Compensation Plan

Free compensation plan template plus a detailed guide on how to create your own.

By Paul Peters, Mar 11, 2024

Paul Peters is the Chief Editor of Betterteam. He's a former print journalist and small business owner and has written articles for a variety of newspapers, magazines and websites.

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.

We have created a detailed guide on how to create a compensation plan as well as a free template that you can download and use straight away.

Compensation Plan Template Download

Download this free compensation plan template in MS Word format and start using it straight away.

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How to Create a Compensation Plan:

1. List all the positions in your company.

Consider how many employees your business will need and what positions are essential to business operations. List every position necessary to get started as well as those positions that will become available as the company grows.

2. Create a job description for each position.

You will need a job description for every position in your company. You can get ideas for job descriptions by researching your competitors, or you can create one using our job description template.

3. Determine the appropriate amount of compensation.

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

4. Factor in overtime, commission, bonuses, and paid time off.

In addition to regular salary or hourly wages, consider if you will be offering overtime, commission, signing bonuses, raises, and other forms of direct compensation.

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

Popular benefits include health insurance, dental care, and workers' compensation. Some employers also offer flexible hours, tuition reimbursement, meal plans, gym memberships, and more. Figure out what benefits you can afford. You may want to look into voluntary benefits as an affordable option.

6. Determine the retirement options you will provide.

Depending on the size of your company and the number of employees, you may want to provide additional retirement planning options. Common retirement options include employee pensions, 401(k), stock options, and profit sharing.

7. Detail your decisions in a document.

After you have determined the compensation for each position, how much it will increase, and what incentives and benefits you will offer, list these in an official document. The compensation plan document can be shared with employees upon hiring.

Additional Resources:

Employee Contract Template

An employee contract template for new hires, including a free download.

FAQs:

How should I do a compensation plan?

List the different positions in your company.
Create a job description for each position.
Determine your budget for compensation, including overtime, commission, and raises.
List the incentives and benefits you will offer.
Decide which retirement options you will provide.
Detail your decision in an official compensation plan document.

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.

Where can I find a compensation plan template?

We have created a free compensation plan template in MS Word that you can download and make your own.

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

A deferred compensation plan is simply an agreement between an employer and an employee about how compensation will be deferred and paid out at a later date. A 401(k), 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.

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 nonqualified deferred compensation plan?

A nonqualified deferred compensation plan (NQDC) is a type of optional deferred compensation that is not registered in the way that a 401(k) 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.