What is a compensation plan?

A compensation plan is a payment package designed to attract and retain employees. A basic compensation package consists solely of a salary or wages. A more comprehensive compensation package could include additional benefits such as bonuses, perks, commission, health insurance, or retirement investments. Compensation plans involve offering fair and competitive payments that simultaneously align with the company budget and promote business success.

What are the different types of compensation? 

It’s critical to build your compensation plan according to your budget and resources. This is especially important when structuring a competitive compensation program with direct and indirect compensation components. Let’s unpack the differences between the two.

Direct compensation

Direct compensation refers to the financial payments given to people in exchange for time worked or results obtained. Examples of direct compensation include salaries, bonuses, and equity. 

  • Salary. Salaries are the bedrock of your company’s compensation plan. They can align with local costs of labor or reflect national pay rates for similar roles. We recommend keeping geography, job responsibilities, cost of living, and external market data in mind when calculating salaries. 
  • Bonuses. Bonuses are additional compensation often used to reward team members for high performance. When calculating bonuses, it’s useful to consider the following three questions: Who is eligible for a bonus? Which targets should they hit to earn a bonus? What should our payment structure look like? 
  • Equity. Equity compensation offers people a stake, or partial ownership, in the company. This benefits an organization by incentivizing talented members of the team to remain with the company. It also encourages high performance—if the company succeeds, everyone succeeds.

Indirect compensation 

To keep pace with an ever-evolving work landscape, many companies have adopted holistic, people-driven strategies to improve their company culture and attract and retain talent. Competitive salaries are rarely enough anymore. 

To tackle the “Great Resignation,” many companies now offer a variety of indirect compensation benefits and development opportunities. Indirect compensation varies from company to company, and often includes: 

  • Medical insurance
  • Dental and vision coverage
  • Retirement benefits
  • Wellness benefits (e.g., gym memberships)
  • Educational incentives
  • Mental health services (e.g., therapy or counseling)
  • Volunteer opportunities
  • Flexible spending accounts (FSA)
  • Hybrid working arrangements 
  • Paid time off (PTO)
  • Disability insurance (DI)
  • Paid holidays
  • Childcare initiatives
  • Relocation stipends or housing options
  • Reimbursement for work-from-home costs
  • Commuter benefits

Why should HR leaders care about compensation plans? 

Compensation packages that adequately reward people for their hard work can drive business profit. An effective compensation plan:

  • Illustrates company integrity and transparency 
  • Assists in attracting and retaining top talent
  • Boosts employee motivation and loyalty
  • Reduces turnover and hiring expenses

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How can you create and implement a competitive compensation plan?

HR professionals can incorporate these practices to develop a compensation plan that attracts talent and boosts retention:

  • Do the research. HR professionals should build a fair compensation plan based on external market analysis and internal company data. Through benchmarking with similar organizations, HR can determine how to create an appealing payment package. Satisfying employee expectations gives the employer a competitive edge in recruiting and retaining talent.
  • Design a compensation philosophy. HR leaders should outline the company’s underlying approach towards compensation. Outlining the purpose of the compensation plan places the compensation program in context, promoting alignment with objectives and company values. The written philosophy usually includes crucial factors such as a pay-for-performance strategy, a method for the establishment, maintenance, and management, and the compensation framework.
  • Explain the compensation plan to employees. Communicating the components of the compensation plan to personnel demonstrates integrity and nurtures trust in the employer. When people understand the breakdown of their payment plan, they can feel comfortable and confident investing their full efforts into their work. 
  • Draft a straightforward employment contract. The compensation plan’s terms and conditions should be simple and easy to understand, both for the employer and employee. A clear employment contract promotes respectful employee-employer relations while also helping avoid disagreements and legal misconduct. During the hiring process, HR leaders should ensure that both parties acknowledge the payment terms.  
  • Approach each position holistically. Examine each job and its different components: What skills and educational levels does the job require? What are the job conditions? How does each job compare to others in value? Analyzing each position in relation to other roles can provide HR professionals with a broad perspective and deep understanding of each job’s overall worth.

Compensation plan template example 

Compensation plans are as unique as the organizations who create them. But below is an example:

Basic information
Company name and address
Employee name and ID
Employee position
Employee department
Direct compensation
Hourly rate
Hourly rate 1.5 overtime
Hourly rate double overtime
Non-exempt 1.5 overtime
Non-exempt double overtime
Commission basis
Commission rate (either percentage or fixed rate)
Payment delay
Sign-on bonuses
Salary-based bonuses
Bonuses based on department goals
Referral bonuses
Holiday bonuses
Quarterly or annual bonuses
Retention bonuses
Health insurance
Family and medical leave
Disability and workers’ compensation
Dental care plan
Hazard pay
Severance pay
Other benefits

How can a thorough compensation plan improve company culture? 

An enticing, competitive compensation plan demonstrates that the organization values its people. When people know their employer appreciates them, they are more likely to feel motivated and engaged and exhibit higher levels of job satisfaction. A fair compensation plan can nurture respect between people and their employers, setting the foundation for a positive atmosphere and thriving company culture. 

How can HRMS help with compensation planning?

Human resource management systems are an invaluable asset for HR leaders when creating a compensation plan.

HRMS can help: 

  • Collate a vast amount of data in one place, streamlining the compensation planning process.
  • Analyze a variety of metrics, such as geography, cost of living, salary bands, bonus structures, equity grants, and benefits to calculate salary targets. 
  • Introduce impartiality and remove biases from the decision-making process. Automated processing can help companies on their journeys towards equitable pay.
  • Monitoring types of stock, grant timing, and vesting schedules given to team members as equity compensation.