Guidelines for a Strong Compensation Plan

Best Practices, Employees, Workplace

By Mitchell Tillwick:

Openly talked about compensation plans are rare. Salary and compensation have always leaned on the side of closed topics unless it’s during reviews, promotions or for new hires. Only 15% of managers in small organizations share the reasoning behind employee pay. This leaves the majority of employees in the dark about their salary rationale.

It’s important to have a strong compensation plan for your company because it can show equal employee pay between gender/race/etc., the full value of benefits/perks and it can help retain employees longer. Having a compensation plan gives your company a reference for salary requirements and criteria rather than subjective measurement. It can help equalize employee pay and show employees how much they’re actually getting paid in the industry.

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When creating/reforming a compensation plan, it needs to be structured (usually data-driven structures are best) and communicated to employees. It also needs to consider factors like the industry and type of plan, and go hand-in-hand with things employees also value, like recognition and a matching culture.

Structure, Communication and Transparency

A plan using data across industry standards helps define a solid foundation for employees to understand, especially when they prospect other companies. Various sources to obtain industry benchmarks can include third-party research companies, paid data sources and government data. Using sources to create a structured plan helps prevent employees from being poached.

It also helps prevent inequality in salary when filling the roles of lost employees. Benchmarking and industry standards are a great way for employers to retain employees because it shows the company is more competitive in their pay than employees thought. Losing employees costs companies 20% to over 30% of the former employee’s salary. More so, those lost dollars increase the longer it takes for the new employee to get up to speed.

Employees should know the strategy of the company, where costs are being allocated and how they can work up the ladder. Using a plan will help arm managers when they explain pay to employees. Using a pay structure can help outline the things employees question and prevent them from doing any inaccurate research on their own. Parts of a plan that allows employees to analyze their value include:

The better the understanding of a logical pay structure, the stronger the relationship between managers and employees.

Plan Types

Plans vary depending on the industry (SaaS vs. retail), company size (corporate vs. small business) and company stage (startup vs. 10-year existence). Plans may also focus solely on how well the sales team performs. For some companies like startups, if they aren’t selling, then they aren’t going anywhere. Plans which focus on sales can revolve around sales team performance, customer retention and long-term customers.

Larger companies, like corporations, have the luxury of using benchmarks and industry averages. Their company may be long-existing and they may even have an influence on the industry standard. The right plan must take these things into consideration, properly use industry data and include the reasoning of their company stage or size. This is essential when your employees ask about their salary and are prospecting other companies.

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Some industries are harder to create a plan for, especially when geographies pay differently and trends are frequently changing. Programmers live in a heavily competitive industry, with hubs in Silicon Valley and Colorado paying much more.

However, with higher pay means a much more difficult hiring process, making it challenging for new entrants to get hired. Compensation plans vary much more in this industry because it changes often due to emerging languages and competitive talent. Factors like the specific industry should be considered as you begin to form your plan.

More Than Compensation

While compensation is a major factor in employee retention and costs, there are other components which can help provide value to employees. Along with a mutual understanding of pay between managers and employees, matching the plan with the company culture is also important. While it’s especially true for small businesses, if the compensation criteria and values don’t match the culture of the company, employees may jump ship to another company.

If your company culture values transparency and honesty, yet the compensation plan doesn’t make sense and your employees aren’t given reasonable explanations for their pay, it can be unattractive. Matching a logical plan that supports the culture adds benefits for employees because they will enjoy what they do and understand their pay for doing it.

Employees enjoy recognition as well, especially when they put more effort into their work. This can be done in multiple ways like perks (free lunch, recognition awards, shoutouts, monthly awards, etc.) or verbal praise.

At the Branch, we meet up the last hour on Fridays, drink wine, eat cheese and call out someone we feel proud of for the week. Then we receive praise for something we’ve done by the head honcho. This makes every employee feel valued by management and their team. Recognition doesn’t have to be extravagant or super expensive, but it just needs to work and give value to employees.

Tips When Creating a Compensation Plan

Creating a compensation plan isn’t going to be easy, but here are some tips every company should use:

  • Get employee feedback and use some of it, but make them understand that creating the plan will not be a democratic process.
  • Make the plan simple. It should be easy to explain and understand.
  • Provide support to employees who don’t feel satisfied. Give them direction on where they are and how they can get to where they want to be. Use company metrics, costs, performance reviews and any other data to back up the reasoning of their pay. Don’t deter them, but give them the support they need to reach their goal.

There’s no one-size fits all plan. Beyond company size and phase, things like culture need to be considered when creating a plan. Plans should be clear to understand and easy enough to explain. If it’s done right, employees should feel motivated and ambitious to reach their goals, gain valuable skills, and qualify for higher paying positions.

Check out these resources on pay and employees

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