How to Create a Compensation Plan for Employee Motivation and Retention

Learning how to create a compensation plan that actually resonates with your employees can be the difference between a productive, loyal workforce and a revolving door of unhappy employees.

A compensation plan is a strategy that outlines the competitive salary, benefits, and incentives offered to employees. Along with salaries, bonuses, and equity, a good compensation plan should include perks such as healthcare benefits, life insurance, paid time off, and discounts.

The compensation plan is one of the most powerful tools for employee motivation and retention. So, before we explain how to create a compensation plan, let’s take a second to understand why they’re so important.

Compensation Plans, Not Just Another Cost

It may not surprise you to learn that 1 in 4 employees in the U.S. would leave their current job within the year for a job offering a higher salary or better benefits. [1]

In addition to economic and cost-of-living factors, employees also want to feel valued by their employers. If you don’t offer competitive compensation packages, they won’t feel motivated to perform to the best of their ability. This de-motivation can quickly lead to dissatisfaction, unhappiness, and turnover in addition to loss of productivity.

63% of employees say their current benefits package motivates them to stay with their employer. For around 40% of workers, benefits are a driving motivator for retention. [2] As well as supporting your employees financially, higher salaries and better benefits make employees feel as though the work that they’re doing is valuable and appreciated, contributing to a positive, people-first culture.

Finding the Best Candidates For Your Budget

Aside from a solid compensation strategy, you need to be able to find the best talent possible for that package range. An Applicant Tracking System (ATS) is one of the tools recruiters use to find and manage large numbers of candidates of varying skill levels.

An ATS like Manatal helps you recruit talent that will stay with you for long thanks to features like AI Recommendations and enriched candidate profiles. Imagine you have all the information you need when it comes to making a precise decision to shortlist job applicants. Setting up criteria like educational background, work experience, or key skills, Manatal’s scorecards, will show you a list of candidates who best fit the role.

{{cta}}

How to Build a Compensation Plan

There’s more to a compensation strategy than offering a pay raise. You need to carefully consider everything from your goals and culture to your specific job roles, career progression framework, labor laws, and more.

So, here’s how to create a compensation plan that works.

1. Understand the Company Goals and Culture

With the help of your workforce, sit down and identify the goals of your compensation plan. For example, are you trying to attract new, high-quality talent? Do you want to increase employee productivity or retention?

Setting clear and well-defined goals will help you quickly create a plan that meets your company's needs and accurately measure the success of your strategy.

You also want to understand your company’s current culture and, if relevant, consider how a compensation plan might improve it. Maybe you want to instill more fairness into your core company culture. Or, you might want to use a compensation plan to maintain a culture that values recognition and rewards.

To best understand your current culture and future goals, use employee feedback software to send out customized surveys to your employees. Ask them what they like about your company’s culture and what they’d improve.

2. Establish Clear Guiding Principles for Compensation

Along with your mission and culture, your compensation plan should detail the key principles of your strategy. Factors such as base salary, bonuses, and benefits should be outlined along with the qualifications, performance, experience, and other variables that make employees eligible for compensation.

Fairness and transparency should also be core guiding principles.

A fair compensation strategy is equitable for your employees. It actively avoids favoring or disfavoring employees based on insignificant traits such as gender, age, and race. Instead, compensation decisions are based on clearly established, relevant, and unbiased factors such as performance levels, experience, and tenure.

A transparent compensation strategy communicates your plan honestly and openly to your employees. It explains what compensation opportunities are available and how eligibility is measured.

3. Assess Job Roles and Responsibilities within the Organization

The next step is establishing a job hierarchy to help you determine base salaries and pay scales for your different roles. You can do this by ranking and categorizing jobs based on their authority and responsibilities.

For example, junior and assistant positions should have a pay scale different from managerial positions. Managerial positions should have different base salaries and pay scales than mid-level executives.

By understanding your organizational structure, you can create a compensation package that aligns with the roles and responsibilities of your different job titles. Market standards and employee expectations should also be considered to maintain competitiveness.

4. Research Industry-Standard Compensation Benchmarks

If you want to attract and retain employees, you must ensure you’re meeting the industry standard. In other words, you need to offer pay that is around the same—or more—than other companies in your industry.

Let’s say that the average compensation package for a senior accountant in your industry is  $120,000/year. If you only offer $100,000/year for the same role, potential candidates might dismiss your vacancy in their job search in favor of a higher-paying opportunity.

Plus, you risk losing current top talent to competitors with better compensation. Remember, a quarter of the current workforce is willing to leave their company for a better salary.

You’ve probably noticed a recruitment trend of employers listing fringe benefits in their job ads. This is because benefits such as health insurance, retirement plans, and remote working are becoming just as desirable as monetary compensation. So, you’ll also want to research non-monetary compensation benchmarks and industry trends to ensure that your package is competitive in that area, too.

5. Create a Realistic Career Progression Framework

Use your earlier assessment of your job roles and responsibilities to create a realistic career progression framework for all of your company’s departments.

A career progression framework details the compensation packages available at different levels of seniority. For example, your sales department will have three main seniority levels: entry-level, mid-level, and senior level.

Entry-level sales positions might include titles such as sales representatives and customer care associates. Mid-level would include assistant sales managers and market research analysts. And senior level positions include your sales directors and executives.

Entry-level positions will start at a lower salary, but there might also be tiers within your entry-level category. A team leader, for example, will be in a higher tier than a sales assistant, thus receiving higher compensation.

The clearer your career progression framework is, the easier it will be to establish compensation packages that align with job titles and responsibilities.

6. Set Achievable Incentive Structures Tied to Measurable Metrics

Poor performance monitoring and high employee retention are two of the most pressing HR challenges companies face. A clever compensation plan tackles this issue by setting achievable incentive structures that are tied to specific, measurable metrics.

For example, if you plan to reward employees based on performance, you must establish what performance targets they need to hit. You should also have a clear method in place for tracking these performance metrics.

A call center might measure individual agent performance based on their customer satisfaction scores or volume of first-call resolutions. These metrics can be tracked using a call center platform. Managers can use these performance metrics to provide ongoing feedback and support, helping employees meet their goals.

And remember, metrics should be tied to specific incentives to drive purposeful engagement. For example, you might reward an employee with a bonus for receiving the best customer satisfaction score.

Of course, keeping up with all of this data can get messy, especially if you need to pull data from different departments and systems. An Enterprise Resource Planning system (ERP) consolidates data from every corner and geographical location of your business, giving you immediate, data-driven performance insights from a centralized place.

7. Include non-monetary benefit packages and time off

For many employees, competitive non-monetary benefit packages are more valuable to them than pay raises and bonuses. 1 in 10 workers would take a pay cut to access better non-monetary benefits. [3]

The most desirable employee benefits are employer-covered healthcare, life insurance, pension plans, mandatory paid time off, and mental health assistance (such as counseling and wellness programs).

8. Ensure compliance with labor laws and industry standards

Compensation compliance helps you avoid legal issues and promotes the fair and equitable treatment of employees. With the help of your finance and legal teams, make sure that your compensation plan complies with local, state, and federal labor laws and tax regulations.

This includes adhering to minimum wage and overtime regulations as well as following non-discriminatory practices and meeting industry compensation standards. You can simplify industry compliance monitoring and tracking with compliance management software.

9. Implement regular pay reviews to reward contributions and tenure

Most U.S. workers haven’t had a pay rise in three years, according to a recent OnePoll survey. This lack of recognition can de-motivate employees, leading to dissatisfaction and turnover. [4]

But when employees know that a prospective pay raise is on the horizon, it can motivate them to work harder. And, when this raise is achieved, it keeps them satisfied and retained in your company for even longer. So, you should make it your mission to recognize and reward long-term contributions.

To do this, implement regular pay reviews. In your compensation plan, outline how often these pay reviews should take place to increase tenure, considering inflation and budget limitations.

Conclusion

Now that you know how to create a compensation plan, you can use it to maximize employee performance, retain a high-quality workforce, and attract desirable candidates. This has many benefits: lower hiring costs, increased productivity, and, ultimately, a boosted bottom line.

But it doesn’t end there. A compensation plan is just one element of your wider, long-term recognition and reward strategy, which infuses appreciating employees into every step of the employee experience.

—

Citations:

1. yoh.com

2. limra

3. Forbes

4. onepoll