How to Design a Compensation Plan in 7 Steps

Paying your employees competitively and equitably is critical in order to retain top talent. While we’d like to believe that our employees don’t know what others are making, we would be woefully mistaken. If an employee perceives that there is a significant pay difference between his or her position and a similar one, dissatisfaction and turnover will increase—and you may even have a potential wage claim on your hands. Compensation has a lot of moving parts, so create a successful compensation plan by focusing on these seven things:

  1. Compensation strategy: Your philosophy is important as you compare salaries in the marketplace. Do you want to pay at the top of your market or somewhere in the middle? Are you okay being considered one of the lowest-paying organizations?
  2. Job descriptions: These don’t have to be long documents, but must explain the key job responsibilities well so that you’re matching positions properly when you do your market surveys.
  3. Formal pay structure: As a compensation pro, you need to be able to explain pay decisions, and a formal system can help. Whether it’s a system of grades or a documentation of current positions, a formal system will help you provide consistency to your employees, as well as help your supervisors and managers become knowledgeable about how the compensation system works. They are your link to your employees.
  4. Exempt/non-exempt evaluation: This is critical regardless of your organization’s size, as the Department of Labor is now looking more closely to ensure proper employee classification. Remember that it is job responsibilities—not job titles—that determine the classification.
  5. Surveys: Conduct regular surveys to understand where you fall in the marketplace for compensation. From developing relationships with others in your competitive area to participating in external salary surveys to administering one of your own, find out what is considered low pay, average and above average to keep up.
  6. New positions: If you have a formal pay structure, make sure you have a process in place to incorporate new positions within the organization. The Department of Labor wants to see that you have an effective, consistent, regularly used process for making decisions around the placement of positions in your salary structure.
  7. Incentive plans: If you create incentive plans for your employees, clearly define what behaviors are rewarded and conduct regular tests to ensure those behaviors are actually being rewarded. Get creative—they don’t have to be expensive or made up of all cash!

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