Compensation Plan

A detailed guide to writing a compensation plan.

By Paul Peters, Updated Jan 25, 2024

A compensation plan is a complete package that details your employees' wages, salaries, benefits, and terms of payment. Compensation plans include details about bonuses, incentives and commissions that may be paid to employees. In addition, compensation plans may detail scheduled raises and increases for years of service.

Below you will find steps related to how you can create your own compensation plan, as well as some frequently asked questions regarding compensation plans.

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How to Create a Compensation Plan:

1. Start from scratch.

Think about how many employees your business will need and what positions are essential to your business operations. Write all of these job titles down.

2. Create a job description for each position.

You should have full job descriptions for every position in your company. You can get ideas for job descriptions by researching your competitors, or you can use one of our job description templates.

3. Determine the appropriate amount of compensation.

While you are researching your competitors, pay attention to how much compensation they are offering for the various positions you need to fill and what special incentives are common. This will give you an idea of what you need to offer to attract the best talent. Be sure to look into OTE or on-target earnings.

4. Factor in overtime.

Maybe some of your employees will have to work overtime, or maybe they won't. If they do, add this into your compensation budget, because overtime costs more and could affect your bottom line.

5. Identify the benefits and incentives that you will provide.

Popular benefits include things like basic health insurance, vision care, and dental care. Some employers also offer things like gym memberships, technology stipends, and so forth. Figure out what benefits you can afford. You may want to look into voluntary benefits as an affordable option.

As far as incentives go, think about what incentives will motivate your workforce and fit into your budget. It is common for sales compensation plans to have incentives for meeting sales targets, such as bonus payments or increased commission payment rates.

6. Detail your decisions in a document.

After you have determined the compensation for each position, how much it will increase, what incentives and benefits you will offer, etc., you can put all of these details down in one document. By having all of this information in one document, you can share your compensation plan with your employees when they are hired.

Additional Resources.

What is an Essential Worker?

Classifying essential workers, their responsibilities, and state requirements.

FAQs:

How should I do a Compensation Plan?

Research competing employers.
Determine your budget for compensation, benefits, and incentives.
Choose incentives and benefits.
Review compensation packages for each position.
Carefully document your compensation plan.

What is the difference between a Deferred Compensation Plan and a 401k?

A deferred compensation plan is simply an agreement between an employer and an employee about how compensation will be deferred and paid out on a later date. A 401k, on the other hand, is a retirement savings plan that is registered with the government and contributed to by the employer.

What represents an employee's total compensation plan?

Hourly wage/annual salary.
Group health benefits.
Incentives and bonuses.
Retirement savings.

How do corporate compensation plans structure their raises?

Most corporate compensation plans specify that employees will be entitled to a raise on a yearly basis following a review of their performance and their salary. Raises are usually incremental and represent a small percentage of the employee's current compensation.

What is a deferred compensation plan?

A deferred compensation plan is a special agreement between an employer and an employee where it is stated that a portion of the employee's earned compensation will be paid out at a later date. Examples of this include a pension or employee stock options.

How do sales compensation plans account for sales commissions?

Sales compensation plans are used in businesses where the majority of an employee's earnings are paid out in correlation to their sales. This includes businesses like car dealerships. In cases like this, employees will earn a percentage of the sale price.

What is a non-qualified deferred compensation plan?

A non-qualified deferred compensation plan (NQDC) is a type of optional deferred compensation that is not registered in the way that a 401k or another investment might be. Someone might want an NQDC if they are nearing retirement and would like to defer the taxes on a portion of their income.