How To Design An Employee Compensation Plan


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We talked a bit about how to come up with a salary range for an individual employee in our article on how to write a job description. In today’s article we are going to continue our series on how to hire and manager with a deeper dive into pay and how to come up with a comprehensive plan for this component of your company’s compensation policy. So let’s get started!

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How To Design An Employee Compensation Plan

  1. 1. How to design an employee compensation plan by
  2. 2. Pay is only One component
  3. 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. 4. •Opportunity to learn and grow within the organization. •Increased Responsibility •Achievement •Recognition
  5. 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. 6. Step 1: Establish a pay philosophy
  7. 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. 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:
  9. 9. • Employees • Clients • Owners
  10. 10. Step 2: Find out how much the competition is paying
  11. 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. 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. 13. After that, you can find out what others that compete for the same talent are paying. The primary ways to do this:
  14. 14. • Talk to people within your industry and ask them what they are paying. • Use’s salary calculator and advanced search feature at • Look for salary surveys online by searching “Your Industry + Salary Survey” on Google.
  15. 15. Step 3: Set the salary level/ per hour rate
  16. 16. Since competitive compensation is not a motivator for higher performance, we generally recommend paying salaries that are in line with competition.
  17. 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. 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. 19. Step 4: Set your performance Pay components
  20. 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. 21. For more on the dangers of performance based pay see Dan Pink’s video.
  22. 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. 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
  24. 24. Step 5: raises
  25. 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. 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. 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. 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
  29. 29. The bottom line
  30. 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. 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.
  32. 32. And Finally...
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