What Are the Components for a Compensation Plan?

How Do I Develop a Compensation Plan to Protect My Company?

Has your company reached the point where it needs a formal compensation plan but you aren’t sure how to create one? You may realize the value of an established compensation policy for employee retention. And, even more, you likely aware that you need to explain and back up your compensation decisions today more than ever, particularly any differences between pay for people in the same position.

As an HR professional at your company, it’s time for you to get informed and take the lead. How do you start the process of developing a formal compensation plan?

Below you will find a list of recommended steps to take, as well as advice on how to avoid difficulties or possible roadblocks when developing your company’s internal pay policies. Remember, a formal compensation plan is an ever evolving document that your company should be reviewing and improving at all times. To get started, here are some key first steps.

Get the Right People Involved

How do you negotiate changes in your current employees’ salaries? View PayScale’s webinar Mission Impossible: Managing and Mitigating Internal Pay Issues to make sure you’re maximizing paying your employees both fairly and effectively.

From the beginning, include the input of the key players at your company. These people include anyone who has the potential to derail this project in the future. This step can be accomplished by sending out a questionnaire, or by holding meetings with certain groups or individual decision makers.

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Once you’ve gathered that information, compose a document that clearly articulates the input that you have collected. This valuable feedback will serve as a foundation for the development of your compensation policy, so you’ll want to make sure that it is clearly and accurately documented and based on input from your key players. Trying to tackle this type of project without key leader input and buy in could be a project buster!

How to Develop Your Compensation Plan

The following list will walk you through the significant points in developing a formal compensation plan.

  1. Create a formal compensation philosophy that will serve as a framework for the development of your policy. It should reflect your company’s core values. Document the philosophy so it is available throughout the process as a reference.
  2. Determine your pay policies in regard to hiring, promotion, and merit or market adjustments. Ensure that your pay policies are consistent throughout all levels of employment at your company and embody a system of checks and balances for pay decisions.
  3. Communicate with your employees about the company’s pay policies and make sure they are informed of the steps the company takes in order to ensure equitable pay practices.
  4. Understand the numbers that you’re working with in regard to compensation. Perform an annual external market analysis that helps you set realistic, up-to-date salary ranges for your specific market and location. Once you’re confident in the salary range for a job position, you can review individual employee’s compa-ratios and make sure they are equitable. Include a policy for identifying and red-circling over-paid employees.
  5. Consider establishing a pay-for-performance culture to drive compensation decision making. A compensation system that is performance-based encourages employees with rewards and goals that are objective and measurable. Make sure managers are trained on how to properly evaluate performance. Employees can be rewarded with forms of cash compensation that are an alternative to their base salaries—like bonuses and incentives.
  6. Know how to have hard conversations about pay. If an employee comes to you directly to discuss their salary, request that they speak with their manager initially, rather than you (as the HR professional). If the employee is not comfortable speaking with their manager alone, then you can invite the manager to include you in the discussion. Acknowledge the concerns of the employee and explain the company’s goal to ensure pay equity. Next, have the employee confirm that their job description accurately represents the KSAs of the position, and then request an updated resume that includes education, certifications and skills. Lastly, discuss with the employee the company’s policies for pay adjustments and how it may affect their situation.

Be Consistent

Once you have your formal compensation plan established and are putting it into practice, consistent compliance to your documented pay practices and policies is your best defense against charges of pay inequity from employees and outside agencies. Wherever your company’s compensation policy is not followed, document the justifications for the decision with relevant information. And, continue to communicate with employees about how the company is working towards pay equity.

By formalizing your compensation strategy, you elevate your company to one that is working to be the best in its industry in every way. That is a great message to send potential employees and your competitors.


Stacey Carroll

Director of Customer Service and Education at PayScale.com

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