Compensation Planning: Meaning, Types & Actionable Steps

Any seasoned business leader knows the value of talent acquisition and retention and, thereby, that of compensation plans or payment packages. Lever's 2022 employee retention study states that salary and potential bonuses motivated 46% of the surveyed employees to continue at their current jobs.

Competitive and flexible compensation plans help organisations fairly reward their talent and forward their business goals. From motivating employees and reducing talent loss to attracting skilled talent, carefully drafted compensation strategies can benefit an organisation in varied ways.

Compensation Planning: The Roadmap to A Successful Company 

Compensation planning refers to structuring ways of rewarding employees for their work in keeping with the larger organisational goals and budgetary limits. These plans may include cash and non-cash benefits extended to employees in exchange for their work. Basic salary, commissions, overtime pay, and fringe benefits like paid holidays are essential to a compensation plan. Even one’s raise schedule and bonus structure are included within these plans.

While under the umbrella of a company’s HR and talent management departments, drafting a fixed or flexible compensation plan also requires inter-departmental input. The plan must blend employee needs and company budgets while ensuring legal compliance. As such, the core management, HR, finance, accounts, and legal teams play a part in distilling compensation strategies and plans for various employee brackets.

Compensation Plans Come in Many Packages 

Now that you know what a compensation plan is, it's time to move on to the various types of compensation plans:

Direct (Cash) Compensation Plans 

• Salary: An employer's base pay plan is designed for a skilled, full-time employee in exchange for regular, fixed working hours. Each employee's title, experience, and seniority determine their base salary compensation packages.
• Hourly Pay: Workers receive hourly compensation for their work and may be eligible for overtime pay. Semi-skilled and part-time retail, hospitality, and construction workers generally work against hourly compensation plans.
• Commission: This type of compensation plan is also known as a target-based payment plan. Common among independent sales agents, sometimes the compensation from such plans might be entirely based on commissions. Alternatively, the employer may opt for a flexible compensation plan with a fixed base pay component and a variable commission-linked pay component.
• Bonuses: The company can offer its employees profit-linked bonuses depending on its annual performance. Employees achieving a target or completing a project might also qualify for a bonus. Usually, a base pay component accompanies such bonus-based direct compensation plans.

Indirect (Non-Cash) Compensation Plans 

• Employee Stock Option Plans (ESOP): ESOPs allow employees to buy (‘exercise’) a certain allotted number of the company’s shares at a fixed grant price. Most companies offer ESOs only after a consecutive work record of 3-5 years at the firm and issue a lock-in (‘vesting’) period for the shares.
• Benefits: The fringe benefits offered by the company fall under this category. This may include medical insurance, life insurance, provident fund plans, paid time off, maternity leave, daycare provisions, and flexible working hours.

Drafting a Compensation Plan 

Payscale’s latest report suggests only 55% of organisations have adopted a formal compensation strategy. If, as an employer, you’re looking to formulate a compensation plan, here’s a list of actionable steps to follow:

Step 1: Ascertain the objective of your compensation planning strategy.

Step 2: Create a compensation committee and appoint a compensation manager to oversee the planning and implementation process.

Step 3 : Set a budget for each employee category.

Step 4: Ensure compensation plans align with your company’s goals and employees’ wants.

Step 5: Conduct market research to ensure the plan remains at par with other companies operating in the industry.

Step 6: Rank jobs to create pay tiers by creating salary ranges and pay grades based on employee experience within each range.

Step 7: Implement the program and take periodic employee and stakeholder feedback.

Step 8: Be prepared to adapt the compensation plan to remain competitive and legally compliant.

Wrapping It Up 

No two compensation plans can look alike since each reflects specific organisational goals, employee needs, and budgetary parameters. Your compensation plan should reflect the company’s values and create a long-term framework for a fair rewards system, boosting employee morale and productivity.

Frequently Asked Questions 

What is the objective of compensation planning? 

Compensation planning has the following objectives:

• Ensure employee retention.
• Attract new talent.
• Motivate employees to enhance productivity.
• Ensure fair and equitable pay.
• Adherence to company objectives and legal compliance protocols.

What is an example of compensation planning? 

Compensation planning varies for different companies. For instance, the compensation plan for a marketing manager will include their base pay, performance-based commissions, and benefits like healthcare and paid leaves.

What are the 4 compensation plans? 

The 4 common types of compensation plans are:

• Straight salary plans
• Commission-only plans
• Salary plus commission plans
• Hourly payment plans

What is the structure of the compensation plan? 

The structure of compensation plans will vary depending on the company in question and the strategy followed. However, most consist of a basic salary, commission or incentives, any applicable overtime pay, and fringe benefits like medical insurance and retirement benefits.