Drafting Effective Employee Compensation Plans

The pandemic has caused scores of people to rethink where and how they wish to work. Thus, your ability to recruit and retain top talent can hinge on your organization’s compensation plan. With that in mind, here’s what you should know about drafting effective employee compensation plans.

What is a Compensation Plan?

This is the collective compensation that employees get in exchange for their services. In addition to base salaries, such plans include the value of what are often called fringe benefits, which can include club memberships, health insurance, paid time off, etc. Such compensation also includes bonuses and any commissions. According to the U.S. Bureau of Labor Statistics, benefits make up 30 percent of an employee’s total compensation, on average.

What Makes for an Effective Employee Compensation Plan

Generally, a good plan is based on proven compensation strategies, policies, and practices that align with organizational goals and objectives. In fact, the process of crafting such a plan includes documentation, budget, tax, and regulatory considerations.

Ultimately, what you want is a plan that lines up with organizational needs, budgeting goals, overarching strategy, and talent retention aims.

Elements of a Total Compensation Plan

Common offerings include:

  • Yearly or hourly pay
  • Medical and dental coverage
  • Paid leave
  • Health savings accounts or healthcare flexible spending accounts
  • Life insurance
  • Disability insurance
  • Retirement benefits
  • An employee assistance program
  • Relocation costs
  • Educational assistance programs
  • Career promotion opportunities
  • Learning and development offerings

The Importance of an Effective Employee Compensation Plan

In this tight labor market, it’s imperative that you improve your employee benefit offerings to remain competitive and even separate yourself from industry rivals. That is why open enrollment communications are so important, and you likely need to re-assess how you approach your employees about the benefits you offer.

Also, for better or worse, word does get around. So, how your plan turns out can affect your future ability to recruit. Further, an effective employee compensation plan promotes employee productivity. It’s a fact that satisfied employees tend to give their all.

Direct vs. Indirect Compensation

Those are the two main types of employee compensation. Direct compensation comprises hourly pay or salary, plus any bonus pay and commissions. Indirect compensation, on the other hand, can include healthcare and retirement benefits in addition to benefits such as flex time and personal time off.

Crafting an Effective Employee Compensation Plan

Every organization’s needs are different. But in general, these are the moves you must make to help you come up with an effective plan:

  • Draft an initial plan. You want to have your objectives here in addition to some goalposts. You should also compose a description for each position and establish a starter workforce budget.
  • Designate a manager. Get someone from HR who can handle compensation manager duties. This individual will be responsible for calculating industry rates for roles, making job classifications, and figuring out selection methods for direct compensation.
  • Establish a compensation philosophy. Are you going to be known for generous direct compensation, or decent pay but rad benefits? Where you fall may depend on what your competitors do.
  • Determine whether you’ll have compensation tiers. If you will in fact have them, decide on the job classifications.
  • Establish opportunities for career advancement for every job classification. Employees do want to know whether they can move up, and what they must do to get there.
  • Establish salaries and wages. You’re now getting into budget nuances.
  • Get leadership on board. You need to pull in top executives to champion your plan.
  • Schedule a workforce introduction. You don’t want any leaks, so make sure all your people find out about the plan at the same time.
  • Assess your plan periodically. You should do this in case you must pivot due to market or industry changes.

When all’s said and done, drafting an effective compensation plan can mean the difference between nabbing the talent you need and losing out to the competition. If you need help fashioning such a plan, we recommend the leading HR consultant Mercer.

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