Compensation plans, also referred to as total compensation plans or compensation programs, encompass all of the compensatory components of a company’s strategy. In addition to salary, compensation can include health benefits, retirement benefits, tuition reimbursement, bonuses or any other non-salary benefit that is considered part of a total compensation package. Show
The Two Types of CompensationThere are two types of compensation: direct and indirect. Direct compensation pertains to monetary benefits, such as salary (for exempt employees), an hourly wage (for non-exempt employees), commission and bonus pay. Indirect compensation is considered the “benefits” of a compensation plan. Indirect compensation includes medical, dental, vision and/or life insurance, short- and long-term disability and employee retirement programs like 401(k) plans. Other examples of indirect compensation can include paid time off, education benefits, flexible work schedules, company car, career development, referral bonuses, additional retirement benefits and more. Direct compensation is earned in return for work performed. Indirect compensation is the added benefits that contribute to your organization’s company culture and enable you to attract and retain qualified candidates and loyal, productive employees. A good compensation plan encompasses a blend of direct and indirect compensation. What is a compensation strategy?According to the Society for Human Resources Management (SHRM), a well-designed compensation plan supports the organization’s strategic plan and initiatives, business goals, competitive outlook, operating objectives and compensation and total reward strategies. This is also known as a compensation philosophy. As such, most compensation plans are designed to follow basic tenets:
Why do companies need a strategic approach to their compensation program?Compensation programs are the catalyst for attracting and retaining employees. According to PayScale’s 2020 Compensation Best Practices Report, more organizations are working toward building “an employer brand, which includes a more strategic approach to compensation and career pathing as well as better benefits and more varied and incentivizing ways to reward performance.” What are the steps to creating a compensation strategy?Look at Your Company’s GoalsThe first step in creating a compensation strategy is to look at your own company’s mission, values and vision. What is most important to your company? Are you looking for immediate profitability, or are you wanting to focus on the future and start building a strong employee base to grow ever time? Are you actively recruiting to attract and retain the best talent? This could determine how you position benefits, such as pay incentives and retirement plans. Knowing your company’s goals is also important when creating employee incentive plans or bonus plans. Do you want to tie incentives to new business acquired, such as a sales commission? Or do you want incentives to reflect the company’s growth, like a yearly bonus based on profitability? Do Research – ExternallySHRM suggests purchasing a salary survey from a survey organization or commissioning a customized salary survey through a reputable consulting company or trade organization. You can also use data from the Bureau of Labor Statistics. Reviewing data from salary surveys will give you a good benchmark as you work to create your own company strategy. Check Out Your CompetitorsFind out what companies in similar industries, structure and number of employees offer. Other than purchasing data, you can research sites like Glassdoor and LinkedIn for general information. These are also good resources to gauge employee expectations and employee engagement based on employee reviews. Perform Salary AuditsMarkets change; therefore, it is important to perform routine salary audits to ensure salary ranges reflect current compensation trends in a particular industry. When performing an audit, the goal is to determine how competitive those particular jobs are and what the external market is demanding. Review the LawsIt’s important to ensure your compensation plans are in compliance with state, federal and employment laws as well as the Equal Employment Opportunity Commission (EEOC). In addition, ensure that it is in line with company policies and fair to employees across the board. Do Research – InternallyOnce you’ve researched the market to determine a benchmark, now it’s time to look inward at how your company currently looks and what’s offered. Take a Look at Job Positions and Job DescriptionsAre they in line with other titles and responsibilities within your industry as far as titles, job responsibilities and qualifications? How often are they updated? Do employees have a voice in the job descriptions? Review Your Current Compensation PackageWhen reviewing your compensation package, there’s many questions to consider. Has your compensation program been structured the same for years? What are some of the pros and cons of your current program? Have you ever solicited employee input via surveys or other feedback to determine what’s important to them in a compensation plan? Is your current plan effective to attract and retain employees? Determine the BudgetHow does the cost of your compensation package align with the overall company budget? If your company has a tendency to experience regular down times, an overly ambitious compensation package may come back to bite you. Start within your means; you can always add a benefit later. Develop Pay StructuresPay structures include determining job grades as well as salary ranges. Job grades allow employers the flexibility and a framework to ensure equivalent jobs are paid equally. They also show employees a pathway to advancement. Pay ranges are just that – the range minimums and maximums for each job. Pay ranges give employers the flexibility to support experience, performance and career growth. Explore Total RewardsMany organizations are turning to positioning their compensation packages as total rewards. Total rewards encompass not only base pay, but other benefits such as stock options, health insurance, dental and vision benefits, retirement contributions, life insurance, paid time off, etc. They can also include perks like performance bonuses, company-sponsored training, employee wellness programs, workplace flexibility options, identity theft protection plans, employee discount programs – things not usually included in compensation or benefits discussions. Total rewards programs have been proven to be an attractive recruitment tool in addition to going a long way toward attracting and retaining employees. In addition, total rewards have been linked to an increase in overall employee performance and satisfaction. Ensure You Have Management Buy-InOnce you develop the compensation plan, make sure you have acceptance from leadership. According to PayScale’s Compensation Best Practices Report, it’s important to convey to them how your plan ties closely to your business priorities, how increases (or decreases) to payroll will affect the bottom line and the costs of not having a compensation plan in place. Important Factors to RememberMake Sure the Compensation Plan Unifies Rather Than Divides EmployeesIf your compensation program isn’t fair and equitable, you’ll find yourself with disgruntled employees who will either cast a negative tone within your organization or ultimately leave. While you’ll always have employees who disagree, ensuring your compensation plan meets, if not exceeds, industry standards will go a long way toward employee satisfaction, better performance and reduced turnover. Communicate It Properly and Keep Employees In the LoopEmployees should be kept informed about changes or updates to your company compensation plan – and transparency is key. Use multiple methods to communicate the program to employees, including organizational charts, internal emails, intranet, in-person discussions or webinars with the human resources department, posted information throughout the company, etc. Also, consider keeping a running list of FAQs that you can add to over time. Ensure employees have a point of contact or method of asking questions, whether that is about the overall package or a specific question related to them. Conduct periodic surveys to gain feedback from employees for future modifications to the compensation plan. Finally, be sure to have detailed materials available for recruiting and onboarding. Designing a compensation strategy and subsequent plan can be a long process. It’s important to employ human resources professionals who have experience in compensation planning and ensure they have the time, budget and resources to gather the information necessary to construct an employee compensation plan that will enable you to be a competitive organization in your industry and attract and retain the best talent. Contact our HR Services team for more information. What considerations should you make when developing a compensation plan?A number of factors should be taken into consideration during the development phase of the compensation plan , including the company's size, financial position, industry and objectives. Also important are market salary data and the level of complexity involved in finding the right talent.
What are the 4 steps you will follow to develop a total compensation strategy?Developing A Total Compensation Strategy: Four Steps. Competitive Dynamics – Understand the Business.. Changing customer needs, Competitors' actions.. Changing labor market conditions& Laws.. Globalization alignment with global Culture/values.. Cultural differences, changing workforce, demographics, expectations, etc.. What are the three criteria to evaluate the compensation strategy?Three General Compensation Strategies To Consider
There are three main compensation strategies to consider when setting salary rates: leading, lagging and meeting the market.
What are the major elements of an effective strategic compensation system?A compensation strategy typically includes four key components:. Base pay. Base pay refers to an employee's salary or hourly pay for their particular job. ... . Incentive pay. ... . Employee benefits. ... . Time off.. |