Payroll, Here Are Your Articles for Wednesday, July 07, 2021
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How To Create a Compensation Plan


The easiest way to make sure your company is treating its employees equitably is to draft a formal compensation plan. Compensation plans include salaries, raise schedules, fringe benefits, union perks, employer-provided vendor discounts, and details about bonuses, incentives and commissions for employees.

How do you develop and implement a compensation program?

  • Create an outline with set objectives and targets. How many employees will your business need, and what positions are essential to operations? List all the job titles in your organization.
  • Describe each position. Begin by finding job description templates to work from, then research competitors to find out what each employee does.
  • Do your research and determine what each position pays, how jobs will be classified and what your company's direct compensation strategies will look like. Make sure each position and its pay aligns with a cohesive strategy.
  • Your compensation philosophy may be determined by your competitive standing. Do you want to lead the market or offer modest pay with great benefits?
  • Rank jobs and place them in a matrix to show the tiered pay structures for each department.
  • Develop grades for seniority and opportunities for career advancement.
  • Assign rates of pay and a salary range for each position and job classification. Fine-tune your organizational budget, settling on salaries and hourly rates of pay. If some employees have to work overtime, realize that this can affect your bottom line.
  • Decide what benefits you will offer. Benefits include medical, dental and life insurance; short- and long-term disability; vision care; vacations, paid time off and holidays; flexible working schedules; student loan assistance; education benefits; assistance with child care expenses; and relocation benefits.
  • See whether other employers offer things like gym memberships or technology stipends for company equipment such as laptops and phones. Voluntary benefits are an affordable option.
  • Commissions are based on volume of production or a predefined level of performance. Bonuses are often associated with sales professionals, but they can be paid for increases in company performance or upon hiring when difficult-to-fill positions are snagged by professionals with unique or highly sought-after skills or experience.
  • Get your company's leadership on board to support what you'll be launching.
  • Be sure to communicate clearly so that every employee understands their compensation package. Put all the details in one document to share when employees are hired.
  • Be prepared to make modifications to remain legally compliant and competitive.

Direct vs. Indirect Compensation

Salary, commissions and bonuses are known as direct compensation. Indirect compensation includes benefits and equity-based programs. Any plan must take into account both exempt and nonexempt workers — the latter being entitled to overtime when they meet certain thresholds. Sales staff may be paid partly or entirely by commission. Besides the basics of pay and essential benefits, a strategically designed compensation philosophy includes incentives to motivate your workforce to meet sales targets. 

Keep your compensation plan current, relevant and in accordance with employment laws supporting several important components of your business:

  • Strategic plans.
  • Budgeting and business goals.
  • Industry-competitive challenges.
  • Operating needs.
  • Total reward strategies that support the retention of top talent.

According to the Society for Human Resource Management, maintaining a dynamic and strategic compensation program has three main purposes:

  • You'll demonstrate how compensation supports your business strategy, competitiveness within your industry, operating objectives and staff needs.
  • You will be able to attract qualified candidates to join your company.
  • It motivates employees to perform at high levels, exceeding goals.

A compensation plan is more than just a formal document. It's a product of your company's culture and is indicative of how employees can expect to be rewarded. You'll need consistency, but also some level of flexibility to reflect changing market conditions. If there's a shortage of skilled workers, you may need to pay a higher salary to secure the right fit. The compensation plan reflects your business's position at any given moment.

Ensure your compensation plan is fair for all employees, compliant with state and federal laws and regulations, and fiscally sensitive. Retention and recruitment are motivating factors in keeping your compensation plan active and relevant. Foster a culture of transparency and trust, and make sure your rewards strategy aligns with your business goals.

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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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