How to create a compensation plan: An introductory guide

Determining employee compensation

According to a LinkedIn study, compensation is the most important part of a job description. Moreover, it contributes to employee satisfaction which in turn can lead to a higher employee retention. Therefore, it’s imperative that each company invests the time and effort in creating a compensation plan that works for their employees, so let’s get started.

When we think of employee compensation, we often think of salary first. While that is certainly a major part of it, compensation includes more than just salary. A compensation package typically comprises bonus, commission, and benefits which can be both monetary and non-monetary, such as stock equity, health insurance, paid time off, and so on. In this article, we will take a look at how you can determine each of these components of employee compensation.

1. Who creates a compensation plan?

2. How to set salary for employees?

3. How to offer a raise to your employees?

4. How to give a bonus?

5. Which benefits should you offer?

6. What are the best practices to follow while determining employee compensation?

Who creates a compensation plan?

Compensation is determined by the executive employees and human resources team. From the HR team, this can include a compensation manager.

How to set salaries?

An employee’s salary, which is the fixed part of compensation, can be determined in the following steps.

1. Decide on your compensation philosophy

A compensation philosophy guides how you will make decisions regarding compensation for all employees. Generally, organisations follow three types of compensation philosophy:

I) You can match the market rate and pay as much as your competitors are paying.

II) You can lead the market and pay more than market salary.

III) You can pay less than the market rate.

In case you go with the third option of lagging the market rate, you can supplement the salary with benefits and incentives such as stock equity, flexible working hours, and paid time off.

2. Conduct a job analysis and evaluation

To do this, start with a list of all the roles in your company and detail the responsibilities in each role. Then, group together positions that are similar in the same categories. For example, technical jobs or marketing jobs.

In addition to this, write the skills, experience, and education needed to perform the jobs. Lastly, rank the jobs in the same category according to their importance in the company. This is called a job grade. For example:

Product management 

Product manager I

Product manager II

3. Do market research and create pay grades

Research on how much other companies in your industry are paying for the job roles that exist in your company as well. You can do this by using data sources such as PayScale and Glassdoor, government data, or paid salary data.

Once you have a fair idea of the salary in each role, create pay grades by deciding the minimum and maximum salary you will pay for each job grade. The minimum salary can be the market rate. While deciding the maximum salary, evaluate whether you will be able to sustain the amount in the future. 

Example of a pay grade:

Product manager I: 4 – 6 lac/annum

Product manager II: 5 – 8 lac/annum

As you may have noted, the pay grades can overlap. This allows you to increase an employee’s salary and reward them when they are not ready for a full-fledged promotion.

A pay grade system ensures that employees with a similar skill set and responsibilities are being paid equally. It also helps employees understand how much room is there for growth, which can help you retain current employees and attract the right candidates for the job.

How to offer a raise to your employees?

Pay raises are an essential part of showing your employees that you value them and retaining them. It may also be necessary to review compensation with the changes in the economy. So, let’s discuss how to go about it.

 To begin with, decide on the criteria for offering these raises and the frequency of the raise.

Criteria can include performance, tenure at the company, working hours, and increased responsibilities. As to how often you should be the nicest employer and give that raise, it could be done during yearly reviews or even mid-year if an employee has shown exceptional performance.

How to give a bonus?

Bonus and commission are part of the variable pay. They often serve as an incentive for meeting the desired goals of the company. Let’s find out how you can include it in your compensation strategy.

Giving bonus is a straightforward affair for a position that brings in direct revenue such as salesperson. A percentage of the revenue they make can be their commission. However, what about other roles that do not lead to direct sales such as administrative jobs? In this case, you can distribute a certain percentage of your profit within the company. This percentage could be pre decided and mentioned in the offer letter or based on the company’s performance.

When rewarding employees with a bonus, you can include different types of bonus in your compensation plan:

I) End of year bonus: As the name suggests, this can be given out when the employees meet their yearly goals.

II) Project completion bonus: This can be given to an individual or team on successful completion of a project.

III) Sign-on bonus: This is a bonus that is given while hiring candidates who possess skills that are difficult to hire for.

IV) Spot bonus: This is an on the spot bonus given to employees for an exceptional performance.

Types of bonus offered in 2020 (Source: PayScale report)

While setting goals to get a bonus, make sure that they are attainable for every member or it could have the opposite effect and lead to dissatisfaction.

Other than bonus, your employees may also prefer to be rewarded in the form of benefits.

Which benefits should you offer to your employees?

Since benefits can be unique to an individual, you can create surveys to understand which benefits are most valued by your employees. Some common benefits include health insurance, stock equity, parental leave, paid time off, flexible hours, work from home, learning and development opportunities, and employee discounts.

Once you have created a list of benefits that you offer, make sure that it’s a part of your job description as they can help you stand out from competition and attract more candidates.

Employee compensation best practices

1. Keep an eye on the market rate and review salaries

Make sure that you are keeping up with the competition by gathering updated data about market rate and reviewing salaries accordingly. You can also conduct exit interviews with employees who are leaving to understand if you should be revising your compensation strategy.

2. Conduct a pay equity audit and close the gender gap

Women in India earn 19% less than men. This inequity can translate into a higher attrition rate among women as they might leave for higher salaries elsewhere.

While we are still far from implementing pay transparency, you could conduct a pay equity audit to address this pay inequality.

If you believe that fair compensation is integral to acquiring talent, then you can check out Fresher Jobs on Internshala wherein all the jobs offer a CTC of at least 3 lac per annum to freshers so that they can get the right start to their career.

Image credits: <a href=’https://www.freepik.com/photos/coffee’>Coffee photo created by cookie_studio – www.freepik.com</a>

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