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How to design an employee
compensation plan
by FitSmallBusiness.com
Pay is only One component
In 1959 Frederick Herzberg
changed the way we think about
compensation. His work
suggested that a different set of
factors actually motivated people
to do a better job. Things such as:
•Opportunity

to learn and
grow within the organization.
•Increased Responsibility
•Achievement
•Recognition
With this in mind a “Total
Compensation Philosophy” should
focus on designing a full package
compromised of:
1. Dollar Amount of Pay
2. Benefits
3. The Motivating Factors listed in the
last slide.
Step 1: Establish a pay philosophy
In this step you should ask
yourself questions such as:

• Do I want to pay more or less than

those companies that compete with me
for talent?
• Do I want to give a lot of other benefits
besides pay, or less benefits so I can pay
more?
• How do I want to incentivize

performance?
• Will owners adhere to the same
compensation plan as employees?
Throughout each stage of developing
your total compensation plan, you should
check if the plan serves all three of the
primary stakeholders in the company:
• Employees
• Clients
• Owners
Step 2: Find out how much the
competition is paying
If you haven’t done so already,
you’ll need create a job
description for each of the
positions in your company so you
can compere what you are
paying with the competition.
When writing the job description
think about:
•What is the scope and major responsibilities
•How complex is it and what is its impact on

the company.
•What are the knowledge, skills and
competencies required to perform the job.
•What are the education levels and
experience required.
After that, you can find out
what others that compete for
the same talent are paying.
The primary ways to do this:
• Talk to people within your industry
and ask them what they are paying.
• Use indeed.com’s salary calculator
and advanced search feature at
Carrierbuilder.com
• Look for salary surveys online by
searching “Your Industry + Salary
Survey” on Google.
Step 3: Set the salary level/
per hour rate
Since competitive compensation
is not a motivator for higher
performance, we generally
recommend paying salaries that
are in line with competition.
Unless you feel a role is
particularly valuable to your firm
and warrants paying above the
competition, or that it is not very
important and therefore you can
pay less.
Keep in mind that Internally,
salary needs to be fair in the
context of the responsibilities
and experience required to do
this job versus others.
Step 4: Set your performance Pay
components
With “knowledge” workers, where
creativity is a large part of their jobs,
paying for performance is not the
best.
For these types of workers, providing
them with autonomy, mastery, and
purpose has proved to be a much
better motivator to performance
based pay.
For more on the dangers of
performance based pay see Dan Pink’s
video.
If you still want to implement a
performance based pay program, here
are examples of the types of things
you want to benchmark against:

• Improving processes and/or results.
• Enhancing customer satisfaction.
• Formulating and implementing new
products.
• Providing innovation and cost-savings to

operational methods.
• Performing at a significantly higher level of
complexity for a specified period of time due
to workload demand or similar circumstance.
For more on Performance Based Pay see this
paper by Oracle and this article from
Worldatwork.com
Step 5: raises
The first thing you want to do when
budgeting for raises is make sure that
your job descriptions and salary
ranges are up to date. If not you
should raise salaries across the board
to get your employees back in line
with the competition.
Then you should make sure that
pay is fair internally as well. To do
this rank employees who fall under
each job category from best to
worst performer, and make sure no
one is being paid unfairly in
relation to peers.
After making sure that pay
practices are inline from both an
external and internal standpoint,
you can look at rewarding top
performers with raises.
Keep in mind that it’s about
percentages, not dollar amount.
Anywhere from 0 - 5% is the norm
for most companies, and
companies rarely raise someone
more than 10% in any one year.
For more on how to handle raises check this article
The bottom line
With these steps you can design a
pay portion of your employee’s
compensation packages. After you
design it you should make sure
that it meets the following points.
• Is simple and easy for everyone to
understand

• Aligns employee, client, and owner
interests

• Will be seen as fair by the employee
when comparing similar jobs both
internally and externally.
And Finally...
To learn how to be a more successful
entrepreneur visit us at....
(Click The Link Below)

www.FitsmallBusiness.com
(Click The Link Below)

www.FitsmallBusiness.com
(Click The Link Below)

www.FitsmallBusiness.com

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How To Design An Employee Compensation Plan

  • 1. How to design an employee compensation plan by FitSmallBusiness.com
  • 2. Pay is only One component
  • 3. In 1959 Frederick Herzberg changed the way we think about compensation. His work suggested that a different set of factors actually motivated people to do a better job. Things such as:
  • 4. •Opportunity to learn and grow within the organization. •Increased Responsibility •Achievement •Recognition
  • 5. With this in mind a “Total Compensation Philosophy” should focus on designing a full package compromised of: 1. Dollar Amount of Pay 2. Benefits 3. The Motivating Factors listed in the last slide.
  • 6. Step 1: Establish a pay philosophy
  • 7. In this step you should ask yourself questions such as: • Do I want to pay more or less than those companies that compete with me for talent? • Do I want to give a lot of other benefits besides pay, or less benefits so I can pay more?
  • 8. • How do I want to incentivize performance? • Will owners adhere to the same compensation plan as employees? Throughout each stage of developing your total compensation plan, you should check if the plan serves all three of the primary stakeholders in the company:
  • 10. Step 2: Find out how much the competition is paying
  • 11. If you haven’t done so already, you’ll need create a job description for each of the positions in your company so you can compere what you are paying with the competition.
  • 12. When writing the job description think about: •What is the scope and major responsibilities •How complex is it and what is its impact on the company. •What are the knowledge, skills and competencies required to perform the job. •What are the education levels and experience required.
  • 13. After that, you can find out what others that compete for the same talent are paying. The primary ways to do this:
  • 14. • Talk to people within your industry and ask them what they are paying. • Use indeed.com’s salary calculator and advanced search feature at Carrierbuilder.com • Look for salary surveys online by searching “Your Industry + Salary Survey” on Google.
  • 15. Step 3: Set the salary level/ per hour rate
  • 16. Since competitive compensation is not a motivator for higher performance, we generally recommend paying salaries that are in line with competition.
  • 17. Unless you feel a role is particularly valuable to your firm and warrants paying above the competition, or that it is not very important and therefore you can pay less.
  • 18. Keep in mind that Internally, salary needs to be fair in the context of the responsibilities and experience required to do this job versus others.
  • 19. Step 4: Set your performance Pay components
  • 20. With “knowledge” workers, where creativity is a large part of their jobs, paying for performance is not the best. For these types of workers, providing them with autonomy, mastery, and purpose has proved to be a much better motivator to performance based pay.
  • 21. For more on the dangers of performance based pay see Dan Pink’s video.
  • 22. If you still want to implement a performance based pay program, here are examples of the types of things you want to benchmark against: • Improving processes and/or results. • Enhancing customer satisfaction. • Formulating and implementing new products.
  • 23. • Providing innovation and cost-savings to operational methods. • Performing at a significantly higher level of complexity for a specified period of time due to workload demand or similar circumstance. For more on Performance Based Pay see this paper by Oracle and this article from Worldatwork.com
  • 25. The first thing you want to do when budgeting for raises is make sure that your job descriptions and salary ranges are up to date. If not you should raise salaries across the board to get your employees back in line with the competition.
  • 26. Then you should make sure that pay is fair internally as well. To do this rank employees who fall under each job category from best to worst performer, and make sure no one is being paid unfairly in relation to peers.
  • 27. After making sure that pay practices are inline from both an external and internal standpoint, you can look at rewarding top performers with raises.
  • 28. Keep in mind that it’s about percentages, not dollar amount. Anywhere from 0 - 5% is the norm for most companies, and companies rarely raise someone more than 10% in any one year. For more on how to handle raises check this article
  • 30. With these steps you can design a pay portion of your employee’s compensation packages. After you design it you should make sure that it meets the following points.
  • 31. • Is simple and easy for everyone to understand • Aligns employee, client, and owner interests • Will be seen as fair by the employee when comparing similar jobs both internally and externally.
  • 33. To learn how to be a more successful entrepreneur visit us at....
  • 34. (Click The Link Below) www.FitsmallBusiness.com
  • 35. (Click The Link Below) www.FitsmallBusiness.com
  • 36. (Click The Link Below) www.FitsmallBusiness.com