Compensation planning refers to when employers or HR teams plan and outline the terms and conditions of their employees’ salaries, benefits, and incentives.

A compensation plan provides employees with information about the total compensation available, including the salary or wage they will receive, their statutory benefits, and any additional incentives such as raises and bonuses.

Compensation planning ensures that employers treat their employees fairly and consistently and supports the overall goals and objectives of the business.

Types of compensation

The types of compensation employers offer their employees depend on the market, the industry, and the company’s resources. However, there are two main types of compensation: direct compensation and indirect compensation.

Direct compensation

Direct compensation refers to the payments an employee receives in exchange for their time worked. Direct compensation is often a statutory benefit employers must provide to their employees. Examples of direct compensation include the following:

  • Salary or wages
  • Bonuses or commissions
  • Overtime
  • Paid time off

Indirect compensation

Indirect compensation refers to non-monetary pay or supplemental pay an employee may receive in addition to their direct compensation. Indirect compensation is also sometimes referred to as supplemental benefits and fringe benefits but may also be mandatory, depending on the country.

Even if indirect compensation isn’t mandatory, employers often offer it as part of their global compensation strategy to improve their company culture and attract and retain talent worldwide.

Examples of indirect compensation include the following benefits:

  • Health insurance
  • Retirement benefits
  • Paid time off
  • Equity incentive plans, awards, and profit-sharing
  • Travel, commuting, or meal allowances
  • Wellness benefits, such as gym memberships and health stipends
  • Educational or professional development opportunities
  • Remote working arrangements 
  • Reimbursements for work-from-home costs
  • Stipends for housing or job relocation 
  • Childcare initiatives

Why employers need a compensation plan

A compensation plan is essential in providing employees with information about the total compensation available to them, but it also plays a crucial role in helping employers manage human resources effectively and support the overall success of the business.

An effective compensation plan achieves the following:

Improves employee motivation and engagement

Compensation plans contribute to a positive work environment and influence employee satisfaction and engagement.

Compensation plans also give employees clear expectations and motivate them to perform better, take ownership of their work, and achieve better results. Incentives help employees feel appreciated and valued, which boosts morale and productivity to perform quality work.

Elevates employee productivity

Incorporating performance-based incentives motivates employees to perform their best work. When employees see a direct link between their work and rewards, it can incentivize them to work harder and increase productivity. Employees striving to hit specific metrics to achieve these goals often result in increased profitability for the business.

Compensation planning also helps develop future leaders within the company. Employers can identify highly productive and high-potential employees through compensation and rewards and help shape their career paths.

Boosts employee attraction and retention

An effective compensation plan offers competitive employee benefits packages and salaries that stand out from competing organizations, ultimately allowing a company to attract qualified and skilled talent.

Compensation plans that provide attractive incentives and rewards also help reduce turnover and retain existing employees. Employees with compensation packages that align with their skills and experience are more likely to be satisfied with their positions and less likely to leave the company.

Upholds fairness and equity

A transparent and well-communicated compensation plan helps uphold fairness and equity within the company. Using objective compensation methods, such as standardized salary structures and transparent criteria for earning promotions, helps employers avoid discrimination and ensure all employees are paid fairly for their skills, performance, and experience.

When employees understand that their compensation is fair and based on objective criteria, they are more likely to be committed to their role and organization.   

Aligns with company budget and goals

A compensation plan should align with the company’s budgets, overall business strategy, and goals.

Compensation planning allows employers to budget and allocate resources to offer their employees a competitive compensation package while ensuring the company remains financially sustainable. Employers can also ensure their employees focus on contributing to the company's overall success by tying compensation to performance metrics. 

Ensures compliance with regulations

Regulations around compensation vary around the globe. Compensation planning is an effective tool to ensure that a company is in legal compliance with global payroll and employment laws and regulations, regardless of where their talent is located.

A thorough compensation plan helps companies avoid legal issues, misclassification risks, and penalties for employee wages, overtime, and other compensation matters.

Learn more: How to Stay Compliant When Hiring Internationally

How to create a compensation plan

To create a fair and equitable compensation plan that attracts top talent, consider the following tips:

  • Research. Understand the current market rates with similar industries, companies, and job positions. Use them as a benchmark to determine an attractive compensation package.  
  • Align with company objectives. Determine the company’s approach and philosophy to compensation. Align your payment strategies, methods, framework, and management with the company’s values and goals. 
  • Outline and define roles. Clearly define the requirements of each job level and the responsibilities and expectations of each position. Use these metrics to develop an appropriate compensation structure and guidelines for performance.
  • Communicate to employees. Communicate a straightforward compensation plan to employees so they understand the breakdown of their pay and benefits options, and create straightforward employment contracts. Provide opportunities for employees to ask questions, provide feedback, and regularly review their salary with their manager so they feel comfortable investing their efforts into their work.
  • Review and update. Review the compensation plan regularly to ensure it is fair and competitive with the changing market and company circumstances. Use employee feedback to update it as needed.

Disclaimer: The intent of this document is solely to provide general and preliminary information for private use. Do not rely on it as an alternative to legal, financial, taxation, or accountancy advice from an appropriately qualified professional. © 2024 Velocity Global, LLC. All rights reserved.

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