Compensation is the payment that an employee recives from an employer in the form of a salary, wages, employee benefits, paid leave, stock options, pension funds and variable pay grades. All this is the way how an employer can compensate their employees.
A compensation plan is an essential part of every business. Expanding business with new jobs and positions in the company could be challenging. Do you already have your compensation plan and do you know where to start and what to include?
In this article, we will talk about a few important things. I will show you several documents and tools that every company should develop to help manage its compensation plan. These documents include a compensation philosophy, a compensation plan, a compensation policy and a compensation manual.
Compensation Documents In The Company
The compensation philosophy is a framework statement of the company where the company represents how it combines and manages all components within the company.
The compensation plan is following the compensation philosophy as an outline statement of how the company incorporates and directs compensation to align employees and behaviours to the company’s mission.
Every company make its own compensation plan and policies, as a combination of the philosophy and practices adopted when determining employees’ salary, base pay ranges, rewards, and benefits. From developing a pay scale for each position to sorting through insurance benefits, you have a lot to consider as a small business owner.
What Is A Compensation Plan?
A compensation plan is a document consisting of an employee’s salary, bonuses, commission, equity, allowances, and other types of privileges for individual performance and duties included in the company’s policy.
Another internal document for administering different compensation components such as salaries, wages and benefits is a manual guide. It called the compensation manual.
Many compensation components that are used in the compensation plan, need to be well described. Workers need to understand how they will be compensated and the different types of compensation that apply to them. Aslo, they need to understand the total value of their compensation package.
The role of the compensation policy is to ensure that the company’s pay practices are conducted consistently and legally, aligned with the compensation philosophy.
What Is A Compensation Policy?
A compensation policy is a compensation tool that lead the way how employees should receive compensation. The policy may cover base pay, incentives, long-term incentives and bonuses. It usually takes the form of monetary payment in exchange for time, labour, expertise, skills, etc.
Management is the key stakeholder in administering the compensation philosophy, so the documents must be clear in their communication of the policy. An effective compensation policy will leave little room for misinterpretation.
The compensation policy, set in the company, applies to all employees and all compensation plans of the company.
Companies regularly monitor their compensation policies to ensure they are paying employees fairly and as competitively as possible compared to other businesses in the industry.
Every compensation policy includes:
- Salary
- Bonuses and commissions
- Paid time off (vacation, holidays and sick days)
- Insurance (medical, dental and vision, pension, life, etc.)
- Retirement savings plan
- Childcare (including off-site and on-site options)
- Flexible work hours
- Subsidized training or education, etc.
What Do We Need To Build A Compensation Plan?
Building an appealing compensation plan is important to attracting and keeping ideal employees and the ones who can take your business to the next level. Compensation can take many different forms and the ideal one is the combination that fits your needs.
If you’re feeling overwhelmed and don’t know where to start with employee compensation, the best place to begin is with minimum wage requirements for your area and your industry. You can find that on official website for worldwide minimum wages.
That’s the lowest salary that workers must receive for the legal working day. Once you determine the minimum wage requirements, you need to come up with an employee compensation plan. Every compensation plan has different compensation components depending on the demand.
Example Of Compensation Plan
Making the right compensation plan for your company will help you create the guidelines for performance evaluation. Create a full job destripction for every position in the company and determine an appropriate amount of compensation you are offering for various positions. You can apply one that best suits you.
Some examples of compensation:
- Annual salary
- Hourly wage
- Raises
- Retirement plan
- Bonuses and incentives
- Health benefits
Annual Salary
Salaried employees are paid an annual rate (fixed amount of pay – salary), usually determined by the value they bring to the company, regardless of actual worked hours. Most salaried employees (referred to as exempt) aren’t entitled to overtime pay for exceeding 40 work hours during a given week. This means a salaried employee is paid 40 hours a week, even if they work fewer hours.
Hourly Wage
Hourly employees simply get paid a set hourly rate for the time they work, up to 40 hours weekly. After 40 hours, hourly-rate workers (referred to as non-exempt) are entitled to overtime pay, which is typically calculated as one and a half times the employee’s standard rate (sometimes known as “time-and-a-half” pay).
Raises
Typically determined by the individual or team performance, pay raises are standard annually among both salaried and hourly employees.
Retirement Plan
Companies often offer employees participation in a retirement plan such as a 401k. Employees who opt-in have a small percentage of their earnings deducted from each check, a portion of which the employer matches. A 401k plan is subject to a vesting period, during which the full employer contribution is not available—a typical vesting period is one to five years.
Bonuses And Incentives
Offered as a supplementary means to drive performance, bonuses and incentives are often awarded to employees who hit pre-determined, employer-set goals.
Health Benefits
Some level of health-care benefits is a standard offering for most companies. Employers cover the bulk of the monthly premium costs, while the remaining cost is deducted from the employee’s gross earnings. Companies usually offer several plans with varying coverage.
What Is Included In A Compensation Package?
The compensation package is more than salary and wages. It is a summary of all the ways that a company directly or indirectly pays employees.
A compensation package includes multiple elements that reward employees for the time and labour they expend at their job. Compensation packages usually vary from employer to employer and the particular position employees are working or applying for.
A Compensation Package Includes
Pay rate
Is an hourly rate, a regular salary or a commission on sales. Depending on exemption status, employees can also earn overtime and time-and-a-half or double pay when they work more hours than expected.
Bonuses
Additional financial compensation or extra cash rewards that employees get for various reasons. Bonuses are offered as a supplementary means to drive performance often awarded to employees who hit pre-determined, employer-set goals.
Types Of Bonuses In A Compensation Plan
- Holiday Bonuses – These bonuses give employees a set amount of extra payment to account for holiday spending and show appreciation. Holiday bonuses are often the same for all employees.
- Referral Bonuses – When employees refer strong applicants to open positions or attract clients, employers may reward them for supporting the company with a referral bonus. These bonuses are usually small amounts but could be in the thousands for hard-to-fill positions.
- Spot Bonuses – Managers give out spot bonuses on a discretionary basis to employees who exhibit exceptional behaviour. There is not usually a system or regular schedule for spot bonuses.
- Annual Bonuses – Sometimes given in conjunction with holiday bonuses, annual bonuses are lump sums that employers give out at the end of the year. Their amount often reflects an employee’s performance over the entire year.
- Retention Bonuses – The purpose of a retention bonus is to give employees extra motivation to stay with the company during a challenging or important period of time. The employer defines the period and provides a lump sum or payment instalments to reward employees for overcoming a stressful workload.
- Signing Bonuses – When a new employee agrees to accept a new job, they can get a signing bonus. Signing bonuses encourage employees to make quick decisions and commit to a new employer instead of entertaining other job offers.
- Performance Bonuses – Employees who meet performance metrics or achieve specific objectives at work may get performance bonuses. Some companies only give out performance bonuses to top achievers, while others give them to anyone who meets a set goal.
- Longevity Bonuses – Employees who have been at a company for a long time may get bonuses when they meet certain milestones like 10 or 20 years of service with a company. This can be cash, a raise or a significant gift.
Savings plans
Retirement and long-term financial planning benefits, businesses can integrate stock options and profit-sharing into their company savings plans, if they want to use company equity to compensate employees.
Insurance
Health insurance is one of the top benefits employees expect from their employer. It can be extremely expensive, so adding up health insurance for employees is a significant financial benefit. While employers must offer insurance to full-time employees, they can choose to extend benefits to part-time employees too. Health savings accounts, standard insurance, dental and vision are common elements of insurance compensation for employees.
Scheduling
Paid time off, remote working options and flexible scheduling options are a significant part of an employee’s benefits. Employers pay employees to take time off as a way to support their life balance and productivity when they are working. Additional time off for jury duty, mourning and life events, whether paid or unpaid, can also be considered part of the compensation package. They are not direct compensation, but they are regularly included as a part of a compensation package to demonstrate the value of these benefits offered to employees.
Employee support services
Free or discounted access to various services for employees can include anything from on-site game rooms and snacks to childcare during work hours and free counselling. Some companies partner with other local businesses to provide discounts on their products and services.
Compensation Package Plan Template
A template can help you summarize all of the comprehensive parts of a compensation package. This is an example of a template you can use to review compensation plan information. Here is previuw of the template.
Conlusion
You can start with simple compensation plan. A salary plus commission pay as the most common type of plan. The basic compensation plan consists only a salary or wages. When you build more detailed compensation package, first create a full job destripction for every position in the company. Also, determine an appropriate amount of compensation you are offering for various positions. From there you can develop more complexed compensation plan. Here you have a preview of the template that can help you start.
