringe benefits, union perks and employer-provided vendor discounts.

A strategically designed compensation philosophy that is kept current, relevant and compliant supports critical components of your business, including the following:

  • Strategic plans
  • Budgeting and business goals
  • Industry-competitive challenges
  • Operating needs
  • Total reward strategies that support retention of the company’s top talent

When your business maintains a robust compensation program, you’ll enjoy the following benefits: 

  • A compensation plan can support your business strategy. A desirable compensation plan describes how your organization’s pay and compensation philosophies support your business strategy, industry competitiveness, operating objectives and staff needs.
  • A compensation plan can help with recruitment. A desirable compensation plan helps your business attract and retain top talent with the in-demand career skills that can take your business to the next level.
  • A compensation plan can boost employee motivation. A desirable compensation plan motivates employees to perform at high levels and exceed goals.
  • A compensation plan can keep your business competitive. A desirable compensation plan helps keep your business competitive in the marketplace in terms of base pay, incentives, total compensation and benefits opportunities.

When you’re writing a job offer letter , detail the position’s salary, commissions and pay schedule, and provide an overview of the benefits package and perks the employee will receive.

Why do companies need a compensation plan?

Companies need a thoughtful compensation program to stay competitive in their industry and attract and retain top talent. Employers that determine salaries and benefits without regard for industry data will slowly lose the talent game to competitors. Additionally, managing a workforce without a predetermined business budget is risky. Compensation programs allow for consistent and predictable budgeting and planning.

According to Payscale’s 2023 Compensation Best Practices Report , job seekers have the upper hand in today’s job market. To attract and retain the best workers, more organizations are focusing on building compensation packages that will help recruit employees in a tough labor market and keep them engaged and motivated. 

What is direct and indirect compensation?

There are two types of foundational compensation:

  • Direct compensation: Direct compensation includes salary, hourly pay, commissions and bonus pay.
  • Indirect compensation: Indirect compensation includes various benefits.

We’ll take a closer look at direct and indirect compensation.  

4 types of direct compensation

Most employers choose one type of direct compensation and stick to it. However, you can use various methods to compensate employees for their work. The exception is bonus pay, which is meant to be an addition to regular pay based on employee or company performance.

  • Salary: The most traditional form of salary is a monetary amount scheduled over one year. How often salaried employees are paid is another part of the compensation strategy. However, businesses typically pay their employees every two weeks. Salary is the most common method of direct compensation for exempt employees . An exempt employee is not eligible for overtime pay . They receive a base salary for their work instead of being paid an hourly rate; employers pay exempt employees for their job instead of the number of hours they work.
  • Hourly pay: Nonexempt employees are typically paid an hourly rate and are eligible for overtime pay; they’re guaranteed at least minimum wage . When an employee works over 40 hours in a workweek, their employer must pay them overtime. The hourly pay rate is typically a predetermined dollar amount per work hour. Hourly employees generally keep a timecard or clock in and out to begin and end their work shifts. During times of slow or reduced work or budget changes, nonexempt employees might not work as many hours as they did in previous weeks. Thus, a routine number of hours worked per pay period is not guaranteed.
  • Commission: Commission is when compensation is based on volume, production or a predefined performance level. This compensation type is also known as “piecework” or “piecemeal.” Paid commissions are usually based on the volume of services performed or products made, or are structured around sales volume. For example, a real estate agent who sells a house will receive compensation from that sale. It doesn’t matter how long or what work activities were necessary to sell the house, only that it was sold.
  • Bonus pay: Bonuses are used to motivate employees or increase their overall performance. Bonuses are a variable compensation method that’s commonly associated with sales professionals, who tend to be salaried or exempt personnel. For example, if a sales professional exceeds their quarterly target by a specific dollar amount based on a predetermined matrix, they will receive a commensurate bonus. Bonuses can also be paid for company performance or when hard-to-fill positions are filled with employees with unique or highly sought-after skills or experience. Holiday bonuses are another popular type of bonus.

When you’re deciding whether to pay employees a salary or an hourly wage , consider the type of work they’ll perform, applicable state laws and job market trends.

Types of indirect compensation

Indirect compensation can be any fringe benefit employers offer. Most commonly, it refers to the various insurance types employers offer in their employee benefits plans . For example, the employer may offer health insurance , dental insurance, life insurance, short- and long-term disability insurance and vision insurance. Employee retirement plans , like 401(k) plans , are another common form of indirect compensation.

Equity-based programs are another compensation offering. However, these aren’t typically offered within the small business realm. Equity-based compensation is generally some sort of share or stock in the company.

Other examples of indirect compensation include the following:

  • Disability income protection
  • Vacation days 
  • Paid holidays
  • Flexible work policies
  • Other forms of retirement benefits
  • Opportunities for advancement and career growth
  • Student loan assistance
  • Educational benefits
  • Assistance with child care expenses
  • Employee relocation packages
  • Company car
  • Company equipment (e.g., laptops, mobile phones)

How to develop and implement a compensation plan

There’s no one-size-fits-all strategy for developing a compensation plan. Rather, it’s best to approach it in terms of what’s right for your team. Here are some suggestions to guide you along the way.

  • Create a compensation plan outline. Set an objective for your program and specific targets. Begin with job descriptions for each position on the team, and set a generalized budget for your personnel.
  • Appoint a compensation manager. This position, usually filled by someone in human resources, aligns the program and researches what each position pays within the industry, how job classifications will be determined and how direct compensation will be selected.
  • Craft a compensation philosophy. Determine how competitive you’ll be in your industry’s job market. Will you lead the market in direct compensation or offer modest pay with great benefits?
  • Rank jobs and place them within a matrix. Outline what, if any, pay tiers should exist in pay structures for executives and sales employees, for example. You also should determine potential tiers within each job classification.
  • Develop seniority grades within each job classification. It’s essential to develop opportunities for career advancement. For example, create levels or senior- and entry-level roles that may affect the compensation matrix but offer advancement for employees.
  • Settle on salaries and hourly pay rates. After you outline your compensation platform, assign pay rates and salary ranges for each position and job classification. This is when you’ll fine-tune your organizational budget.
  • Complete necessary policies. A compensation plan may affect policies related to payroll, fringe benefits and other pay-related matters. For example, companies often have policies for paid holidays, healthcare benefits, payroll administration and company-issued pay advances that must factor into — or at least align with — the company’s compensation policy. Ensure that all policies are updated and included in your employee handbook .
  • Get approval or buy-in from your company’s other leaders. Once everything is in place, ensure that your company’s leadership team fully supports your compensation packages.
  • Develop a communication plan. All of your employees should learn about the compensation program at the same time. Use several communication methods to share the plan (e.g., email, group gatherings, social media, flyers in common areas). Issue this messaging in multiple languages if not all of your employees speak English as a first language. You should also expect many questions. The complexities of total compensation are not easy to understand, and it’s essential for every employee to understand their compensation package.
  • Monitor your compensation plan. Be prepared to keep tabs on and change employee compensation. Over time, adjustments will be necessary for you to remain legally compliant and competitive.

Commissions and bonuses are considered variable pay for sales employees. An employee’s base salary and variable pay are called the employee’s “pay mix.”

How can you ensure equity, fairness, legality and competitiveness?

Part of developing a compensation plan is ensuring it’s fair for all employees. This pertains to gender, culture, race and ethnicity, as well as to the skill sets and experience new team members bring to your company.

Before you unveil your compensation plan, address the following questions: 

  • Are the programs in your compensation policy legally compliant? Be mindful of labor laws , including state laws (which may include PTO or vacation regulations) and federal laws (such as the Affordable Care Act).
  • Is the overall program fair to all employees?
  • Do employees perceive the overall program as fair? In this case, perception is reality.
  • Is the overall program fiscally sound? Can you maintain the benefit offerings even if profits dip for a quarter or two?
  • Can your organization effectively communicate the overall program to employees?
  • Are the programs fair, competitive and in line with your overall compensation policies?
  • Is the compensation policy competitive? Will it help your organization attract and retain top talent in your industry?

It’s crucial to keep your compensation plan active and relevant by adjusting it as necessary to stay compliant and continue attracting and retaining excellent employees.

Tracking commissions, bonuses and other compensation types can be daunting, but the best payroll services can streamline calculations, determine taxes and minimize errors.

Resources for creating compensation plans

Consider the following compensation planning and design companies that can guide you toward a fair, desirable compensation plan: 

  • Culpepper and Associates: Culpepper and Associates offers compensation surveys and other services.
  • PeopleFluent: PeopleFluent provides talent management services.
  • Unit4: Unit4 offers comprehensive HR and financial software, including employee compensation management software.
  • Flex HR: Flex HR provides full-service consulting.
  • emPerform: emPerform offers all-inclusive employee performance management.

Performance management software can help with compensation management as well as succession planning and employee reviews.

Good compensation plans make good teams

A solid compensation plan should be a key component of any company’s strategy for attracting and retaining the best team members possible. There are many ways to offer a good compensation program to your employees based on your business needs and budget. Take the time necessary to develop a comprehensive program that works for your organization, and then communicate the plan effectively to everyone on your team. Do it right, and your employee morale and retention will increase substantially.

Natalie Hamingson contributed to this article. 


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Designing Executive Compensation Plans

Incentivizing executives to meet business objectives is a critical factor in designing executive compensation plans. Organizations can choose from several well-established methods to pay for the performance of executives, often with significant tax advantages to the executive and the employer.

It has become increasingly more important to ensure that the public and elected officials can readily grasp the reasonableness of executive compensation plans—especially in public corporations as executive compensation plans have come under significant regulatory and political attack.

Seemingly lavish executive compensation garners high-voltage attention in print, TV and Internet media. The public often does not understand that executive compensation is a matter of meeting, and beating, global competition to attract the best and brightest executive talent.

At the same time, executive compensation plans have abused both public funds and the interests of private shareholders. Directors of corporations, C-suite executives, division managers and HR professionals struggle with how to design the right type of executive compensation plans to meet corporate goals and still appear reasonable to a public that does not understand the complexities and market challenges of the job.

Given this legal, social and political environment, a straightforward and well-balanced assessment of key design issues is critical for HR professionals.

A sound executive compensation program depends on good governance and well-established compensation philosophies, policies and practices that are closely aligned with the organization's overall goals and objectives.

Expanding the executive compensation package beyond a base salary and an annual cash incentive plan involves a number of accounting, tax, regulatory, cost and documentation issues. When considering the range of alternatives, employers should seek the advice and counsel of knowledgeable legal, technical and consulting professionals.

HR's Role

The role of HR with regard to designing and managing an executive compensation program is varied. The most basic role an HR professional plays is being in a position to inform management of the benefits, costs and array of options in launching or improving an executive compensation program. This responsibility also includes assessing the adequacy of the technology being used in the incentive compensation program.

HR professionals are key in determining what in-house and outside expertise is necessary and sufficient to handle an executive compensation program. Almost every organization needs some degree of outside expertise for the design and management of an effective executive compensation program.


Communication is one of the most important and common roles of HR professionals with respect to executive compensation programs, and it is a key component for success. Communications take place with other compensation professionals, the executives at issue, the board of directors, and possibly the media and governmental agencies. See Executive Compensation Is a Powerful Communication to Stakeholders .

The failure of many executive compensation programs can be linked to failures in the communication process, such as the following:

  • Failure to obtain employee input in programs that will actually incentivize executive performance.
  • Failure to clearly define performance goals up front.
  • Failure to state performance goals that are within the scope of influence of the target employee.
  • Changing performance standards midstream.
  • Judging employee performance according to standards that were not stated in written documentation.
  • Providing job descriptions that do not reflect the goals set forth in the executive compensation plan.

Effective communication can also avert employee perceptions of unfair executive pay. Having a clearly communicated compensation philosophy that addresses the company's executive compensation strategy can be beneficial.

The U.S. Securities and Exchange Commission (SEC) issued a rule requiring U.S.-based publicly traded companies to disclose how median employee pay compares with CEO compensation. Employers must reveal this information for their first fiscal year beginning on or after Jan. 1, 2017. After that, they must identify the median worker wage once every three years—or more frequently if their workforce or pay arrangements significantly change. See CEO Pay Ratio Disclosures Have Begun, Putting Morale at Risk .

Plan Design

Designing an effective executive compensation plan requires organizations to balance shareholder alignment, performance-based pay, recruitment and retention, and the assessment of cost versus perceived value. A long-term compensation plan with performance-based incentive vehicles can help achieve that balance.

Executives are privy to a wide range of compensation arrangements. Executive compensation arrangements may include several employees, or they may consist of individual agreements between the organization and one executive. According to the Center on Executive Compensation, "Executive pay arrangements typically consist of six distinct compensation components: salary, annual incentives, long-term incentives, benefits, perquisites and severance/change-in-control agreements." 1

The following are some of the latest trends in executive compensation:

  • Non-financial environmental, social and governance (ESG) metrics such as diversity, equity and inclusion efforts, waste reduction and climate commitment are common.
  • Pay incentives are more focused on long-term results. Long-term incentives like stock options often make up more than 60 percent of total direct compensation.
  • Companies have cut back on perquisites for executives, especially the types most likely to raise shareholder ire—such as cushy severance packages, tax gross-ups on golden parachutes, spousal travel, cars and private security.

Recently, politicians and the media have made a case that prevailing executive compensation practices drive employees to take short-term risks with little consideration for long-term effects on the organization and the overall economy. Regulatory proposals have suggested that employers offer more pay through restricted stock or other forms of long-term incentives designed not to reward short-term performance. Researchers from Washington University in St. Louis reviewed data from filings of more than 700 large publicly traded firms in the U.S. and found that a large number of firms manipulate data to meet short-term targets. While the research did not find evidence of fraud or illegal activity, it does question whether these firms are acting in the best interest of shareholders in the long term. 2

Total compensation strategy

Each element of an executive compensation plan contains various degrees of accounting, tax and regulatory considerations. Organizations need to develop a strategy for how they will use each of these elements. The total compensation strategy should address all the elements of the executive compensation plan.

When determining the appropriate compensation strategy, employers should consider the following organizational factors:

  • Business philosophy, mission and vision.
  • Business plan or strategy.
  • Life cycle, organizational structure and business processes.
  • Workforce composition and demographics.
  • Tax and accounting regulations.
  • Industry and competition.

An organization's business philosophy encompasses its basic values and beliefs and defines the environment in which a total compensation strategy is to be administered. Mission and vision statements normally set the employer's culture and philosophy as well as its total compensation strategy. Similarly, the organization's business plan outlines the executives' key performance measures and total compensation plan.

The total compensation strategy should also address benefits such as health care, retirement, life and disability insurance, and capital accumulation plans. These types of benefits, unlike vacation, holiday and paid-time-off plans, are directly affected by changes in business conditions, which in turn affect the organization's total compensation strategy.

Compensation rates and trends among comparable organizations are important factors in determining the direct and indirect pay that organizations may provide an executive. See How to Use Compensation Survey Data to Set Executive Pay . 

Direct compensation

After reviewing and determining the factors associated with the total compensation strategy, employers typically identify target amounts for each element of the executive compensation plan and express them as a percentage of base salary.

For many jobs in an organization, base pay rates are heavily influenced by compensation trends in the local or regional labor market. For executive-level jobs, the direct pay criteria are predominantly the type of industry and the size of the organization as measured by sales revenue or assets. See SHRM Compensation Data Center .

Annual incentives and bonuses

Annual incentives and bonuses are common ways to provide incentive compensation to corporate executives. Bonuses may be paid as a fixed amount or as a percentage of sales or profits. ESG metrics are more commonly being added to executive incentive compensation plans. See More Companies Use DE&I as Executive Compensation Metric .

Within the specialty of compensation, incentive compensation has grown in importance as organizations continue to refine their methods of paying for performance. Executive compensation has increasingly come under the pay-for-performance methodology. Performance-based cash bonuses are used by organizations as a source of motivation for executives to reach both organizational and individual goals.

Bonus percentages can vary widely depending on the industry, on an organization's view of the at-risk element of direct pay, on a job's level in the organizational structure, on numerous combinations of the priorities and objectives of the overall organization or a specific unit or department, and on an individual's job performance. See Be Careful Where You Give Bonuses .

Long-term incentives

Long-term incentive plans are another distinctive element of many executive pay packages. These plans typically have performance measurement periods of three years or more and are provided to select top managers whose decisions and actions have a direct impact on the performance and success of the entire organization.

The most common form of long-term incentive arrangement among organizations with publicly traded stock is the nonqualified stock option. With this type of incentive, participants are granted a right or option to purchase stock from the company at a specific price—usually the fair market value of the stock when the option is granted.

The option to purchase shares continues over an extended period that is measured in years. Presumably, sustained good performance by the organization will lead to a higher market price for the shares when they are sold at a future time. The executive can realize a monetary gain by exercising the option to purchase shares at a lower price and concurrently or at a later date sell the shares at a higher market value. Of course, if the market price of the stock falls below the price paid by the executive at the time the option is granted, the opportunity for compensation under the plan is nullified. If a stock option will not return a profit for reasons beyond control of the executive (for example, a natural disaster, terrorism or a scandal involving a different executive), then the incentive value is lost and the executive may lose motivation to perform in his or her area of responsibility; in fact, the executive may be motivated to seek more favorable compensation elsewhere. See For Family-Run Businesses, Here's The Key to Competitive Recruiting .

Stock plans

Incentive stock options and restricted stock grants are two other forms of longer-term incentive plans employers use to give executives an opportunity for significant additional compensation.

Each plan has different eligibility, grant size or company and personal tax implications. The plans may be used alone or in combination with nonqualified stock options. See Companies Ramp Up Stock Compensation to Compete for Talent .

Organizations that do not have publicly traded stock may provide executives with longer-term compensation plans by using other types of organizational performance measures. These can include phantom stock arrangements, wherein the value of a hypothetical stock unit that may be granted is linked to the book value of the organization at various points in time, or the appreciation in the value of a hypothetical unit is determined with a precise formula.

Perquisites/benefits plans

Executive compensation packages frequently include a number of indirect pay or noncash privileges called perquisites or perks. Employers have long used special perks and fringe benefits to attract, reward and improve the productivity of executives. These perks are generally noncash fringe benefits that provide an immediate financial reward and are given in addition to wages, commissions or incentives.

Perks include employer-provided vehicles, paid meals and lodging, use of eating and athletic facilities, paid entertainment expenses, participation in educational reimbursement plans, free parking, vacations, country club memberships, cellphones and laptops, and much more.

Many organizations also offer executives supplemental health and welfare benefits. Some of these may be automatic and fully paid (or reimbursed) or provided by the employer. Some organizations may even make a range of choices available to the executive, either within an existing pretax payment plan provided to all employees or as a voluntary out-of-pocket, after-tax expense to be paid by the executive.

Among these types of executive benefits are the following:

  • Supplemental life insurance.
  • Split-dollar life insurance.
  • Supplemental disability insurance.
  • Long-term care insurance.
  • Job-related liability insurance.
  • Supplemental medical insurance or reimbursement.
  • Extra or special vacation day allowances or sabbatical leave of absence.

Although the use of perks has been a longstanding practice, many organizations have started cutting back on perks and fringe benefits they provide to executives as a result of increased scrutiny and government regulations.

Additionally, the value of all fringe benefits must be included in an employee's wages for income tax and employment tax purposes, unless they are specifically excluded or exempt from taxation. Four categories of noncash fringe benefits can be excluded from an executive's gross income for tax compliance purposes:

  • No-additional-cost services. These are free services provided to all employees in which the employer incurs no substantial additional cost in providing the service, and the service is normally offered to the employer's customers in the line of business.
  • Qualified employee discounts. These are discounts provided to all employees on the selling price of certain property or services in the ordinary course of the employer's business. In the case of merchandise, the discount cannot exceed the gross profit percentage of the price at which the property is offered to customers. For services, the discount may not exceed 20 percent of the price at which the service is offered to customers.
  • De minimis fringe benefits. These include property or services provided to all employees that are so minimal that accounting for them would be unreasonable or administratively impractical. See De Minimis Fringe Benefits .
  • Working condition fringe benefits. These consist of the fair market value of any property or service provided to an employee to the extent that if the employee paid for that property or service, the payment could be claimed as a business deduction. The fair market value of a working condition fringe benefit is excluded from the employee's gross income if the employee could have deducted the expense as a business expense if he or she purchased the item directly.

See Employers Tax Guide to Fringe Benefits .

Retirement plans

Retirement plans that do not meet the guidelines required to receive favorable tax treatment are known as nonqualified plans. These plans are exempt from the restrictions placed on qualified plans and are typically used to provide additional benefits to key or highly paid employees, such as executives and officers. Nonqualified plans are not "qualified" under the Internal Revenue Code or the Employee Retirement Income Security Act (ERISA), the way 401(k) plans are, for instance, because nonqualified deferred compensation (NQDC) plans are offered only to certain highly compensated employees. That means they are exempt from most ERISA and reporting requirements; there are no caps on contributions and no minimum distribution rules. However, to ensure exemption from ERISA mandates, employers should offer the plan to no more than the top 10 percent of earners.

Deferred compensation

Due to the limitations imposed on qualified plans, such as 401(k) plans, under the Internal Revenue Code and ERISA, executives are often not given the opportunity to fully participate in an employer's tax-deferred savings plans. Nonqualified plans give an organization the flexibility to design an arrangement to compensate a select group of managers and highly compensated individuals. These nonqualified plans give executives the opportunity to defer taxation of compensation and investment earnings until retirement or some future date.

NQDC plans are one of the most popular nonqualified compensation options. These plans allow executives to defer part or all of their compensation until a time in the future, thus significantly reducing their tax liability in some cases. However, for the plan to retain a tax-deferred status, it must meet the following criteria:

  • The employee is not in constructive receipt of the amount promised, which means the employee has no right to receive or turn down the benefit.
  • The employee does not receive an economic benefit from the compensation; for example, the employee cannot use the promised benefit as security for a loan.
  • A substantial risk of forfeiture must exist; that is, the executive's ownership is contingent on meeting certain conditions and goals, and ownership is forfeited if those goals or conditions are not met.

The plan usually credits interest to the deferrals, which allows executives to maximize tax-deferred growth and take their total earnings over an extended period of time. Executives can choose to defer a significant amount of their salary or bonus and write their own pre- and post-retirement options. As executives' needs change, so can the amount of deferrals and future payout arrangements. See IRS Nonqualified Deferred Compensation Audit Technique Guide .

Supplemental executive retirement plans

One example of a nonqualified benefits plan is a supplemental executive retirement plan (SERP). A SERP may be offered to meet a number of different goals, including making up benefits lost in other retirement plans. Unlike a deferred compensation plan, a SERP is generally paid solely by the employer to offset the disparity in retirement benefits between key executives and other employees. The SERP provides retirement benefits that may not be provided through the employer's regular retirement plan because the level of benefits would cause the plan to violate nondiscrimination rules or would exceed specified caps on maximum benefits or compensation that can be provided.

A SERP can take into account all executive income, including bonuses and other incentives that exceed the compensation dollar limit for qualified retirement plans. For organizations with defined benefit pension plans, this is an attractive solution to retention.

Rabbi trusts

Protecting the plan assets ensures that executives receive the benefit promised in case of a change of control due to mergers or acquisitions of the company. The most popular trust vehicle in use today is the rabbi trust, which is a trust established by an employer to provide a source of funds that can satisfy the employer's obligation to executives under one or more nonqualified plans. The rabbi trust is used to provide the executive with assurance that the employer will pay the promise when due. However, the assets of the trust are always subject to some risk of loss because they are subject to the claims of the employer's creditors in the event of the employer's bankruptcy or insolvency.

Golden parachutes

Golden parachutes are executive compensation arrangements under which a corporation agrees to pay amounts—often in excess of the executive's usual compensation—if the corporation undergoes a change in ownership or control. Golden parachutes are often used by employers as a defensive measure to prevent hostile takeovers under the assumption that the guarantee of additional financial benefits to executives will increase the cost of the acquisition and, thereby, discourage prospective purchasers.

A parachute payment is any payment, in the nature of compensation, to a disqualified individual (i.e., shareholders, officers or highly compensated individuals, including corporate directors) that is contingent on a change in ownership or effective control of a corporation, or in the ownership of a substantial portion of its assets. In addition, the aggregate present value of payments in the nature of compensation must equal or exceed three times the individual's base compensation amount.

Payments that are not contingent on a change in control may still be treated as parachute payments. Payments in the nature of compensation that are made to or for the benefit of a disqualified individual, pursuant to an agreement that violates generally enforced securities laws or regulations, are subject to regulation as securities violation parachute payments.

A parachute payment can come in the form of cash or property, including the spread on the exercise of a stock option, pension proceeds, insurance or annuity proceeds and payments made pursuant to a covenant not to compete.

The golden parachute rules were expanded in 2008 to apply in the event of a severance from employment by a covered executive of an employer that participated in the U.S. Department of the Treasury's Troubled Asset Relief Program (TARP). Because of the potential for abuse that is implicit in such arrangements, excess parachute payments that exceed three times an executive's compensation are subject to tax penalties. Amounts equal to the excess of any parachute payment made over the portion of the base compensation amount allocated to the payment are considered excess parachute payments.

Excess parachute payments may not be deducted by the employer. The disqualified individual is also subject to a nondeductible excise tax (in addition to applicable state and federal income taxes and Social Security taxes) of 20 percent of the amount of the excess parachute payment. The amount of an excess parachute payment may be reduced if there is evidence that the payment was reasonable compensation for services rendered by the disqualified individual prior to a change in ownership or control.

The Internal Revenue Service (IRS) has provided a safe harbor method for valuing compensatory stock options. The following payments are exempt from treatment as parachute payments and, thus, may be deducted by the employer and do not subject the recipient to the 20 percent excise tax:

  • Payments with respect to a small domestic business corporation.
  • Payments with respect to a corporation in which, immediately before the change in ownership or control, no stock is readily tradable on an established securities market or otherwise; and payments that have been approved by more than 75 percent of the corporation's shareholders.
  • Payments to or from a qualified plan, including a tax-sheltered annuity, simplified employee pension (SEP) plan or savings incentive match plan for employees (SIMPLE).
  • Payments made by a tax-exempt organization undergoing a change in ownership or control.
  • Payments of reasonable compensation for services to be rendered on or after the change in ownership or control (including payments made pursuant to a covenant not to compete).

See IRS: Golden Parachute Payments Guide .

Compensation Agreements

The various elements of direct and indirect compensation included in the pay package of an executive are often expressly outlined in a formal employment agreement that spans multiple years. See Executive Employment Agreement .

These agreements may also include special severance pay arrangements that become effective when an involuntary termination occurs or simply when there is a change of control due to a merger or acquisition.

Some employers also establish formal plans for deferring current compensation to a point in time when an executive's marginal tax rate may be lower. In addition, it is not uncommon for executive pay packages to include one or more (nonqualified) deferred compensation plans specifically designed to provide retirement income that, in effect, makes up for benefits payments that would have been available from any qualified (ERISA) plan or plans provided to all employees, were it not for a number of regulatory limitations on contribution, covered compensation and maximum benefit amounts. In some organizations, for example, other deferred plans are instituted simply to provide supplemental retirement income for a select group of highly paid personnel as an incentive to encourage prospective midcareer executives to join an organization.

Golden handcuffs

Although definitions vary, the general idea of golden handcuffs is to cause financial hardship to senior managers and executives if they leave the organization before the organization wants them to leave. A golden handcuff is a benefit, payment or incentive linked to the recipient staying for a specified period of time.

There are many ways financially to bind an employee to an organization, such as requiring the employee to reimburse the company for a hiring bonus or for education or relocation expenses if the employee leaves for a new job within a one- to three-year period. Golden handcuffs may do little to retain very wealthy executives who can easily shrug off the financial hit.

To bring home the consequences of leaving early on highly compensated executives, employers can use various kinds of NQDC plans. Typically, these are set up as 401(k) mirror accounts. To executives, it seems just like a 401(k) account, allowing them to put aside some of their own salary, with a match, to be paid out either at retirement or at some point in the future. This approach gives highly compensated executives flexibility to invest money for retirement without immediate tax consequences. Another similar tactic is to provide a supplemental employee retirement plan that acts like a pension—as long as the employee makes it to retirement with the organization. The major disadvantage of retirement-based handcuffs is that they may be far less effective with younger executives.

Stock options with a vesting period are another common retention tool. Typical vesting periods range from one to three years and often include some kind of rolling schedule. As executives become fully vested and can exercise options, they pick up other options with a new, later vesting period.

Employers may also offer split-dollar insurance plans. Some executives have large estates that will be subject to hefty estate taxes when they die. To address this concern, some organizations pay for life insurance policies, the proceeds of which will be paid to family trusts, free of estate taxes, after the executive dies. An executive who leaves the company before death or retirement loses that insurance. When considering split-dollar insurance, it is imperative to review the details carefully, keeping in mind that premiums may not be deductible by either the employee or the employer.

Compliance Issues

Compliance with the many legislative and regulatory requirements surrounding executive compensation and NQDC plans is critical to avoid sanctions, fines and potential disqualification of the plans themselves.

Over the past several years, Congress and other governmental agencies have made significant changes to the rules governing executive compensation and NQDC plans.

Employers that maintain NQDC plans for executives must be aware of these rules, which require that many of these plans be amended periodically. Additionally, employers must address new tax reporting rules, disclosure statements and proxy statements.

At the federal level, the SEC defines what executive pay items must be disclosed to shareholders or filed with the SEC. The SEC also has oversight responsibility for financial accounting, which is currently more directly controlled by the Financial Accounting Standards Board (FASB), a privately funded organization that promulgates rules on financial accounting to be followed by organizations and independent financial auditors.

The SEC requires in-depth disclosure of executive compensation, pursuant to rules that are designed to accomplish the following:

  • Provide shareholders with a clear and concise report of all the compensation paid to an organization's principal executive officer, principal financial officer, highest-paid executive officers and directors.
  • Clarify and explain the reasoning underlying fundamental compensation decisions.

The U.S. Securities Act, the Securities Exchange Act and the Investment Company Act require certain companies to file public disclosures with the SEC.

In a section called Compensation Discussion and Analysis, the SEC requires detailed disclosure of three categories of executive compensation:

  • Compensation with respect to the past fiscal year, as reported in a Summary Compensation Table that reflects current and deferred compensation and compensation composed of current earnings or awards provided under the plan.
  • Holdings of equity-related interests that pertain to compensation or are potential sources of future gain.
  • Retirement and other post-employment compensation, including retirement and deferred compensation plans, other retirement benefits, and post-employment benefits.

An employer must disclose compensation policies for nonexecutive officers if the policies create risks that are reasonably likely to have a material adverse effect on the company.

In disclosing executive compensation, organizations (other than small business issuers) are initially required to provide a narrative overview of the compensation program maintained for named executive officers. The Compensation Discussion and Analysis must address all material elements of the organization's compensation arrangements, including the following:

  • The objectives of the company's compensation program and what the program is designed to reward.
  • Each element of compensation.
  • How the employer chooses to pay each element of compensation.
  • How the employer determines the amount for each element.
  • How the element of compensation and the organization's decisions regarding that element fit into its overall compensation strategies and affect decisions regarding other elements of compensation.

Pay Ratio Disclosure. The SEC adopted a final rule mandated by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act that requires a public company to disclose the ratio of the compensation of its CEO to the median compensation of its employees. The rule provides shareholders with information they can use to evaluate a CEO's compensation and requires disclosure of the pay ratio in registration statements, proxy and information statements, and annual reports that call for executive compensation disclosure. Companies are required to provide disclosure of their pay ratios for their first fiscal year beginning on or after Jan. 1, 2017. The rule does not apply to smaller reporting companies, emerging growth companies, foreign private issuers, multijurisdictional disclosure system (MJDS) filers or registered investment companies. The rule does provide transition periods for new companies, companies engaging in business combinations or acquisitions and companies that cease to be smaller reporting companies or emerging growth companies. See SEC Adopts Rule for Pay Ratio Disclosure .

Say-on-Pay Votes. The say-on-pay rule requires public companies subject to the proxy rules to provide their shareholders with an advisory vote on the compensation of the most highly compensated executives.  Say-on-Pay votes must be held at least once every three years. See Say-on-Pay and Golden Parachute Votes and Executive Pay Growth During the Pandemic Faces Scrutiny .

Clawbacks. In 2015, the SEC proposed the Exchange Act Rule 10D-1 that would direct national securities exchanges and national securities associations to establish listing standards requiring issuers to have policies for the recovery of erroneously awarded compensation, which are commonly referred to as "clawbacks." The 2015 proposed rules were never adopted; however, the SEC reopened the comment period on the rule in October 2021, with plans to finalize the rule in 2022. See 5 Executive Pay Issues for 2021 .

Pay-Versus-Performance . The SEC reopened the comment period in February 2022, for a proposed executive pay rule first issued for comment in 2015 but never finalized. The proposal has been amended to include additional disclosures. The rule would implement provisions of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act that require publicly traded companies to disclose, in both tabular and narrative formats, how their executive compensation is paid in relation to their financial performance. See SEC Reopens Comment Period on Executive Pay-Versus-Performance Rule .

Sarbanes-Oxley Act

The Sarbanes-Oxley Act, also known as SOX, came into force in July 2002 and introduced major changes to the regulation of corporate governance and financial practice. SOX contains sweeping provisions relating to corporate governance and accounting reforms, executive compensation and employee benefits.

SOX contains the following provisions:

  • Public companies may not make personal loans to their directors and executive officers.
  • Insiders cannot trade in company stock during certain blackout periods.
  • Plan administrators of individual account plans like 401(k)s must give a 30-day advance notice of any blackout period.
  • CEOs and CFOs must repay certain compensation if earnings are restated.
  • Penalties are increased for ERISA violations.

See What does the Sarbanes-Oxley Act (SOX) have to do with HR?

Employee Retirement Insurance Security Act

A fundamental question employers must ask themselves is whether their executive compensation plans are covered by ERISA. If so, certain disclosure and reporting procedures are mandated, and administrators of the plan may be deemed "fiduciaries" subject to individual liability.

A nonelective retirement plan maintained in conjunction with a qualified retirement plan may provide for benefits under the qualified plan's formula, to the extent they cannot be provided by the qualified plan because of the limitations of §415 of the Internal Revenue Code. This plan is called an "excess benefit plan," and it is exempt from ERISA coverage. Therefore, it is a contract subject to state contract law. Any other nonelective, unfunded retirement plan that covers a select group of highly compensated employees is known as a top-hat plan and is subject to ERISA.

If an excess benefits plan is amended to provide benefits that are restricted because of the compensation limitation of §401(a)(17) of the Internal Revenue Code, the plan will become a top-hat plan because it is no longer limited to excess benefits.

Other executive compensation arrangements may be subject to ERISA enforcement if they are found to provide welfare benefits of the type covered by ERISA. Regardless of whether the arrangement provides for welfare or retirement benefits, the initial inquiry often focuses on whether the arrangement is a "plan." Given the broad scope of ERISA's definition of a plan, benefits provisions contained in employment agreements or memoranda are likely to be enforceable under ERISA.

Internal Revenue Code

Section 409A of the Internal Revenue Code defines coverage for NQDC plans. For deferral decisions to be in compliance, the election to defer must have been made in the year before the year in which services were performed, within 30 days after first becoming eligible or within six months before the end of a performance-based compensation plan of at least 12 months.

Distributions may be made only for the following reasons:

  • Separation from service.
  • Disability.
  • Date specified on election date.
  • Change in company ownership.
  • Unforeseen emergency causing financial hardship (with amount limited to the amount of the emergency need).
  • Termination of the plan.

When an executive receives the deferred amount, it is taxed as ordinary income. An exception is if the deferral is shares of stock and the executive made an election in accordance with Internal Revenue Code §83b within 30 days of being informed of the award. In this situation, the executive would be taxed at the time of deferral at the current value of the stock and long-term capital gains tax on the increase in stock value when received. However, the executive forfeits the paid tax if he or she is unable to collect the deferral. Furthermore, employers are not required to allow executives to make an §83b election or even to defer income.

Internal Revenue Code Section 162(m) generally prohibits tax deductions by publicly traded companies on the portion of pay for "covered employees" that exceeds $1 million per year. Currently, covered employees are the chief executive officer, chief financial officer and the three next-highest-compensated individuals. See ARPA Expands Deduction Limits on Executive Pay Over $1 Million .

1 Center on Executive Compensation. (n.d.) Basics of executive compensation. Retrieved from

2 Washington University of St. Louis. (2016, March 23). Research reveals the dark side of CEO incentive-based pay. The Source . Retrieved from ; Bennett, B., C. Bettis, R. Gopalan, and T. Milbourn. (2015, April 6). Compensation goals and firm performance. Retrieved from

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Crafting a Competitive Employee Compensation Plan Guide (with Templates)

Last updated on: January 29, 2024

If you want to hire and retain top talent, improve employee productivity , and build trusting relationships with your employees, then crafting a competitive compensation plan is what you need.

Still, a compensation package involves far more than just an employee salary or pay rate, and it is equally important to both employees and business owners.

This text will cover everything you need to know about crafting a compensation package and benefits, including:

  • The definition of compensation plan,
  • Benefits of crafting a compensation package,
  • Types of compensation,
  • Steps on how to create a compensation plan, and
  • Compensation plan templates and examples.

Let’s begin! 

Employee Compensation Plan - cover

  • A compensation plan is a formal document that outlines the components of an employee’s pay structure.
  • An effective compensation plan helps attract top talent, boosts employee morale and productivity, promotes a healthy company culture, and more.
  • Direct compensation is financial or monetary compensation given to an employee for the time worked, such as hourly wages, salary, commissions, and bonuses.
  • Indirect compensation, on the other hand, is non-monetary compensation that includes a retirement plan, time off, health insurance, and other employee benefits.
  • Crafting a competitive compensation package includes several steps, such as deciding on your company’s compensation philosophy, researching the job market, defining the compensation structure, and including employee benefits.
  • Time tracking is crucial in keeping track of your employees’ work hours, PTO, and more.

Table of Contents

What is a compensation plan?

A compensation plan is a formal document that includes all the components of the employee compensation packages . This involves: 

  • Hourly wages, 
  • Salaries, 
  • Commissions and bonuses, as well as 
  • Employee benefits and other incentives.

Compensation plans are somewhat flexible, as it’s up to the employers to decide what they want to offer to their employees in order to stay competitive in the labor market.

Nowadays, as more employees work remotely, companies must make sure they offer competitive compensation packages that cater to their remote workers . For some, that may be offering location-based or location-agnostic compensation. While location-based pay will require you to pay your employees based on the cost of living in their place of residence, location-agnostic pay calls for equal pay no matter the location.

The 2 types of compensation

There are 2 major types of employee compensation for an employer to consider when setting up a compensation plan:

  • Direct compensation, and
  • Indirect compensation.

Apart from these 2 major types of compensation, there is an additional type that doesn’t fall into any of these categories and which we’ll discuss in more detail below.

Let’s break down each in more detail. 

Type #1: Direct compensation

Direct compensation is financial compensation given to an employee for time worked. It can be in the form of a salary, overtime pay , bonuses, or commissions (we’ll go over each more thoroughly in The 4 types of direct compensation section below).

Type #2: Indirect compensation

As opposed to direct or financial compensation, indirect compensation is the non-monetary payment provided to an employee. This type of compensation usually involves the benefits an employee receives in addition to the direct compensation, commonly known as employee benefits .

Such benefits may include health insurance, life insurance, vacation or paid time off , retirement funds, fringe benefits, etc. Some companies may also offer company stocks and profit-sharing in their benefits packages.

💡 Clockify Pro Tip

Want to know how to request time off and track it properly? Stick around and read the following blog post on the matter:

  • How to request time off and track it successfully

Bonus compensation type: Incentives

Speaking of the additional type of compensation, incentive pay is also a form of employee compensation — one that doesn’t strictly fall under the above-listed categories.

Incentive pay is a form of compensation that is usually either indirect or non-financial and based on performance rather than on time worked. Incentives serve as a form of encouragement and motivation for employees to strive for excellence in their work. They usually imply a specific goal — if an employee reaches the said goal, they get the incentive, which may be in the form of travel, merchandise, or even cash. 

If you want to learn more about goals, their types, and most importantly, how to achieve them, pay attention to the following text:

  • Different Types of Goals and How to Achieve Them

The 4 types of direct compensation

As we mentioned earlier, direct compensation is monetary or financial employee compensation, and these are main types of direct compensation:

  • Hourly compensation,
  • Salary compensation,
  • Commissions, and
  • Bonuses.  

Direct compensation type #1: Hourly compensation

Hourly compensation is a type of direct compensation associated with base pay, meaning companies pay their employees a predetermined rate for each hour worked.

Unless additional rules apply (some hourly workers are exempt from minimum wage and overtime ), hourly employees are treated as non-exempt as they are entitled to the federal minimum wage under the Fair Labor Standards Act . In addition to the hourly wage, the same act entitles hourly workers to receive overtime compensation — 1.5 times their standard hourly rates. This rule applies for each hour they spend working beyond 40 hours per week .

The required federal minimum wage in the US is $7.25 per hour worked . Still, if a state law requires a higher minimum wage per hour worked, then the more favorable law for the employee prevails. 

To find out if you are eligible for either federal or state minimum wage, read the following text that will give you more insight into the topic:

  • Minimum wages by state in USA for 2023

Direct compensation type #2: Salary compensation

Salary compensation is another type of direct compensation associated with base pay, meaning employees receive a fixed amount of money each pay period (weekly, monthly, bi-weekly, etc.).

This fixed salary is always based on a salary range defined for a particular job position.

A salary range is the pay range defined by the employer that describes the minimum and maximum pay rate for a job position. It also includes a series of mid-range pay increases employees may expect to get during their time at a company.

In case salaried employees are exempt from the FLSA , they do not get paid either minimum wage or overtime for the hours they spend working past 40 hours per week. This is the case if they earn more than $684 per week or $27.63 per hour . If they earn less than this amount, they are treated as non-exempt and are entitled to minimum wage and overtime pay.

To learn more about the differences between hourly and salaried employee compensation, as well as their pros and cons, check out our blog post on the subject:

  • Salary vs hourly employment: pros and cons

Direct compensation type #3: Commission 

Compensation based on commission is a type of direct compensation associated with variable pay . It is common among people in the sales industry who get paid in this manner based on the sales quotas, sales percentages, and goals they reach.

Commission rates may be based on:

  • Revenue — for example, if a sales professional gets 5% worth of commission for each sale, and they make a $50,000 sale, they get $1,000 worth of commission for that sale,
  • Gross margins or profit — the higher a sales professional sells a product or service, the higher the commission rate, and
  • Commission fee — the sales professional makes a fixed commission amount regardless of the monetary value of the sales they made.

Direct compensation type #4: Bonuses

Compensation based on bonuses is another direct type of compensation associated with variable pay. Professionals who have precise goals to reach — such as managers and salespeople — usually receive bonuses.

Bonuses are frequently paired up with other types of compensation, such as commissions or salary.

In some companies, bonuses may be implemented as an incentive meant to help employees reach higher performance standards at their jobs. In such companies, employees usually receive bonuses when they live up to certain metrics (such as company OKRs or KPIs ).

How do I create an employee compensation plan?

In this section, we’ll talk about the steps you need to undertake in order to design a competitive compensation package properly.

The following steps will help your organization stay competitive in the market and attract the top-talent professionals you need. 

Let’s go over each step in more detail.

Step #1: Define the company’s compensation philosophy

Competitive compensation is based on market pay rates. Therefore, when defining the compensation in your company, you can choose to: 

  • Lead, 
  • Lag, or 
  • Match the market .

While leading the market would entail offering higher compensation than the competitors, lagging would include offering lower compensation as compared to competitors. Finally, matching the market would mean giving the same compensation as the competitors. 

Establishing the company’s compensation philosophy is completely up to you, but bear in mind that if you want to attract and retain top talent, you should at least match the numbers on the market.

You can always offer additional, non-monetary compensation such as more days off or other employee benefits that may sound more appealing to a job candidate than the actual monetary compensation.  

Step #2: Define the type of employees you will hire

When outlining your compensation strategy, it’s also important to decide which employees you tend to hire. Remember that, as an employer, you must be aware of the different legal regulations and obligations concerning each type of worker. 

Therefore, when choosing which employees to hire, you ask yourself the following questions: 

  • Are your employees full-time or part-time employees?
  • Will you tap into the gig economy and employ contractors and freelancers?
  • What are the average hourly rates you’ll need to offer to your freelancers and contractors?
  • Does your business need to hire seasonal workers during peak times such as summer or winter holidays?

In case you’re wondering how to pay contractors and freelancers, here’s a text that will help you: 

  • How to pay contractors and freelancers in 5 simple steps

Step #3: Research and analyze the job market

As said above, you need to scrutinize the market before defining your compensation package and benefits since it’s crucial for attracting top talent. 

If you are operating in the US, you can obtain useful general compensation statistics from the US Bureau of Labor Statistics .

Still, the best way to do so is to analyze and research salary data and market surveys — this is also known as compensation benchmarking.

When looking for market surveys and salary data to buy and analyze, make sure you pay close attention to the following elements:

  • Industries — look for surveys that cater to your company’s industry,
  • Location — look for surveys that cater to the country, state, or city your company is operating in, 
  • Employee size — look for surveys that cater to the size of your company,
  • Revenue size — look for surveys that show data from companies that have a similar business volume as you, or
  • Job summaries — look for the job summaries closest to the positions you need.

Furthermore, if you want to find compensation statistics on salary-focused websites, bear in mind that this data is not the true representation of the market, as anyone can edit it. 

Step #4: Define your compensation structure 

Compensation structure refers to the compensation strategy you will use to define how employees will be paid. No matter how you choose to compensate for your employees’ work, you’ll need to think carefully about how best to define the hourly rates, salaries, and salary ranges you want to offer.

Also, make sure you take the following elements into consideration before you make your decision:

  • The industry you are operating in,
  • The size of your company,
  • The revenue your company makes,
  • The specific job positions you are looking for, and
  • The importance and worth of these positions for the successful operation of your company.

Here’s how you can best define the salaries and hourly rates in your company .

Defining employee salaries

If you’ve decided to compensate your employees through salaries, you’ll need to think about the salary ranges you want to offer.

To best define employee salaries , make sure you: 

  • Carry out job analysis — determining more information about the job position you are opening, 
  • Group the jobs into job families — grouping the jobs by department and type (such as executive, administrative, technical) or location,
  • Gauge employee experience and expertise for a certain job position — focusing on the skillfulness and the collection of experiences that an employee possesses for the successful operations of the company,
  • Group jobs by job grades — the US federal government recognizes 15 job pay grades, each characterized by the General Schedule (GS) payscale . For instance, for an entry-level position with a bachelor’s degree, the average pay rate in 2023 was from $40,082 to $52,106 per year,
  • Calculate the actual salary ranges — most companies will use +/- 15% or 20%, starting from the midpoint, and
  • Decide how you want employees to progress within their salary range — for example, you can base this progression on the number and difficulty of skills, duties, and responsibilities, on a preplanned schedule, etc.

Defining employee hourly wages

If you decide to hire hourly workers, you must make sure you determine hourly wages carefully. To be able to do that (and make sure you are offering competitive hourly rates), you must also take in factors such as your industry, skills, and the experience you are looking for in a candidate.

Here are some hourly rates effective for 2024 based on federal pay grades that you can use as a reference when defining your own compensation packages:

  • Entry-level positions (an associate’s or bachelor’s degree) — hourly rates range from $18.10 to $23.52,
  • Mid-level positions (a bachelor’s or master’s degree) — hourly rates range from $24.60 to $31.97, and
  • Top-level positions (a master’s degree or Ph.D.) — hourly rates range from $42.41 to $55.14.

Step #5: Add in employee benefits

Apart from direct compensation, in order to attract top talent, you’ll also need to offer competitive benefits packages when crafting your compensation strategy.

Therefore, make sure you include the most common employee benefits in your employee compensation package. Such benefits include (but are not limited to): 

  • COBRA health insurance — additional 18 months of health coverage to eligible employees after job termination, either voluntary or involuntary (applicable to companies with 20 employees or more),
  • Workers’ compensation insurance — medical insurance and compensation to employees who suffered an injury or illness in the workplace,
  • Disability insurance — compensation benefits provided to employees due to ‘temporary disability’ that occurred in the workplace, 
  • Paid holidays — in order to stay competitive, employers may provide employees with paid holidays as a way to boost employee morale,
  • Family and medical leave — includes maternal, paternal, and adoption leave (not required to be paid leave, by law),
  • Flexible schedules — employers may choose to offer flexible work arrangements such as a 4-day workweek or a 9/80 work schedule that contribute to a better work/life balance,
  • Hazard pay — provided to employees whose job duties require them to work in unsafe conditions (such as security and military professions),
  • Regular work breaks — times off during work time provided for lunch breaks, short breaks, and others.

If you are not sure about the holidays (paid or unpaid) you are entitled to while living and working in the US, head on to the following blog post to learn more about it:

  • What are paid holidays and how do they work?

Bonus tip #1: Calculating commissions

If you’ve decided to include commissions in your compensation planning (either as the only form of compensation or a supplementary form of compensation), there are several factors you should consider when defining commissions for your employees:

  • The commission rate — this is the percentage (e.g., 5%) of fixed compensation (e.g.,$25) employees will get for each sale they make.
  • The total number of sales,
  • The gross margin of the product being sold,
  • The net profit of the product being sold (when you want to inspire your sales team to focus on selling more profitable products in your offer),
  • The cash received from sales (when you want to inspire the sales team to collect all overdue receivables), and
  • The inventory (when you’re looking to eliminate a product from stock).
  • The overrides — one percentage (e.g., 5%) of fixed compensation (e.g., $25) may apply before the employees reach a certain goal, after which they can count on a higher percentage (e.g., 8%) or fixed compensation (e.g., $30).
  • The splits — in the case when two or more employees are responsible for the sale they split the commission.
  • The payment delay — commissions are usually calculated subsequently at the end of the month.

Bonus tip #2: Calculating bonuses

Sometimes, you’ll want to include bonuses in your employee compensation packages as additional incentives for high-quality performance.

Here are some of the bonuses you can consider offering:

  • Signing bonuses — bonuses offered to job candidate executives as incentives to inspire them to accept positions,
  • Salary-based bonuses — based on the amount of hourly wages or annual salaries the employees are making (the higher the wages or salaries, the higher the bonuses),
  • Bonuses based on department goals — once a team or department meets the predefined goal, all members of the team receive bonuses,
  • Referral bonuses — the higher the number of customers referred, the higher the bonuses for the employees who referred them,
  • Performance bonuses — bonuses based on the employee’s overall performance or achieved specific goals at work,  
  • Holiday bonuses — non-performance-based bonuses typically paid around a beloved national holiday, such as Christmas,
  • Quarterly or annual bonuses — if the company reaches a certain net profit goal, the employees receive a flat rate bonus or percentage,
  • Retention bonuses — bonuses paid to top performers in order to keep them, and others. 

Benefits of a fair compensation system

A fair compensation strategy must be developed and implemented without any prejudice or favor to anyone or anything.

As such, a compensation system has a handful of benefits for both the company and the employees:

  • It helps you attract top talent through competitive compensation packages,
  • It helps employees understand exactly how valued they are within the company,
  • It motivates employees to perform better at work ,
  • It raises the morale and cooperation level among the employees,
  • It elevates employee satisfaction for a job well done, and
  • It promotes a healthy company culture.

If you want to learn more about calculating work hours and streamlining your payroll processes, head to the following link:

  • How to calculate work hours: A step-by-step guide to calculating payroll and hours worked

Compensation plan template 

Now that you know what you need to include in your compensation plan, here is an example of a compensation plan template that you can follow when defining your compensation packages.

You can download the template and choose the form that suits you best, whether that’s Google Sheets, Google Docs, PDF, Excel, or Word.

Template screenshot

⏬ Download an Employee Compensation Plan in Google Sheets

⏬ Download an Employee Compensation Plan in Google Docs

⏬ Download an Employee Compensation Plan in PDF

⏬ Download an Employee Compensation Plan in Excel

⏬ Download an Employee Compensation Plan in Word

What is an example of a compensation plan?

The following is an example of a filled out compensation package template. The example plan below contains some of the most important information when preparing a compensation package for your employees, including: 

  • Basic information, 
  • Direct compensation information, 
  • Benefits, 
  • Retirement planning, and 
  • Other relevant information.

Most of the information in the compensation plan example we already discussed in the above text, and we hope this example helps you craft your compensation package successfully.

Compensation plan basic information, screenshot 1

As for the direct compensation section in the template, you can see that the employee is an hourly worker hence there’s no salary information. Since she is a sales specialist, you can see all the details about her commission-based compensation, too.

Compensation plan basic information, screenshot 3

The next section in the template is about the employee’s benefits — whether the employee in question is given dental care, information about medical insurance, time off, and others.

Compensation plan basic information, screenshot 4

As for the retirement planning section, the template provides information about the employer-paid retirement savings plan, eligibility to buy shares of the companies and under which conditions, or whether the employee may obtain a percentage of the company’s earnings or not.

Compensation plan basic information, screenshot 5

Finally, the template allows you to write any additional information about certain benefits, break and meal periods, reimbursement of transportation, and others. 

Tracking work hours vigilantly is the cornerstone of fair employee compensation

Whether you need to fill in employee timesheets, track overtime, PTO, or billable hours, having a reliable tool is critical. Clockify is an efficient solution that can help you with that, as it allows employees to track their work time in real-time (with a timer), add it manually afterward, or enter it in a timesheet template .


With Clockify, you’ll also be able to define hourly rates for each employee and have their pay calculated automatically based on the number of hours they worked in a given time period.

What’s more, no matter if you hire salaried or hourly workers, exempt or non-exempt, Clockify’s free employee hours tracker will also help you stay on top of compensatory time (provided that your employees are eligible for comp time, of course).

Clockify can be your ally in making sure your employees are compensated accurately and timely, no matter which employees you hire.

Get started with Clockify today for free .  

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Marija Kojic is a productivity writer who's always researching about various productivity techniques and time management tips in order to find the best ones to write about. She can often be found testing and writing about apps meant to enhance the workflow of freelancers, remote workers, and regular employees. Appeared in G2 Crowd Learning Hub, The Good Men Project, and Pick the Brain, among other places.

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Compensation Planning: What It Is and Why You Need It

business management compensation plan

BY Sharon Rusinowitz

business management compensation plan

Seventy-three percent of employers say their people are fairly compensated, but only 36% of employees would agree. And because things have changed significantly over the past few years when it comes to how we work, people now expect more from compensation packages than money alone.

Mental health benefits, 401K plans, equity, flexible work hours, and home-office stipends are just a few of the benefits that top companies offer employees. Considering all of these benefits (and more) help organizations create competitive compensation packages . 

Therefore, a compensation strategy is essential to attract  and retain talent , and understand exactly why that’s the case can help you create an appealing strategy for your organization.

Looking for a downloadable quick-start guide? We’ve got you covered.

Get the guide here

What is Compensation Planning?

Compensation planning means developing a compensation strategy that supports your business strategy, operating objectives, and employee needs. Your compensation plan should include salaries , benefits, and incentives, as well as pay-band details, development levels, and when and how employees are eligible for raises and bonuses. 

Compensation isn’t just the amount in your offer letter or paycheck. Instead, it consist of a variety of elements, including:

  • Health insurance
  • Retirement plans
  • Flexible work hours
  • Growth opportunities
  • Personalized coaching
  • On-site services
  • Subsidized transportation benefits
  • Fitness stipends
  • Catered meals

Compensation Planning on a Budget

Creating a new compensation plan can be daunting, especially if you don’t have a large budget for salary increases. So although 76% of people say pay is their top priority when considering a job, never fear. While you should pay people what they’re worth, offering top pay isn’t the only way to attract talent and keep your current workforce happy.  

Remember that your company culture also attracts talent . Lucy Bell, Talent Acquisition and Workforce Planning at Headspace Health, explains that the past few years have provided people with “a frank reflection on how and in what ways people want to show up in their lives.” Many candidates are now looking for what she calls “the intangibles:” leadership transparency , modeled company values , mental health benefits, and positive relationships. 

Barry Marshall, CEO and Founding Partner of P5 Collaborative Consulting , agrees, noting that “financial compensation is never the driver for employee satisfaction.” Instead, he says, unseen benefits – like relationships with managers or increasing representation at all levels – are what really make people champions for your organization.

Need to audit pay equity across your organization?

Here’s 4 steps to make it happen

So if you don’t have the budget for highly competitive salaries, but still want to support your people and their efforts, consider tying your values to your rewards. An example of doing so is Digital Ocean , which rewards top employees with gifts such as Kindles loaded with their CEO’s favorite books. And over at ChartHop, managers gift team members Blueboard rewards for earning Quarterly Value Awards or hitting work milestones.

4 Benefits of a Strong Compensation Plan

Wondering why you should create a compensation plan, even if you’re not actively hiring? Below are four benefits of how compensation plans specifically help you succeed, no matter the size or status of your organization.

1. It Improves Motivation 

Everyone likes to feel good about the work they do…but a pat on the back shouldn’t be your people’s only motivator. A detailed compensation plan further motivates employees to achieve their goals. That’s because strong compensation plans:

  • Are housed in one spot that all employees can access
  • Provide a roadmap for career progression and pay raises
  • Tie pay directly to job performance, which incentivize employees to hit their OKRs and KPIs

By improving employee motivation, you’re also most likely increasing their engagement. And we all know the benefits of having highly engaged employees : organizations experience a 20% increase in sales and 21% greater profitability.

CH-Compensation Summary-01

The right people operations platform provides employee self-serve access to their information. No more contacting your manager to send your OKRs or HR to review your compensation band.

2. It Helps Retain Your People

You’re looking to hire and decide to bump up your compensation to attract top talent. That’s a good decision, right? Maybe not. If you change the pay for new hires, but not for employees already in a similar position, you might struggle to retain your current workforce. 

This issue is pretty common, says Insider , as they report salaries for new hires are 7% higher, on average, than the median pay for similar roles. Therefore, if you’re adjusting your compensation strategy, make sure you’re giving your current workforce some love, too, as salary discrepancies between new hires and existing employees can often be an issue for organizations. 

To combat voluntary turnover, consider:

  • Creating a competitive plan for your current employees (i.e. retention raises and new benefits).
  • Consistently reviewing your people data to help spot issues before they happen.
  • Implementing a salary transparency strategy that fits your organization’s goals, such as defining roles and levels, publishing transparent pay bands, or updating job descriptions to include salary ranges.

3. It Strengthens Your People-First Culture

Culture is a make-or-break consideration for a lot of people. So if you’re looking to strengthen your people-first culture , there’s no better place to start than your compensation strategy. 

Mike Metzger , President & CEO at PayScale, explains: “Compensation policies reflect the culture at the organization. Employers who pay fairly for competitive positions and foster open dialogue around pay will build more trusting relationships with their employees that, in turn, will impact the bottom line.”

Besides creating an equitable compensation plan (which is no small feat), make sure you use surveys to determine what people want. Instead of establishing general benefits that you think your employees want, it’s best practice to gather feedback to develop your compensation plan. My Doan Cong , VP of People ALT, used a wellness survey to focus on the mental, financial, physical, and emotional health of employees. The result? Learning that employees needed help boosting their financial health – and ALT creating the resources to do so.

Interested in learning about other leaders making waves with people-first initiatives?

Check out the 2022 pioneers here

4. It Combats Discrimination

If you truly want to work on improving your DEIB strategy , look at your compensation plan. By creating one with equity in mind, you’ll help reduce wage gaps between different demographics and ensure fairness in hiring and promotion decisions. 

One of the easiest ways to view your people data across categories and demographics is in a people operations platform. By slicing and dicing your data, you can spot any trends and opportunities for improvement to ensure people in the same role and level are receiving equitable compensation for their responsibilities. Ultimately, it’s important to have a strong, clear, and fair compensation strategy to create a more desirable and equitable workplace.

Next Steps for Creating Compensation Plans

Strong compensation plans positively impact your people, company, and ultimately, your bottom line. So if you’re ready to jump in and begin creating a plan to attract and retain talent, look no further than the resources below. 

Grab our tips for tackling informed, responsible compensation planning.

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What is a Compensation Plan? Guide for 2024

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Table of Contents

In today’s competitive job market, a compensation plan is a critical component for companies to attract and retain top talent. A compensation plan outlines the pay and benefits that employees receive for their work. It can include financial incentives and additional perks, such as health insurance and retirement plans. In this guide, we will discuss the different types of compensation plans, their key components, and how you can design an effective compensation plan for your organization.

What is a Compensation Plan?

A compensation plan is a document that outlines the various components of an employee’s pay and benefits package. It covers everything that the employee receives in exchange for their work, including their base salary, bonuses, and benefits like healthcare and retirement savings. An effective compensation plan should incentivize high performance, align with company goals, and remain competitive within the market.

When creating a compensation plan, it’s important to consider the unique needs of your organization. For example, if your company is in a high-cost-of-living area, you may need to offer a higher salary to attract top talent. On the other hand, if your company is in a more affordable location, you may be able to offer a lower base pay but still remain competitive with benefits and perks.

The Key Components of a Compensation Plan

Compensation plans can vary widely, but some key components include base pay, bonuses and commissions, benefits, and perks. It’s essential to offer a package that is in line with other organizations in the same industry and location to remain competitive and attract skilled professionals. The plan should prioritize transparency, fairness and include room for growth within the organization.

When it comes to benefits, it’s important to consider what matters most to your employees. For example, if you have a younger workforce, they may value things like student loan repayment assistance or flexible work arrangements. On the other hand, if you have an older workforce, they may place a higher value on retirement benefits.

Perks can also be an important component of a compensation plan. These can include things like gym memberships, company-sponsored events, or even free snacks in the office. While these may seem like small things, they can go a long way in creating a positive work environment and keeping employees happy and engaged.

5 Types of Compensation Plans

Compensation plans are an essential aspect of any organization, as they play a crucial role in attracting and retaining talented employees. A well-designed compensation plan can motivate employees, boost productivity, and ultimately contribute to the company’s success. In this article, we will explore the different types of compensation plans that companies can offer to their employees.

Salary-based Plans

Salary-based compensation plans are the most common type and involve a fixed amount of pay regardless of performance. Employees typically receive an annual salary, but there may be room for negotiation based on the level and type of job. Salary-based plans are often used for administrative and support roles, where performance is difficult to measure.

However, it is essential to note that salary-based plans may not be as effective in motivating employees as other types of compensation plans. Employees who receive the same salary regardless of their performance may not feel motivated to go above and beyond their job responsibilities.

Commission-based Plans

Commission-based compensation plans are prevalent in sales and involve paying employees based on the number of sales they make. These plans can be hugely beneficial for sales teams, providing incentives to go above and beyond customer expectations while earning bonuses and commission on sales made.

Commission-based plans are often used in industries where performance can be easily measured, such as retail, real estate, and finance. These plans can motivate employees to work harder and achieve better results, as their earnings are directly linked to their performance.

Bonus-based Plans

Bonus-based compensation plans offer additional financial incentives for employees based on their performance. These plans are helpful in boosting employee motivation and productivity. Employees often receive a percentage of the company’s profits or achieve predetermined targets.

Bonus-based plans can be used in various industries and job roles, and they can be customized to fit the company’s specific needs. For example, a company may offer a bonus to employees who exceed their sales targets or achieve specific goals within a set timeframe.

Stock Option Plans

Stock option plans offer employees the option to buy company shares at a discounted price. These plans can have long-term benefits for employees, giving them a stake in the company’s future success.

Stock option plans are often used in startups and high-growth companies, where the potential for future success is high. By offering employees the opportunity to own a share of the company, employers can motivate them to work harder and contribute to the company’s growth and success.

Profit-sharing Plans

Profit-sharing compensation plans divide a percentage of the company’s profits among eligible employees. Profit sharing is an excellent way to reward employees for their contributions to the company’s financial success .

Profit-sharing plans can be used to motivate employees in various industries and job roles. By sharing the company’s profits with employees, employers can create a sense of ownership and loyalty among their workforce. Profit-sharing plans can also help to align employees’ interests with the company’s goals, as they have a direct stake in the company’s financial success.

How to Design an Effective Compensation Plan

1. align with company goals and objectives.

A compensation plan is an essential tool for any organization looking to attract and retain top talent. However, designing an effective compensation plan requires careful consideration of the company’s goals and objectives. Your compensation plan should incentivize employees to work towards the company’s objectives. This means that every component of the plan should align with your organization’s overall mission and values.

For example, if retention and teamwork are critical benchmarks for your organization, consider offering long-term benefits and profit-sharing incentives for teamwork. This will encourage employees to work collaboratively and remain with the company for an extended period, contributing to the organization’s success.

2. Consider Market Competitiveness

One of the most critical factors to consider when designing a compensation plan is market competitiveness. Your compensation plan should be competitive within the market and industry you operate in. Doing your due diligence to ensure that your compensation plan meets industry standards will make sure that you attract and retain top-quality professionals.

It’s essential to research and understand the compensation packages offered by your competitors. This will help you design a compensation plan that is not only competitive but also attractive to potential employees. It’s also crucial to keep in mind that compensation is not just about salary. Benefits, such as healthcare, retirement plans, and vacation time, can also be a significant factor in attracting and retaining top talent.

3. Balance Fixed and Variable Pay

Compensation plans that balance fixed salary and variable pay for bonuses and incentives are the most effective. Fixed salary provides stability and security for employees, while variable pay motivates employees to go above and beyond. Additionally, variable pay allows the organization to reward employees for meeting benchmarks and achieving specific goals.

When designing a compensation plan, it’s essential to consider the balance between fixed and variable pay. Too much emphasis on variable pay can lead to employees feeling insecure about their income, while too much emphasis on fixed pay can lead to a lack of motivation among employees.

4. Ensure Fairness and Transparency

It’s crucial to ensure that your compensation plan is fair and transparent. You want employees to be confident that they are paid fairly for their work, and the organization values their contributions. This can be achieved by evaluating each position, ensuring that employees have room for growth, and are promoted within the organization based on their achievements.

Transparency is also crucial in ensuring fairness. Employees should have a clear understanding of how their compensation is determined, including the criteria for bonuses and incentives. This will help build trust between employees and the organization, leading to increased job satisfaction and retention.

5. Regularly Review and Update the Plan

Your compensation plan should be reviewed at least once a year, and it should accommodate the changing needs of the organization and its employees. With the competition for top talent being more fierce than ever before, it’s essential to ensure that your organization remains competitive, attracts top talent, and retains top-performing employees.

Regularly reviewing and updating your compensation plan will help you stay competitive in the market and retain top talent. It will also ensure that your compensation plan remains aligned with your organization’s goals and values.

In summary, a well-designed compensation plan can be a valuable tool in attracting and retaining top talent while supporting your overall organizational objectives. Understanding how to create a compensation plan, the types of compensation plans available, and their key components are crucial in ensuring that your plan is competitive and effective.

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Guide to Compensation Management

Table of contents.

business management compensation plan

A lot more goes into compensation management than just giving your employees some money and hoping they will stay. A well-thought-out strategy can be the difference between a mass exodus and long-term employee retention.

The concept of “total compensation” matters. It is where the real battle is fought for top talent. Your compensation management program will partially determine the strategic goals and objectives your company meets annually. Well-run compensation programs ensure pay equity and equality in benefits throughout the organization. It is important for business owners and HR leaders to know how compensation management works and what employees’ expectations are so companies can hit the bull’s-eye with their compensation programs.

What is compensation management?

graphic of two people looking at a screen with a bar graph on it

Compensation management is the practice of planning and distributing the overall pay and benefits package to a company’s employees. This program ensures that a company’s salaries and bonuses remain competitive within the industry and equitable within the organization. It also involves managing company benefit programs and ensuring job classifications are up to date, risks are minimized, and the package meets the overall needs of employees and their families.

A company’s compensation program is one of the main reasons employees choose to either remain with an employer or look for a new one.

According to research from the ADP Research Institute , 83 percent of workers worldwide expect a raise in 2023.

Even when employees choose to stay, that does not mean they appreciate or fully understand their compensation package . Employers need to make the effort to help employees learn the true value of their overall compensation package.

The benefits and challenges of compensation management

graphic of two people holding large coins near a bar graph

Creating and implementing an optimal compensation structure and strategy can do wonders for your organization, but there are some challenges to doing it. 

Benefits of compensation management 

Here are some of the ways it can positively impact your company: 

  • Helps you attract top talent: The total compensation package you offer to employees can make your company attractive to top candidates. In fact, according to a Glassdoor research study, nearly two-thirds of respondents said that salary and benefits are two of the most important factors when considering whether to accept a job offer.
  • Increases employee engagement: Motivated, engaged employees do better work, are more productive and can act as brand ambassadors. Having fair, thoughtful and generous total compensation is a huge motivator and lets employees know that you care about their needs.
  • Reduces attrition and helps retain key employees: When employees are unhappy with their compensation, they feel undervalued and stressed, causing some to look elsewhere for employment. This means you lose that person’s skills, contacts and knowledge, and need to spend more money on recruiting, training and onboarding.
  • Creates equity: Having a transparent and fair compensation plan eliminates unfair treatment and rewards employees based on their value to the organization. Equity improves morale among employees, contributes to a positive company culture and significantly reduces the company’s exposure to employment-related lawsuits and regulatory penalties.
  • Improves the company’s reputation: When you treat your employees right, people find out about it. It can generate additional sales from customers, positive press coverage and goodwill from communities.

Challenges of compensation management

Although stellar compensation management confers a host of benefits on companies, it also has its challenges:

  • It’s expensive. Employee compensation accounts for about 70 percent of the average company’s total operating costs, according to the U.S. Bureau of Labor Statistics . Increased compensation costs take a bite out of the company’s profit, so it’s important to balance both needs.
  • It can be subject to bias. Ultimately, despite your best efforts, compensation decisions are made by humans and they can be biased. To reduce this as much as possible, institute objective and transparent compensation policies, review compensation for equity regularly and train managers on unconscious bias.
  • It requires administration and oversight. Since compensation has so many components and employees are evaluated on a variety of metrics, compensation management can be quite complex. If you do not have the resources to have a human resources manager or department, consider a top HR outsourcing company or utilize a payroll service with built-in AI and pay equity features. See our best picks for payroll services for more information.
  • It can be difficult to describe to employees. A complex system can be challenging to explain to employees, and since one of the main benefits of compensation management is to motivate employees, clear communication is crucial. When communicating with employees and new hires about compensation, break it down into monetary, nonmonetary and benefits sections. If you have bonuses or any kind of performance-based pay, be clear about which performance metrics employees need to achieve in order to qualify for it.

When employees get a bonus or other performance-based compensation, congratulate them publicly and say why they received it so that others can be motivated to do the same.

What are the main types of compensation?

There are four primary types of direct compensation:

There is also indirect compensation, which includes retirement benefits, health insurance and paid time off. Factoring direct and indirect compensation together helps determine total compensation – the full remuneration a company pays to its employees.

In addition to salaries, hourly pay, bonuses and commissions, total compensation includes the value of any benefits employees receive. These are some of the most common attributes within the total compensation spectrum:

  • Paid time off (vacation days, sick days and holidays)
  • Profit-sharing distributions
  • Insurance (medical, dental, disability and life)
  • Tuition assistance
  • Child care assistance
  • Retirement plans
  • Employee assistance programs
  • Gym memberships
  • Relocation expenses
  • Learning and development offerings
  • Career advancement opportunities
  • Stock options
  • Other non-cash benefits

While these aren’t all the options that can be included in a compensation package, you will likely need to offer at least some of the above perks to keep employees engaged and remain competitive within your industry. [Read related article: 7 Ways to Create a Happy and Motivated Workplace ]

Some employers provide employees with a total compensation report that details all of the compensation they receive. Here’s an example of a total compensation statement from Genesis HR Solutions:

Total compensation statement

Source: Genesis HR Solutions

How is compensation determined?

HR managers typically use a two-part process to assess employee compensation. The first part is done internally. It includes determining not only what the company should pay, but what it can afford to pay.

The second aspect of this process involves external factors. For example, what do market surveys tell you? What are your competitors paying? How do regional differences in the cost of living impact total compensation? Are there hiring challenges in certain markets?

These are some of the factors in compensation rates:

  • Research: Conduct market research inside and outside your industry to gauge what’s normal and on trend.
  • Competitive strategy: You should offer enough to not just stay on par, but attract top talent from your competitors.
  • Collective company salaries: You’ll want to consider your company (and each job level within it) as a whole in your salary strategy. As a general philosophy, you may want to target the 25th percentile within each job category.
  • Marketplace drivers: If you’re recruiting for employees with hard-to-find skills, you might need to pay more to get them on your team.

Employees are often paid based on an hourly rate or annual salary, while independent contractors are typically paid per job or a flat fee.

Why is compensation important to HR?

Compensation management plays a significant role in HR, as it directly ties in with employee retention, the hiring and onboarding processes, employee performance, and team engagement throughout the company. Many larger companies have not only HR managers but also compensation managers to lead this process.

At its heart, compensation is the foundation of employee motivation. So, while HR assists supervisors with behavioral and performance matters, they can also factor employee performance into compensatory decisions.

What is compensation management software?

Compensation management software (whether a stand-alone solution or part of a larger HR software platform ) is enterprise software that helps HR curate, manage, calculate and budget for employee salaries. This type of software can benefit businesses of all sizes. The best, most comprehensive compensation software platforms are designed to bring teams closer together and to present information quickly, accurately and cleanly.

Compensation management systems tend to be handled by HR teams, but depending on your permissions and security settings, they can be accessible to managers, supervisors or lead workers whenever necessary. Much of the time, compensation management data are accompanied by employee performance data . These combined data sets can help determine promotions, bonuses and annual increases.

These are some of the more popular HR software platforms with compensation management abilities:

  • Paychex Flex HR software: Paychex Flex is a full-service payroll and HR software platform that can support businesses of any size. Its scalable features can help businesses manage their remote workers and maintain legal compliance. Learn more in our Paychex Flex review .
  • Rippling HR software: Rippling is customizable HR software that combines HR and IT automation into one platform. The intuitive software is easy to implement and accessible through a self-service dashboard. With more than 400 integration capabilities, Rippling is easy to incorporate with other business software as well. It helps with HR tasks like onboarding automation, benefits administration, talent management and legal compliance. Find out more in our Rippling HR software review .
  • Gusto HR software: Gusto is ideal for employers who want advanced payroll capabilities. Users can onboard new hires, administer employee benefits, track hours and paid time off, run payroll, and automatically file payroll taxes. Read our Gusto HR software review to find out if these robust features are right for your business.
  • GoCo HR software: GoCo is comprehensive HR software that allows small businesses to manage and streamline their HR processes. The flexible and user-friendly program is ideal for automating employee hiring and onboarding workflows. To manage employee payroll, businesses can either use GoCo’s embedded payroll option, Execupay, or integrate any cloud-based payroll software of their choice. GoCo users can access custom reporting, a self-service dashboard and supportive customer service. You can learn more in our full review of GoCo .
  • BambooHR software: BambooHR is ideal for small businesses wanting a flexible HR software option with great performance management features. You get traditional HR-management features to streamline your internal HR processes, and advanced capabilities like goal tracking and employee assessments can be added separately. Read our BambooHR software review for more information on their features.

Compensation management FAQ

What is a deferred compensation plan.

A deferred compensation plan is an agreement between an employee and employer in which the plan withholds a part of the employee’s income until a specific date. The lump sum is then paid out to the employee on that date – typically around the time the employee retires. Some common examples of deferred compensation plans are retirement plans, pensions and stock options.

What regulations affect compensation?

Several regulations affect how you compensate your employees. For example, minimum wage requirements, overtime rates and bonus payments are all regulated. There are also regulations on how many hours certain employees can work, as well as equal pay for equal work. The Fair Labor Standards Act establishes many of these regulations, although there are other federal and state laws to consider as well.

What can HR leaders do to ensure effective compensation management?

Human resources leaders should regularly analyze employee compensation rates for current and future employees to ensure they are abiding by all current federal and state laws, and that the rates they offer are competitive with the industry standard. Performing competitive analyses and offering competitive rates will help attract and retain top talent. HR leaders should also ensure that employees are being paid the correct amount in a timely and reliable manner.

What is performance-based compensation?

There are different types of performance-based compensation, but they all share in common an “if-then” structure. If the employee’s performance reaches a certain benchmark, then the employee receives additional compensation. Employees are therefore motivated to hit the targets. Examples include:

  • Sales commissions
  • Discretionary bonuses
  • Department or companywide bonuses when targets are reached
  • Bonus for customer service rep based on customer satisfaction
  • Profit sharing
  • Non-monetary prizes

How can you keep compensation fair?

  • Outline the jobs in the organization. This should include job title, responsibilities, value of those responsibilities to the organization, position rankings and tiers within each job area (entry level, experienced, supervisor, manager, etc.).
  • Research the industry compensation rate for each job as a benchmark. Calculate the minimum, maximum and median amount for each job.
  • Create pay ranges for each job. Using the industry rate you just calculated, compare it to your current compensation budget. Pay ranges should take into account the skill level required, the level of responsibility involved, the amount of authority in the role and years of experience in the job.
  • Implement pay ranges across the company and communicate to employees about them. Since the pay ranges are applied equally and are based on specified criteria, they will be more fair than pay decided by managers on their own.

Patrick Proctor and Skye Schooley contributed to this article. 


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What is compensation planning? Benefits & actionable steps

business management compensation plan

More than 47 million* US workers quit their jobs in 2021, and over 63%* of them reportedly resigned due to low pay. Despite concerns about a recession, millions of people are still moving on to new opportunities each month.

Recruiting, hiring, and onboarding employees is also expensive — replacing a staff member costs from half to two times their annual salary, and voluntary turnover costs US businesses over US$1 trillion* each year.

Losing top talent is about more than just money; it also means missing out on potential leaders, innovative thinkers, and problem solvers. That’s just too many opportunities walking out of the door. And putting together thorough compensation plans and offering employees fair, competitive salaries is one of the best ways to attract and retain top talent.

If you’re in the midst of your compensation planning process, this guide is here to help you. We’ll cover:

  • What compensation planning is

Why compensation planning is important

  • The steps businesses should follow to develop and implement compensation plans

1. Harvard Business Review , 2022 2. Pew Research Center , 2022 3. Gallup , 2022 ‍

What is compensation planning?

Compensation planning is the process of developing a compensation strategy that can help attract, motivate, and retain the best talent. And well-thought-out compensation plans aren’t only about salary range — they also outline variable compensation , healthcare benefits, paid holidays, and other perks while upholding company culture, values, and strategies.

Compensation planning encompasses many elements that companies should consider to deliver fair and competitive packages that align with their budgets and industries.

Photo of four colleagues discussing how to strategically implement a compensation plan

Common elements of compensation plans include:

  • Annual salary
  • Incentives (i.e., bonuses)
  • Lifestyle and remote work stipends
  • Professional development opportunities ‍

Compensation strategies also account for: 

  • Current employee salaries vs. market benchmarks
  • When employees are eligible for pay raises or bonuses
  • What giving out pay raises or bonuses should look like  ‍

Compensation is the first thing over 76% of employees consider when accepting a job offer. And direct compensation also has a big impact on how existing employees perform; low pay often results in reduced productivity, poor employee engagement, and a lack of motivation. In contrast, well-paid employees are often happy with their jobs and likely to stick around. 

Compensation planning is essential for many reasons — but let’s break down the top four: 

Increased performance & productivity

Improved employee engagement, higher retention rate.

  • Top talent recruitment ‍

Photo of two professionals talking to each other

When employees aren’t paid fairly, they can feel unmotivated and are likely to move on when a better opportunity comes. And even when employees do stay with their company despite poor pay practices, they likely won’t work efficiently or feel invested in their performance — and may even build up resentment. 

On the other hand, employees who are satisfied with their compensation are much more invested in company success. They work harder to help their team hit targets and feel happier and more valued in their positions. That means they’re more motivated to go above and beyond and achieve great results for their company.

And while compensation isn’t the only factor contributing to performance and productivity, it’s one of the most important. ‍

Employee engagement is more than just employees interacting with each other and feeling happy in their workplace. It extends to how committed staff members are to their work, how passionate they feel about what they’re doing, and how aligned they feel with the company’s values.

Great employee engagement is essential for individuals and their employers to thrive. People are generally much happier, motivated, and fulfilled when they’re engaged with their work. On the other hand, companies with engaged employees enjoy more productive workers, a richer company culture, and fantastic retention rates.  

Over 73% of companies believe that compensation is a key driver of employee engagement. Of course, a competitive compensation plan can provide people with a sense of job satisfaction and happiness, but it also goes further than that.

A good compensation plan ensures employees know they play critical roles in your organization and feel that their ideas and contributions have a meaningful impact on company growth.

And when employees know their managers are invested in helping them excel and see leadership putting together career progression frameworks , they feel more connected to their workplaces and excited about what they can achieve — leading to higher engagement. ‍

In the age of The Great Resignation and The Great Reshuffle , employee retention is a major concern for companies. In one report, the percentage of voluntary turnover stood at 36% in 2021 — a significant increase compared with previous years.

Photo of a professional walking with a briefcase

Over 44% of companies also reported insufficient compensation as a primary reason they lose employees. And with inflation being a central concern in 2022, employees are likely to look for new opportunities if their jobs don’t cover their expenses and allow them to pursue their personal interests.

To tackle this problem, it’s crucial to build an employee compensation plan that accounts for inflation and industry benchmarks, besides allowing staff members to understand the logic behind their current base salary and potential for pay raises, bonuses, and promotions.

‍ As a result, your people will feel that the company is fair and transparent with them, and will be more likely to stay in their positions longer. ‍

Top talent recruitment

Companies are always looking for talented individuals — even though many organizations are laying people off, the job market is still going strong .

In this highly competitive labor market, you must ensure that you’re fairly compensating all your employees — not just new hires. Otherwise, they might take a better offer from one of your competitors.

Remember: compensation packages aren’t just about salaries. You can make your company’s compensation program more competitive by including incentives like equity, healthcare, paid leave, and development opportunities. ‍

💰 Want to build a streamlined compensation management process?  Leapsome’s compensation management tool helps businesses build scalable, collaborative, and fair compensation plans. 👉 Learn more

6 steps to developing & implementing a compensation plan

Implementing your compensation plan the right way is just as important as building and scaling it. That’s why we’ve listed the main steps businesses must follow to develop and implement their compensation plans. They are:

  • Defining your company’s compensation philosophy 
  • Outlining compensation goals & breaking them down into objectives 
  • Researching & gathering relevant data
  • Appointing a compensation manager
  • Building a career progression framework
  • Approving & implementing your compensation plan ‍

1. Define your company’s compensation philosophy 

To put together an excellent compensation plan, consider your people’s wants and needs. What you’re offering should be attractive enough to recruit top talent, fair enough to motivate current staff to stick around, and reasonable enough to fit your budget. And the first step is to define your company’s compensation philosophy. 

Suppose you want to set US$70,000 as minimum annual compensation for all your people; in this case, your company’s compensation philosophy should explain the reasoning behind your decision. It should also define how employee salaries increase over time and what milestones they need to reach to get raises or bonuses.

Reflecting on and defining your compensation philosophy will help you understand:

  • How to compensate employees in different departments and seniority levels.
  • What people need to achieve to get a raise or promotion — and how often they should happen. Tools like Leapsome’s promotion management software can help you create streamlined, effective promotion processes.
  • How your salaries compare with industry benchmarks and at what range you want to be (e.g., top 25%).
  • How your compensation plan stacks up when you compare it with those of competitors.

Here are a few additional factors to keep in mind when building your company’s compensation philosophy:

  • Industry type
  • Company size
  • Budget and financial considerations
  • Company goals
  • Compensation packages offered by competitors

Once you’ve established your company’s compensation philosophy, you can use it to build, analyze, and optimize your compensation plan. ‍

2. Outline compensation goals & break them down into objectives

Once you’ve figured out your company’s compensation philosophy, the next step is choosing related goals and breaking them down into specific, measurable objectives . 

Some of the broader goals often associated with compensation planning are: 

  • Attracting top talent
  • Retaining and rewarding your people
  • Increasing motivation

Photo of a team of three people working on a compensation plan

‍ Let’s say your primary goal this quarter is to retain at least 85% of your people. Here’s how you’d break that down into measurable objectives that could help you reach your goal: 

  • Send out an employee engagement survey and assess how employees feel about their compensation
  • Gather regular employee feedback with monthly employee pulse surveys
  • Carry out exit surveys when team members leave to identify improvement opportunities for your company

As you outline goals and break them down into objectives, you’ll find it easier to develop and implement a well-balanced compensation strategy. ‍

3. Research benchmarks & gather relevant data

While creating your compensation strategy, research what your competitors offer and familiarize yourself with market trends. If other companies in your industry pay senior Java developers US$100,000/year, but your yearly compensation package for the same position is US$70,000, you’ll have trouble attracting top talent.

When researching, ensure your sources are credible; inaccurate data can result in companies:

  • Looking unprofessional
  • Offering unattractive compensation packages
  • Losing top talent
  • Building a toxic workplace culture ‍

4. Appoint a compensation manager

Hiring a compensation manager makes developing an excellent compensation plan much simpler for companies. These professionals are responsible for:

  • Gathering and researching compensation data
  • Making sure their company’s compensation plan is fair
  • Aligning compensation with DEI best practices
  • Managing the program’s development, implementation, and admin
  • Ensuring compliance with compensation laws and regulations ‍

If you think you could benefit from working with a compensation manager but aren’t ready to hire a full-time team member, you can: 

  • Collaborate with current HR/People Ops managers
  • Hire an HR freelancer or consultant
  • Bring someone on board on a part-time basis ‍

5. Build a career progression framework

Once you’ve built the foundation of your compensation plan, the next step is creating a career progression framework (also known as a development framework ) for every department in your company — that is, if you don’t have one yet.

Let’s consider a company’s marketing department at three seniority levels: ‍

Entry-level roles

  • Content Marketing Associate
  • Performance Marketing Associate
  • Social Media Associate ‍

Senior roles

  • Senior Content Marketing Manager
  • Senior Performance Marketing Manager
  • Senior Social Media Manager

Expert-level roles

  • Content Marketing Lead
  • Performance Marketing Lead
  • Social Media Lead

When you’re done organizing your career progression framework, compare your role-based compensation packages with the research conducted in step three. It’s important to compare what you’re paying your employees now vs. industry benchmarks vs. employee expectations, so you develop a pay structure that’s both effective and logical. 

Your career progression framework should be based on a skills matrix system for each role, ensuring you promote employees fairly over time and identify development opportunities. ‍

🚀 Wondering how to build a career progression framework? Check out our step-by-step guide on  how to create a career progression framework 👉 Read now

6. Approve & implement your compensation plan

It’s almost time to put your compensation plan into action! But first, ensure it’s compliant with state, local, and federal compensation laws and regulations.

Once that’s done, review your plan with upper management and C-level executives to get it approved. Afterwards, communicate it to all employees to ensure transparency — and likely make team members feel excited and more engaged too! 

A word of warning: Implementing a compensation plan usually means discovering some people aren’t properly compensated . In this case, communicate raises and promotions to each affected individual. 

As the labor market evolves, it’s critical to review and modify your plan, updating your pay structure so that your people remain satisfied with their compensation packages. ‍

Create a competitive & fair compensation strategy

A great compensation plan should ensure employees are paid fairly, while factoring in industry pay benchmarks, benefits, and company budgets. Building and implementing a compensation strategy won’t just help you figure out how much to pay your employees — it’ll also help you attract and retain top talent. 

‍ It may seem daunting, but companies can simplify the compensation planning process with the right tools . Leapsome’s people enablement and compensation management tool helps companies build a streamlined compensation process for an equitable, transparent, and consistent compensation experience. ‍

⭐️ Want to build a fair and transparent compensation plan? Leapsome’s compensation management tool helps businesses set up and implement their compensation strategies with personalized and customizable templates. 👉 Book a demo now

Leapsome Team

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How to Create an Employee Compensation Plan

6 Min Read | Sep 8, 2023


Picture yourself sitting on the white sandy beaches of your dream vacation. You dig your toes into the sand while waves roll onto shore. Life’s pretty good thanks to a little paid time off.

Yep, paid time off (PTO) is a pretty great employee benefit. But for most companies, PTO is just one piece of the overall compensation plan.

A great employee compensation plan does three things:

  • Attracts the talent you need to fill your open positions
  • Motivates your current team to do great work
  • Keeps your company profitable

That’s a tall order lots of companies struggle with. So, let’s dig into the ins and outs of how to create an employee compensation plan and our advice for building one that’ll work for your company.

What Is a Compensation Plan?

A compensation plan is how a business takes care of its most important assets—its employees. It’s a combination of a company’s wage structure and additional benefits, like health insurance and financial wellness benefits.

A good compensation plan helps retain employees and attract new talent.

What’s Included in a Compensation Plan?

For potential employees, the compensation plan is the make-or-break standard—if you don’t offer enough benefits or the benefits you have don’t appeal to them, they may take another company’s job offer instead of yours.

Here are some key components of compensation plans:

  • Wages and salaries
  • Annual bonuses
  • Health insurance
  • Life insurance
  • Dental insurance
  • Disability insurance
  • Profit sharing
  • Retirement savings accounts, like a 401(k) match
  • Fringe benefits (financial wellness benefits, fitness reimbursements, grocery membership reimbursements, etc.)

Just as a detailed compensation plan can attract the best applicants, it can also serve as a retention and motivational strategy for your employees. With great benefits—like a 401(k) match, profit sharing and other fringe benefits—you make it easier for your employees to stay because they appreciate the compensation plan.

Direct and Indirect Compensation

There are two main types of compensation: direct and indirect. Direct compensation is money you pay an employee for the work they do. That pay includes salaries, wages and bonuses.

Indirect compensation includes fringe benefits and other parts of a compensation plan that don’t directly affect an employee’s income. Think of things like insurance, PTO, financial wellness benefits like SmartDollar, relocation packages, fitness benefits and more.

employee compensation table

Employee Classifications

Before you start creating a compensation plan, you need to take a look at employee classifications. Most people are familiar with salary and hourly jobs, but there’s another classification called exempt and nonexempt.

Exempt means employees can’t work overtime. Nonexempt means employees can work overtime for additional pay.

Overtime isn’t only for hourly workers, it’s for salaried workers too, unless the employee meets the exempt criteria established by the U.S. Department of Labor. They outline the exemption at a minimum salary of $684 per week, as well as additional criteria for specific positions. 1

Roles and Pay Types

Typically, certain jobs are associated with types of pay (salary, hourly, commission, etc.). As you develop your compensation packages, learn from the current market.

Most sales jobs offer compensation through commission. Employees get paid for their sales, calls and leads. Their income is one of the top lines of a company’s budget. Take care of your sales teams and they’ll take care of you.


Click here for free, SHRM-accredited webinar content on all things HR and business leadership.

Although commissioned pay is great for sales, this kind of pay isn’t realistic for every position. So, for indirect revenue roles (aka supporting roles like administrative assistants, designers and developers), offer a salary, or an hourly rate when appropriate. A salary or hourly wage pays employees what they’re worth. Since you can’t always determine the impact on sales and business growth with these employees, a salary or hourly wage says you know your company wouldn’t get sales without them.

When it comes to other department leadership roles, Ramsey Solutions offers a base pay with commission off the bottom line. The additional commission for these department leaders keeps them involved with their team since they get a slice of the pie when the team is successful. It’s a great motivational and engagement tool for leadership.

3 Steps to Create Your Compensation Plan

Whew! That’s a lot of information. But now that we’ve got the nuts and bolts of compensation plans covered, let’s talk about how you can use them to create a compensation plan for your company.

Step 1: Identify your company’s business and hiring values.

First, you need to figure out your compensation values. These values are rooted in your company’s identity—how you conduct business and how you hire.  

Here at Ramsey Solutions, we use our core values to guide us through everything, especially compensation. Two of our core values are Profit Sharing and Self-Employed Mentality. Our team members share the struggles and successes of the company with profit sharing. In turn, they take more ownership of their job (self-employed mentality), which helps them find unique solutions to business problems.

Step 2: Outline your positions with accurate job descriptions.

From the outside looking in, job descriptions are the first impression of a company. But behind the help wanted ad is a company setting their priorities.

A job description helps you create a compensation plan in two ways:

  • It documents the roles your company needs to fill.
  • It informs your compensation research (more on that later).

As your business grows, you know you need more people, but who do you need? Figuring out all the positions you need helps you prioritize which roles to fill first to make sure you can afford to pay those hires.

Hiring needed talent and what you can afford to pay them is a delicate balance. If you rush the hiring process, you run the risk of causing an imbalance and hurting the company and employees long term. For example, too much hiring and low profits often lead to layoffs, which hurts everyone.

Step 3: Conduct market research on compensation packages for each position.

A good compensation plan is a continuous conversation with the marketplace. If you stop having that conversation, you’ll get left behind. That’s right. Conducting market research is the best way to stay on top of your compensation packages for each position.

During your research, pay close attention to business trends, hiring freezes, nationwide layoffs, inflation, real estate markets, and your local economy. Compensation isn’t a one-size-fits-all package. You need to do what’s best for your company, in the area you live, while addressing your hiring needs.

A Compensation Plan Is a Win-Win for You and Your Employees

The best deals in business are those where both sides love what they get out of the deal. You and your employees should feel the same way about your compensation plans.

Every well thought out compensation plan balances the cost to the employer with the benefits to the employee. So, while they’re on vacation sipping on a mai tai, you know they’ll come back (some day).

Listen to your employees and talk with them regularly to learn how you can improve your compensation plan over the years. Two-way communication will save your company and improve retention.

Want to keep learning how you can offer the best compensation and benefits for your employees? Go here .

Did you find this article helpful? Share it!

Ramsey Solutions

About the author

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners. Learn More.

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The Power of Strategic Compensation: A In-Depth Guide

business management compensation plan

In today's rapidly evolving business landscape, compensation managers face the critical task of aligning compensation strategies with organizational goals. Strategic compensation isn't just about paying employees; it's about creating a competitive advantage, attracting top talent, and motivating teams to achieve peak performance.

What is Strategic Compensation?

Strategic compensation involves designing and managing compensation packages that support an organization's objectives.

business management compensation plan

Unlike traditional compensation practices, which often focus solely on salary and benefits, strategic compensation takes a holistic approach. It considers factors like market trends, performance-based incentives, long-term rewards, and employee engagement.

The Role of Compensation Managers

The role of compensation managers in strategic compensation is crucial in designing, implementing, and managing compensation programs that align with an organization's overall business strategy and objectives. Here are the key responsibilities and contributions of compensation managers in the realm of strategic compensation:

  • Designing Compensation Strategies: Compensation managers are responsible for creating compensation strategies that support the organization's goals. They must understand the company's mission, vision, and strategic objectives to ensure that compensation plans are in sync with these larger aims.
  • Market Analysis and Benchmarking: They conduct regular market research and benchmarking to determine competitive pay rates for various positions within the organization. This involves comparing the organization's compensation packages with those of similar companies in the industry to remain competitive in attracting and retaining talent.
  • Pay-for-Performance Models: Compensation managers develop and implement pay-for-performance models that tie compensation to employee contributions and achievements. This could involve designing bonus structures, merit-based pay systems, or incentive programs that motivate employees to excel in their roles.
  • Benefits and Perks: They oversee the design and administration of employee benefits and perks, such as health insurance, retirement plans, paid time off, and additional benefits like wellness programs or tuition reimbursement. These offerings are integral to attracting and retaining top talent.
  • Long-Term Incentives: In organizations where it is relevant, compensation managers design long-term incentive programs, such as stock options or profit-sharing plans, that encourage employees to have a vested interest in the company's long-term success.
  • Equity Compensation: For publicly-traded companies, compensation managers may be responsible for managing equity compensation programs, which can include stock grants, stock options, or stock purchase plans. These programs are designed to align employee interests with shareholders.
  • Data-Driven Decision-Making: Compensation managers leverage data and analytics to make informed decisions. They analyze compensation-related data, including salary surveys, performance metrics, and turnover rates, to identify trends, ensure fairness, and support strategic decisions.
  • Ensuring Equity and Fairness: They play a critical role in ensuring that compensation practices are fair and equitable across the organization. This includes addressing wage gaps, discrimination, and ensuring compliance with laws and regulations related to pay equity.
  • Managing Budgets: Compensation managers must work within budget constraints to allocate compensation resources effectively. This involves prioritizing compensation elements that have the most impact on employee satisfaction and performance.
  • Communication and Transparency: They communicate compensation plans and changes effectively to employees, addressing questions and concerns. Transparency is essential to build trust and reduce resistance to compensation changes.
  • Adapting to Changing Trends: Compensation managers must stay up-to-date with evolving compensation trends, such as remote work considerations and diversity, equity, and inclusion (DEI) initiatives, and adjust compensation strategies accordingly.
  • Legal Compliance: Ensuring compliance with labor laws and regulations related to compensation is paramount. Compensation managers are responsible for ensuring that compensation practices align with legal requirements to mitigate legal risks.
  • Monitoring and Evaluation: Continuous monitoring and evaluation of compensation plans and their impact on employee performance, retention, and engagement are essential. Compensation managers should be prepared to adjust strategies as needed based on performance metrics and feedback.

The Benefits of Strategic Compensation

Strategic compensation offers a range of benefits to organizations that go beyond simply paying employees. These benefits contribute to the overall success and competitiveness of the organization. Let's explore these benefits in detail:

Improved Employee Engagement and Motivation

  • Alignment with Organizational Goals: Strategic compensation plans tie employee performance and contributions directly to rewards. When employees see a clear connection between their efforts and their compensation, they are more likely to be engaged and motivated to excel in their roles.
  • Recognition and Reward: Employees feel valued when they are rewarded for their hard work. Strategic compensation includes recognition and rewards for outstanding performance, which can boost morale and motivation.

Enhanced Talent Attraction and Retention

  • Competitive Advantage: Organizations that offer strategic compensation packages gain a competitive advantage in the job market. Top talent is more likely to be attracted to organizations that offer comprehensive and appealing compensation packages.
  • Reduced Turnover: When employees are satisfied with their compensation and see opportunities for growth and advancement, they are less likely to seek employment elsewhere. This reduces turnover and the associated costs of recruitment and training.

Improved Company Performance

  • Increased Productivity: Motivated and engaged employees are more productive. Strategic compensation can lead to higher productivity levels, which contribute to the overall success of the organization.
  • Innovation and Creativity: Employees who are motivated by strategic compensation are more likely to contribute innovative ideas and creative solutions to business challenges, driving the company forward.
Also Read: Exploring the  Different Types of Incentives and How to Use Them to Motivate Your Employees

Alignment with Organizational Values and Culture

  • Supporting Company Values: Compensation plans can be designed to reflect and reinforce an organization's core values and culture. For example, a company focused on diversity and inclusion can incorporate equity in compensation practices.
  • Cultural Fit: Compensation plans can attract and retain employees who align with the company's culture and values, fostering a more cohesive and productive workforce.

Better Employee Retention

  • Long-Term Commitment: Strategic compensation often includes long-term incentives, such as stock options or retirement plans. These incentives encourage employees to commit to the organization for the long haul, reducing turnover.
  • Succession Planning: Long-term incentives can also be used as a tool for succession planning, ensuring that key talent remains with the organization as it grows and evolves.

Cost Savings and Efficiency

  • Targeted Compensation Spending: Strategic compensation ensures that compensation resources are allocated effectively to positions and employees that have the greatest impact on the organization's success.
  • Reduced Recruitment Costs: By retaining talent through competitive compensation, organizations can reduce the costs associated with recruitment and onboarding.

Adaptation to Market Changes

  • Flexibility: Strategic compensation plans are adaptable to changing market conditions. They can be adjusted to respond to economic shifts, industry trends, and competitive pressures.
  • Market Competitiveness: Regular market analysis and benchmarking ensure that the organization remains competitive in terms of compensation, allowing it to attract and retain top talent even in a changing market.

Enhanced Employee Well-Being

  • Comprehensive Benefits: Strategic compensation often includes a comprehensive benefits package that supports employee well-being. This can include health insurance, wellness programs, and mental health resources.
  • Financial Security: Long-term incentives and retirement plans provide employees with financial security, reducing stress and enhancing overall well-being.

Key Components of a Strategic Compensation Plan

A strategic compensation plan is a comprehensive framework that aligns an organization's compensation practices with its business objectives.

business management compensation plan

To create an effective strategic compensation plan, several key components need to be considered and integrated. Here are the essential elements of a strategic compensation plan:

Market Analysis and Benchmarking

  • Market Research: Conduct thorough research to understand the current job market, industry salary trends, and compensation practices of peer organizations.
  • Benchmarking: Compare your organization's compensation packages with those of competitors and similar companies to ensure your offerings are competitive.

Pay Philosophy and Strategy

  • Compensation Philosophy: Define the organization's compensation philosophy, which should outline the principles, values, and goals that guide compensation decisions.
  • Compensation Strategy: Develop a clear strategy that aligns compensation practices with the organization's overall business strategy and objectives.

Job Analysis and Evaluation

  • Job Descriptions: Create detailed job descriptions for all positions within the organization, outlining the roles, responsibilities, and required qualifications.
  • Job Evaluation: Assess and rank jobs based on their relative importance, complexity, and value to the organization. This helps in determining appropriate compensation levels.

Pay Structure

  • Salary Ranges: Establish salary ranges for each job or job family, setting minimum, midpoint, and maximum pay levels to provide a structured framework for compensation decisions.
  • Grade Structure: Implement a grade or pay grade structure that groups similar jobs together, simplifying the compensation process.

Pay-for-Performance Models

  • Performance Metrics: Define clear performance metrics and criteria that link individual or team performance to compensation outcomes.
  • Variable Pay Programs: Develop variable pay programs, such as bonuses, incentives, commissions, or profit-sharing, to reward high performance.

Benefits and Perks

  • Benefit Packages: Design a comprehensive benefits package that includes health insurance, retirement plans, paid time off, and other perks like wellness programs or flexible work arrangements.
  • Total Rewards Approach: Consider the total rewards approach, which combines both monetary and non-monetary rewards to attract and retain talent.

Long-Term Incentives

  •   Equity-Based Compensation: If applicable, include long-term incentives like stock options, restricted stock units (RSUs), or performance-based equity plans to encourage employee loyalty and alignment with company goals.
Also Read: A Deep Dive Into  Long Term incentive Plans and LTI Compensation Structures  | Guide 2023

Equity Compensation

  • Stock Options: If relevant, offer stock options that allow employees to purchase company stock at a predetermined price, usually below the current market value.
  • Stock Grants: Consider granting employees shares of company stock as part of their compensation package, which can vest over time or based on performance.

Communication and Transparency

  • Clear Communication: Communicate compensation plans and changes transparently to employees, ensuring they understand how their compensation is determined.
  • Education: Provide resources and educational materials to help employees make informed decisions about their compensation and benefits.

Regular Review and Adjustments

  • Data Analysis: Continuously collect and analyze compensation-related data to identify trends and assess the effectiveness of compensation strategies.
  • Adjustments: Be prepared to make adjustments to compensation structures and practices in response to changing market conditions, business objectives, and employee needs.

Legal and Regulatory Compliance

  • Labor Laws: Ensure that all compensation practices comply with federal, state, and local labor laws, including minimum wage, overtime, and anti-discrimination regulations.
  • Pay Equity: Regularly review compensation data to identify and address any potential pay disparities based on gender, race, or other protected characteristics.
Also Read: Getting started  with Pay Equity

Employee Feedback and Engagement

  • Surveys and Feedback: Solicit employee feedback through surveys or focus groups to gauge satisfaction with compensation packages and gather suggestions for improvements.
  • Engagement Initiatives: Develop engagement initiatives that connect compensation practices with overall employee engagement and satisfaction.

Performance Evaluation and Accountability

  • Regular Performance Reviews: Conduct regular performance evaluations to assess whether employees are meeting performance expectations and to determine merit-based increases.
  • Accountability: Hold managers accountable for fair and consistent application of compensation practices within their teams.

Trends to Keep in Mind While Drafting Strategic Compensation

Remote work considerations.

In a post-pandemic world, remote work considerations are crucial. Compensation managers must adjust compensation strategies to account for remote employees and their unique needs.

Diversity, Equity, and Inclusion (DEI) Initiatives

The focus on DEI initiatives has grown significantly. Compensation managers should ensure that compensation practices promote diversity and equity within the organization.

Legal and Compliance Considerations

Compliance with labor laws and regulations is essential. Compensation managers must ensure that their compensation practices align with legal requirements to avoid potential legal issues.

The Role of Data and Analytics in Strategic Compensation

Data plays a crucial role in designing, implementing, and managing strategic compensation plans effectively. Various types of data are essential for compensation professionals to make informed decisions and ensure that compensation practices are fair, competitive, and aligned with organizational goals. Here are the key types of data to consider for strategic compensation:

Salary Surveys

External salary data from industry-specific or general salary surveys provides insights into market pay rates for different job roles and industries. It helps organizations understand how their compensation compares to competitors.

Internal Compensation Data

Historical compensation data for your organization is essential to track changes over time, identify trends, and assess the impact of compensation decisions.

Market Research

Research on industry and economic trends, including labor market conditions, can help organizations anticipate changes and adjust compensation strategies accordingly.

Job Descriptions and Job Evaluation Data

Detailed job descriptions and job evaluation data are crucial for determining the relative value of different roles within the organization. This information informs decisions about job classifications and pay grades.

Performance Metrics

Performance data, such as individual or team performance ratings, sales figures, or project outcomes, is used to link compensation to performance through pay-for-performance models.

Employee Engagement and Satisfaction Surveys

Surveys that measure employee satisfaction and engagement can provide insights into how compensation practices affect employee morale, motivation, and retention.

Turnover and Retention Data

Tracking turnover rates and the reasons employees leave the organization can help identify potential compensation-related issues and inform retention strategies.

Market Positioning Data

Information about how your organization positions itself in the market compared to competitors can influence compensation decisions. This includes factors like your organization's market share, brand reputation, and competitive advantages.

Benefits and Perks Data

Data on employee benefits and perks, including health insurance costs, retirement plan contributions, and additional benefits like flexible work arrangements or tuition reimbursement, is crucial for managing the overall compensation package.

Equity and Inclusion Metrics

Data related to diversity, equity, and inclusion (DEI) initiatives can inform compensation strategies aimed at promoting fairness and equity in compensation practices. This includes demographic data on the workforce, pay equity analyses, and DEI program effectiveness.

Market Competitiveness Data

Information on how your organization's compensation compares to industry benchmarks and trends helps in ensuring that your compensation remains competitive in attracting and retaining talent.

Legal and Regulatory Data

Knowledge of relevant labor laws, regulations, and compliance requirements is essential to ensure that compensation practices adhere to legal standards and avoid potential legal issues.

Understanding the costs associated with compensation, including payroll expenses, benefits costs, and the budget available for compensation adjustments, is crucial for financial planning and budget allocation.

Employee Feedback and Surveys

Gathering feedback from employees through surveys, focus groups, or one-on-one discussions can provide valuable insights into their compensation preferences, concerns, and expectations.

Competitor Compensation Data

Data on compensation practices at competing organizations can help you benchmark your compensation strategies and identify areas where adjustments may be necessary to remain competitive.

Also Read: How to Conduct  Effective Compensation Benchmarking

Overcoming Challenges in Strategic Compensation

Implementing strategic compensation practices can be challenging, but addressing these challenges is essential for achieving success in attracting, motivating, and retaining top talent. Here are some common challenges in strategic compensation and strategies to overcome them:


Budget Constraints

  • Strategy: Prioritize compensation elements that have the most significant impact on employee satisfaction and performance. Allocate resources strategically to focus on key positions and high-potential employees.
  • Flexibility: Consider a flexible compensation structure that allows for adjustments based on the availability of financial resources or changes in business conditions.

Employee Resistance

  • Communication: Implement clear and transparent communication about the reasons behind compensation changes. Address employee concerns and provide opportunities for questions and feedback.
  • Education: Offer education and training to help employees understand the new compensation strategies and how they align with organizational goals and individual performance.

Lack of Data and Analytics

  • Data Collection: Invest in data collection and analytics tools to gather relevant compensation data and insights. Utilize surveys, market research, and HRIS (Human Resources Information Systems) to track compensation metrics.
  • Expertise: Employ or consult with compensation professionals who are skilled in data analysis and can interpret compensation data effectively.

Competitive Pressure

  • Market Research: Continuously monitor industry trends and competitor compensation practices. Adjust your compensation strategies to remain competitive and attractive to top talent.
  • Value Proposition: Highlight non-monetary benefits such as a positive company culture, opportunities for growth, and meaningful work to complement compensation offers.

Legal Compliance

  • Regular Audits: Conduct regular audits of compensation practices to ensure compliance with labor laws and regulations. Seek legal counsel when necessary to address complex legal issues.
  • Pay Equity Analysis: Implement pay equity analyses to identify and rectify any gender, race, or other protected characteristic pay disparities.

Inequity and Fairness

  • Transparency: Promote transparency in compensation practices by clearly communicating the criteria used for determining pay, performance evaluations, and career advancement.
  • Equity Assessments: Regularly review compensation data to identify and address any disparities in pay that may exist within the organization.

Resistance from Managers

  • Training and Education: Provide training and education for managers on how to effectively communicate and implement compensation changes. Ensure they understand the rationale behind these changes.

Changing Workforce Dynamics

  • Remote Work: Adapt compensation strategies to accommodate remote work arrangements, ensuring equity and fairness for both on-site and remote employees.
  • Generational Differences: Tailor compensation packages to appeal to the preferences and needs of different generations within the workforce.

Benefits Costs

  • Cost Management: Evaluate benefit packages to manage costs effectively. Consider offering more cost-efficient benefits or sharing costs with employees.
  • Employee Education: Educate employees on the value of benefits to help them make informed choices and reduce unnecessary expenses.

Global Expansion

  • Local Expertise: Seek guidance from local experts or consultants when expanding into new international markets to understand local compensation practices and regulatory requirements.
  • Standardization: Develop a global compensation strategy that balances standardization with local flexibility to ensure consistency and competitiveness.
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Frequently Asked Questions(FAQs)

1. what is strategic compensation.

Strategic compensation is a deliberate approach where organizations carefully design and manage their compensation systems to align with their broader business strategies. It encompasses various elements, including salaries, bonuses, benefits, and non-monetary rewards, all aimed at attracting, retaining, and motivating the right talent necessary to achieve the company's strategic goals. This approach considers both internal equity within the organization and external market factors, ensuring competitiveness and fairness in compensation packages. Strategic compensation also plays a pivotal role in enhancing employee engagement and satisfaction, ultimately contributing to the organization's overall success.

2. What Benefits Does Strategic Compensation Offer to Organizations?

Strategic compensation offers organizations a multitude of benefits, including the ability to attract and retain top talent through competitive pay structures, motivating employees to perform at their best by linking compensation to performance, fostering loyalty and satisfaction among staff, aligning individual and organizational goals, promoting fairness and equity in pay practices, and ultimately contributing to the organization's long-term success by ensuring a motivated, engaged, and fairly compensated workforce.

3. What Are the Key Components of a Strategic Compensation Plan?

A strategic compensation plan encompasses key components such as thorough job analysis and market research to determine fair wages, the establishment of a clear pay structure, performance-based incentives, a comprehensive benefits package, transparent communication, legal compliance, employee feedback mechanisms, and regular plan reviews. These components collectively ensure that the compensation strategy aligns with organizational goals, attracts and retains talent, motivates employees, and remains adaptable to the evolving needs of both the company and its workforce.

4. What Are Some Common Challenges in Implementing Strategic Compensation?

Implementing a strategic compensation plan can be challenging due to the need for alignment with overarching business objectives, the requirement to remain competitive in the job market while controlling costs, navigating complex regulatory landscapes, ensuring transparent communication with employees, adapting to evolving workforce trends, and effectively measuring the strategy's impact on organizational goals and employee satisfaction.

5. What Is the Importance of Strategic Compensation in Today's Business Landscape?

Strategic compensation holds immense importance in today's business landscape as it serves as a critical tool for attracting and retaining top talent, motivating employees, aligning with business objectives, promoting diversity and inclusion, and bolstering overall employee satisfaction. In an era marked by fierce competition and evolving workforce dynamics, organizations that prioritize strategic compensation are better equipped to thrive and adapt to the changing demands of the market.

In conclusion, strategic compensation is a vital tool for compensation managers seeking to drive employee engagement, attract top talent, and improve company performance. By understanding the key components, leveraging data and analytics, and adapting to changing trends, compensation managers can navigate the complexities of strategic compensation and unlock success for their organizations.

If you're looking for further guidance or assistance in implementing strategic compensation plans, feel free to reach out to us and book a free demo for Compport.

‍ Find out how Compport can help you manage all your Sales Incentive process, book a demo today!

business management compensation plan

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Compensation and benefits

  • Business management
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How to Pay Your Sales Force

  • John P. Steinbrink
  • From the July 1978 Issue

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Next-Gen Retirement

  • Heather C. Vough
  • Christine D. Bataille
  • Leisa Sargent
  • Mary Dean Lee
  • From the June 2016 Issue

Compensation and Benefits for Startup Companies

  • Joseph S. Tibbetts, Jr.
  • Edmund T. Donovan
  • From the January–February 1989 Issue

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CEO Pay Is Even More Outrageous Than It Seems

  • William Lazonick
  • Matt Hopkins
  • February 07, 2018

America's Long and Productive History of Class Warfare

  • March 07, 2014

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I Survived a Hate Crime. Here's How My Company Supported Me.

  • Bhavik R Shah
  • October 31, 2022

business management compensation plan

How Small Companies Can Offer Great Paid-Leave Programs

  • Joan Michelson
  • January 07, 2021

business management compensation plan

Does Money Really Affect Motivation? A Review of the Research

  • Tomas Chamorro-Premuzic
  • April 10, 2013

business management compensation plan

Wages Are Growing Faster at Larger Companies

  • Gretchen Gavett
  • May 07, 2015

business management compensation plan

The Best-Performing CEOs in the World, 2019

  • Harvard Business Review
  • From the November–December 2019 Issue

Adults Behave Better When Teddy Bears Are in the Room

  • Sreedhari Desai
  • Scott Berinato
  • From the September 2011 Issue

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How to Ask for a Raise

  • Carolyn O'Hara
  • March 05, 2015

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Does Business Need a New Model?

  • Roger L. Martin
  • Lucian A. Bebchuk
  • From the January–February 2021 Issue

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The Average Mid-Forties Male College Graduate Earns 55% More Than His Female Counterparts

  • Erling Barth
  • Claudia Goldin
  • Sari Pekkala Kerr
  • Claudia Olivetti
  • June 12, 2017

business management compensation plan

Winning Back Lost Customers

  • From the March 2016 Issue

Taking Time Seriously in Evaluating Jobs

  • Elliott Jaques
  • From the September 1979 Issue

The Best-Laid Incentive Plans

  • From the January 2003 Issue

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3 New U.S. Employment Regulations That Companies Should Prepare for Now

  • Charles G Tharp
  • April 18, 2023

When the CEO Can't Let Go (HBR Case Study)

  • Sandi Sonnenfeld
  • September 01, 1995

A Blockbuster Move on Executive Pay

  • Stephen Davis
  • May 15, 2007

business management compensation plan

Jill Draeger

  • Howard H. Stevenson
  • Michael J. Roberts
  • June 30, 2020

Cross Country Group: A Piece of the Rock (A)

  • Robert Simons
  • Indra A. Reinbergs
  • March 15, 1999

Measure of Delight: The Pursuit of Quality at AT&T Universal Card Services (A)

  • Roy D. Shapiro
  • Michael D. Watkins
  • Susan Rosegrant
  • October 25, 1993

Hale and Dorr (A)

  • David B. Godes
  • June 08, 2005

Cross Country Group: A Piece of the Rock (B)

  • January 24, 2000

Jieliang Phone Home! (A)

  • Ethan S. Bernstein
  • Nina Bilimoria
  • February 15, 2009

Guidant Corp.: Shaping Culture Through Systems

  • Antonio Davila
  • April 01, 1998

Scope of the Corporation

  • David J. Collis
  • March 30, 1995

Poland's A2 Motorway

  • Benjamin C. Esty
  • Michael Kane
  • December 18, 2001

Arck Systems

  • Ian I. Larkin
  • March 23, 2011

Privatization of Rhone-Poulenc--1993

  • Donald S. Collat
  • Peter Tufano
  • October 11, 1994

Supply Chain Close-Up: The Video Vault

  • V.G. Narayanan
  • March 25, 2002

Corporate Governance: The Jack Wright Series #10-Dealing with External Pressures

  • John L. Colley
  • Wallace Stettinius
  • November 05, 2003

A Tower for the People: 425 Park Avenue

  • John D. Macomber
  • Joseph G Allen
  • Emily Jones
  • March 05, 2020

Designs by Kate: The Power of Direct Sales

  • John Deighton
  • Sarah L. Abbott
  • April 19, 2011

Sales Force Integration at FedEx (D)

  • October 14, 2005

Kramer Pharmaceuticals, Inc.

  • Derek A. Newton
  • March 01, 1980

CareMore Health System (B)

  • Robert S. Huckman
  • Brian W. Powers
  • August 02, 2017


  • Janice H. Hammond
  • August 04, 1997

Westchester Distributing, Inc. (A)

  • Robert J. Boxwell Jr.
  • January 15, 1991

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Why Mess with the Male Competitive Model?: The Growing Need for Alternative Career Paths

  • Sylvia Ann Hewlett

business management compensation plan

Carlos Ghosn: Hero or Villain?, Teaching Note

  • Andrea Santiago
  • Fernando Martin Roxas
  • August 26, 2019

Corporate Governance The Jack Wright Series #'s 9 and 10 - Dealing with External Pressures, Teaching Note

  • January 12, 2004

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Business Development compensation Plans

How and how much should a marketing communication firm pay its business development personnel? While there is no easy answer, following these five steps should help lead to a compensation (pay) plan that works for employee and employer. This article builds on last month’s Win Without Pitching Newsletter issue, Business Development Planning , which discussed setting proper goals, aligning performance incentives and forecasting results. Together, these two articles should help to point you toward business development success in the year ahead.

Step One: Set Proper New Business Goals

(What follows is a recap of the goal-setting principles I addressed last month. If you read and retained that and want to skip to step two, go ahead.)

A firm’s business development person is charged with shaping its future client base. Goals around her performance should largely be goals of quality over quantity. As ReCourses’ David C. Baker laid out for us in last month’s issue, the typical firm should have between eight and twelve ongoing clients, each representing about 10% of the agency gross income (AGI, which is the sum of all fees, mark-ups and commissions).

A firm with $2 million in AGI should target the distribution of that AGI across ten client or so, with each client representing approximately $200k in AGI, on average. Appropriate business development goals for such a firm should be to replace two, three or four of these clients with a roughly equivalent number of clients at the same level of AGI or higher.

The average AGI per client is important because this number, or one close to it, should serve as the firm’s minimum level of engagement. The business development employee needs to see her role as identifying and helping to secure the next two, three or four perfect fits for the firm, at or above this minimum level of engagement.

In our example above, any incentives should be aligned to encourage adding three new clients at $200k+ in AGI and discourage pursuing a larger number of smaller clients. So while the magic number is $600k in AGI from new clients, the avenue to reaching this number (three clients or less) is just as important. With incentives properly aligned, the minimum level of engagement will come up early in conversations with prospects. Those whose spending capacity falls well below will be weeded out quickly. Without aligning the incentives to this goal the firm’s principals are likely to find themselves being brought opportunities that they shouldn’t even be considering.

Step Two: Determine Target Compensation Level

Once appropriate business development goals have been set, the next step is to set target compensation for the employee. This number is calculated on a few factors, most importantly, experience/seniority, market considerations and results required. Generally speaking, I believe business development personnel should earn roughly what those of similar experience and performance earn in other roles in the firm (e.g.: account services), possibly with additional, properly aligned incentives that provide for the opportunity to earn up to 20%-25% more.

The business development position can be staffed at the EVP/VP, director, manager or coordinator level, depending on other variables such as how the firm approaches the function and the principals’ level of involvement in it. As a result, business development compensation can quite rightly vary wildly even among firms of similar size and financial performance. Some questions to consider include, what do others of this seniority/experience level earn? Does the market place a premium on the value of the business development role relative to others? What are the employee’s income goals? For the sake of this discussion, let’s assume the employee wants to earn $100k and both parties agree that the market values her experience level accordingly. $100k, then, becomes our target compensation.

If the employee wants to earn $150k and the employer feels the position is worth $100k, then we either have a poor fit between person and position, unrealistic compensation expectations, or the employer will have to look at bridging the gap through incentives in a carefully constructed compensation plan, with the employee understanding the exemplary performance required to achieve this target compensation level.

Step Three: Establish a Base

Most employees (not all) want security of income, and most employers want stability in employee performance. The way to get this security/stability is through base salary. Many business development employees (again, not all) want the chance to be rewarded for good performance beyond their salary. Someone with a high competitive drive tends to use her income as a means of keeping score on how she is doing in life. Such a person enjoys the idea that her earning potential is not capped.

Start with a High Base

Some business development employees prefer the high-reward model of straight commission (with no base salary), and some employers equally prefer this model as they see it greatly reducing their risk. This is not a model I favor, and one needs to only revisit step one above (setting proper goals) to deduce why. The best plans offer a high base salary and simple incentives for meeting the stated business development goals.

A base salary is provided in exchange for certain things such as following policies, protocols and systems, putting the needs of the agency first and generally being a team player. The higher the base salary, the higher the implied expectations of the employee on this front. The lower the base, the more implied freedom she has to do things her way. An employer who has his business development personnel on full commission has very little authoritative ground to stand on when it comes to dictating how things should be done. His employee is likely to see herself as an independent contractor with all implied freedoms.

Employers should seek to construct a plan with a high base – as high as they are comfortable with. Using our $100k target income example, I recommend a base salary of between $70k and $90k (70%-90% of the target). Generally speaking, the more risk the employee takes (lower base) the more reward she should get for hitting targets.


  • History Main article: History of Washington, D.C. The District of Columbia, founded on July 16, 1790, is a federal district as specified by the United States Constitution. The U.S. Congress has ultimate authority over the District of Columbia, though it has...


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  • Tracking System: Ensure meticulous tracking of long-term award values, with detailed holding reports and vesting schedules. Provide clear visibility and management of long-term incentives, enhancing transparency and trust.
  • Employee Portal: Offer your employees a user-friendly portal to view their long-term award statements, sign grant agreements, and access important documentation. Empower employees with information and a sense of ownership over their long-term incentives.

Employee Value Proposition

  • Benefit Visualization: Craft comprehensive and visually appealing statements that encapsulate the full spectrum of each employee's benefits. Recognize your employees’ contributions and vividly illustrate the total value they receive, enhancing their understanding and appreciation of the company's investment in their well-being.
  • Reward Communication: Implement a proactive communication strategy that engages employees through timely emails, both before and during the distribution of reward statements.
  • Employee Education: Go beyond mere notification by educating employees on the full extent of their value proposition. Include detailed explanations of various components like cash compensation, health insurance, and both short and long-term incentives.
  • Engagement and Participation Analytics: Monitor and analyze how employees interact with their statements, tracking views and engagement. This insight allows for the visualization of compensation roll-up and program participation, offering a window into the effectiveness of your communication and the perceived value of the compensation packages.

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    Compensation planning means developing a compensation strategy that supports your business strategy, operating objectives, and employee needs. Your compensation plan should include salaries, benefits, and incentives, as well as pay-band details, development levels, and when and how employees are eligible for raises and bonuses.

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