Compensation plans include understanding what the marketplace is offering and establishing your salary levels or pay rates for each position in your company. Compensation planning must be done carefully and strategically to attract and retain the best talent, especially in tight, competitive labor markets and in certain industries.

1. Designing Employee Compensation
Plan for Small Business

2. EMPLOYEE COMPENSATION PLAN
A COMPENSATION PLAN REFERS TO ALL
THE COMPONENTS OF
A COMPENSATION PACKAGE (WAGES,
SALARIES, AND BENEFITS), THE MANNER
IN WHICH IT WILL BE PAID, AND FOR
WHAT PURPOSE EMPLOYEES RECEIVE
BONUSES, SALARY INCREASES, AND
INCENTIVES. BENEFITS OF HAVING A
COMPENSATION PLAN.

3. DESIGN FOR THE EMPLOYEE COMPENSATION PLAN FOR
SMALL BUSINESS
Establish a Pay Philosophy
How Much is Your Competition is Paying
Set the Salary Level or Hourly Pay Rate
Create Incentive Compensation Plan Components
Pay Raises
Choose Your Payroll Software
The Bottom Line

4. Establish a Pay Philosophy for the Business:
This is the initial phase, where you should ask yourself questions such as:
 Do I want to pay more or less than those companies that compete with me
for talent? (your location and industry will help determine your answer to
this question)
 Do I want to give a lot of other benefits, like health insurance, or fewer
benefits so I can pay more in salary?
 How do I want to incentivize performance? Do I want to have a bonus or
commission plan and create an incentive compensation plan?
 Will everyone be on the same compensation plan or will managers, my
business partners or fellow owners, and I be on a different plan? Why or
why not?

5. How Much is other Businesses are Paying in the market?
Once you have an outline of the duties and responsibility level of each position,
then you can find out what other businesses who are offering similar positions are
paying.
There are three primary ways to do this:
1.Talk to people within your industry and ask them what they are paying. Make sure
you describe the duties and responsibilities of the position so you can compare
apples to apples. You can also use a forum on LinkedIn or Internet to do the same.
2.Use Indeed.com’s salary calculator or a website like PayScale, Salary.com, or
Glassdoor to compare salaries.
3.Look for salary surveys online by searching “Your Industry + Salary Survey” on
Google.

6. Set the Salary Level or Hourly Pay Rate for your Business:
Competitive compensation is necessary for an employee to be happy, but it is not
always a motivator for better performance.
Exceptions to this rule would be:
• If you feel a role is particularly valuable to your firm and warrants paying above
the competition.
• If you have a role that is not very important, and you feel you can pay less.
• If you have a strong performance incentive or bonus system where the
employee can receive higher compensation based on good performance.

7. Create Incentive Compensation Plan Components for
your Business:
Paying for performance is a controversial subject.
Think about your company and its culture, or the culture you are trying to create. For
example:
• Select a situation where the 10% hike is minimum awarded every year for their
performance?
• Do you want a community-like culture where sales and achievements are shared
among teams or all employees together (i.e. company-based performance bonuses)?
• Do you want to have a combination of the two, where you perhaps have contests for
small bonuses on a weekly or monthly basis?

8. Think about the Raising the Pay for the Business:
Once you have your base level of compensation set (salary or hourly rate
including incentives) you can set the budgeting for pay raises to reward your top
performers and make sure that your salary standards are maintained.
Create some sort of ranking system and make sure that employees are being
compensated in alignment with their ranking.
While this is easy to do with sales positions, you might find trouble doing this
with, say, your accounting team, which is why we recommend implementing
performance management as a way to be fair with your employees.

9. Selection of Payroll Software for the Business:
After setting up the compensation strategy, it’s time to make sure you have the
systems in place to successfully implement that strategy. You will need to set up
several components, including state and federal tax forms and workers
compensation coverage.
While selecting the Payroll Software certain points can be considered, as follows: -
 Define the need of the Business for the Payroll.
 Checkout for required level of analysis.
 Set standards with payroll legislation.
 Research and examine payroll software features.
 Use some free trials to get use to the Payroll Software’s.
 Fix a payroll budget.
 Read through customer reviews.
 Select a payroll software.

10. The Bottom Line
Designing a Compensation Plan for the Business is a step-by-step process that any
company can follow to design the pay portion of their compensation package.
You can give it one final check over to make sure it meets the objectives of the
Business:
• Is it simple and easy for everyone to understand?
• Does it align employee, client, and owner interests?
• Will it be seen as fair by the employee when comparing similar jobs both
internally and externally?
• Does it align with your budget and cultural needs?
Note: Compensation plan also needs to be in alignment with federal and state
labor Laws.