This informative guide contains everything you need to know about creating potent compensation plans, including recent compensation trends to enhance the attractiveness of a position to potential hires.
Creating a Strong Compensation Plan
The business of employment is ever-changing. The labor market ebbs and flows, workplace laws evolve, and business needs fluctuate — sometimes from one extreme to another. Still, some things have remained constant. Among them is the value of employee compensation.
Compensation plays a significant role throughout the employment life cycle. It’s a draw for attracting and securing qualified candidates during the hiring process. And it’s key for helping employers to keep high performers on board by remaining competitive within the talent marketplace. To achieve these outcomes for your company, you’ll need an intelligently designed, well-built compensation plan. In this guide, we’ll show you how to develop one.
What is a compensation plan?
A compensation plan is a formal written document describing the company’s position on total rewards provided to employees for services rendered. A good plan addresses the following:
Who (i.e., which employees) is/are to be compensated.
What types of compensation will be provided (e.g., salaries, benefits, bonuses, etc.).
Why the compensation is offered (e.g., standard pay package, employee incentives).
How much (i.e., the amount and/or value of each type of compensation).
How often (i.e., the frequency of the specific compensation).
Once implemented, a strong and competitive compensation plan should:
Support your business strategy and your operational and workforce needs.
Keep you competitive within your industry.
Attract and retain high-performing, qualified talent.
Improve employee performance and job satisfaction.
Help define your competitive market position in terms of base pay, incentives, and benefits.
Help establish a total rewards plan based on your compensation budget, competition, and business conditions.
Types of Compensation
Before you develop your compensation plan, be sure you understand the different types of compensation. Categorically, there are 2 overarching types: direct and indirect.
Direct compensation
Direct compensation refers to salaries and wages paid by employers to employees for work performed. It is monetary — such as base pay, variable pay, and differential pay.
Base pay
This is the employee’s hourly rate or an annual salary, without additional pay like overtime or incentives. It’s the foundational amount that you offer new hires. Generally, this amount increases or decreases over time based on the employee’s performance.
Base pay can be a solid indicator of the value your company places on an employee’s role and contributions. Moreover, a few factors must align for base pay rates to be effective. The organization and employees must view them as sustainable, externally competitive, internally equitable, legal and defensible, and easy to understand.
Variable pay
Variable compensation is pay that isn’t automatically set for the same amount every time. Variable pay may hinge on various factors and is usually based on reaching desired outcomes. An individual’s, team’s, or company’s performance is typically the basis for variable compensation. This structure is often used as part of a sales compensation plan.
Increasingly, organizations are offering variable pay based on employee performance or results achieved. Variable payment can increase employee engagement, productivity, and earning potential. For the employer, it risks less of the payroll budget.
Variable pay is incentive-driven. It can take the form of short- and/or long-term incentives, including:
Commission plans
Profit-sharing plans
Stock options and stock-based plans
Deferred compensation
Signing bonuses
Cash recognition awards
Some jobs are a mix of base and variable pay. For example: salespeople who receive salary plus commissions.
Differential pay
Also called “premium pay,” differential pay is extra wages paid to employees for working undesirable shifts (i.e., nights or weekends). It can also apply to employees working under adverse conditions (such as unusually cold weather). Differential pay is typical in the manufacturing industry.
Indirect compensation
Indirect compensation refers to the benefits an employer offers employees, whether voluntarily or mandatorily. These often include:
Health insurance, health savings accounts (HSAs), and flexible spending accounts (FSAs)
Employer assistance program; wellness benefits
Retirement plans; matching contributions
Paid holidays, vacation time, and other paid time off
Educational and development programs; tuition assistance
Disability, life, and supplemental insurances
Fringe benefits and perks, such as discount programs and company-provided equipment, vehicle, or lunches
6 Forward-Thinking Compensation Trends
What do employees want in a new job in 2023? In recent years, the focus has been on a better work-life balance, more PTO and vacation time, shorter workweeks, and the ability to work remotely as needed. Some of these benefits options became hot topics following what’s now referred to as the Great Resignation. In its wake emerged the need to attract new talent in order to compensate for ongoing labor shortages.
Today, the employment landscape looks a little different. But it’s still important to have a robust compensation package to help secure new hires to fill your open positions. You may be wondering just how big your total compensation package should be to stay competitive with other organizations. A good place to start is with the U.S. Bureau of Labor Statistics.¹
According to BLS, total employer-to-employee compensation costs for civilian employees averaged $41.86 per hour in September 2022. Wages and salaries accounted for 69%; additional benefits accounted for the remaining 31%. The average was higher for government workers.
Here, we’ll cover 6 employee compensation trends for the year ahead.
1. More pay transparency
Pay transparency is going to be a factor in 2023 as pay equity continues to be in the forefront. Pay gaps are often due to educational differences and differences in employee experience levels and hours worked. Still, your company may be asked to explain any that apply to current employees and new hires. Therefore you might consider demonstrating elements of fair compensation by listing salary ranges in job ads.
You might also create an internal company page that lists salary information for years of experience, education, training, and employee status. This could include additional info. pertaining to salary increases, hourly wage increases, monetary bonuses, and other incentive compensation.
2. Monetary compensation that accounts for the cost of living and inflation
Reportedly, salaries are expected to increase in 2023. The Fed may be trying to keep inflation low by raising the interest rate. Still, inflation was at 7.1% in November ’22, according to Statista. Employees will want types of compensation that account for the rising costs of food, housing, utilities, and even cars. A competitive salary or wage that addresses cost of living and other factors will enhance cash flow despite tough times.
3. More flexible hours
In order to attract the best employee for your open position, consider adding flexible hours to your job offer. Many employees will still be looking for positions that offer alternative ways to work. That will include staggered start and end times and in-office, hybrid, and remote work options. By providing multiple ways to work, employers enable employees to best optimize their time and productivity.
4. Health coverage to include medical, dental, vision and mental health
As the importance of physical and mental health remains in the forefront, employees are bound to continue seeking robust healthcare plans. This means that your company will need to look into offering comprehensive medical, dental, vision, and mental health benefits.
5. Company cultures that support employee growth and well-being
Employers who think they can’t find good employees because no one wants to work might be fooling themselves. The truth for some companies is that they can’t retain talent because no one wants to work for them.
Every day, companies are outed for any combination of off-putting attributes. These can include toxic company culture, bad pay practices, off-kilter work-life balance, and unprofessional compensation practices.
Some employers seek objective means for learning what past and current employees really think about their workplace. Those interested can search online for reviews or take an honest look at employee turnover and why employees say they’re leaving.
Looking ahead, expect employees to continue to gravitate toward companies that are known for desirable qualities. Those include having positive company cultures of inclusion and that focus on individual employees’ growth and well-being.
6. Employee training and advancement
Are you preparing your employees for the next stages of their career and advancement within your company? In 2023, employees will be looking for companies that take career advancement seriously. That means they’ll be interested in those offering both ongoing on-the-job training and external sources of training. They will value compensation for advanced degrees and classes that can help them hone and advance their skills.
Having a comprehensive compensation strategy ready for the year ahead can help you mitigate the effects of ongoing labor shortages by attracting top talent to your organization. Ultimately, a good mix of desirable employee benefits in your compensation plan can help you increase employee engagement, satisfaction, and productivity while reducing turnover and the need to replace workers.
Creating and maintaining a compensation plan that works for your business
A strong compensation plan is the backbone of a healthy and thriving business. Your compensation system as a whole should be reflective of your company’s values, company culture, and strategy. Establishing and sustaining a compensation plan that helps recruit and retain talent also requires regular evaluation and monitoring. It’s important to remain competitive within your industry and with other companies vying for the talent you seek.
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