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How To Create A Compensation Plan in 6 Steps

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❶Direct experience as a business analyst or technical writer in an Agile or Waterfall environment. There are three primary ways to do this:

Once your pay practices are in line from both an external and internal standpoint, you can look at rewarding top performers with raises. It is important to give raises at the same time that performance reviews are given. That way, employees understand that there is a well thought-out process behind the raise and that they are not just being given a raise on a whim.

Keep in mind that it is about percentages and not total dollar amount. You will need to set up several components, including state and federal tax forms and workers compensation coverage. This is why we recommend taking the headache out of payroll by using payroll software, which can take care of all of these things for you for a reasonable monthly fee.

We recommend Gusto for small businesses. Their payroll solution is easy to use, inexpensive, and they provide the first month free. Click here to try it. Here are our top factors you will want to consider for creating your total compensation plan, in addition to the 6 steps above.

Surprise, not all employees are motivated by pay! Some value things like the value of their work to the client, the value of their work to society, the opportunity to work with or manage great people, and other things. So, you may even consider doing an employee survey on what motivates your team before you consider giving raises or creating a complicated incentive compensation plan.

Some other ideas for compensation include providing a free gym membership to a local gym, parking passes, or try our Employee Recognition Ideas article or our Employee Engagement Ideas article totalling over 50 ideas between the two articles!

Yes, of course you would pay everyone what they wanted if you could. So look at your budget, do the salary research we talk about in step 2, and then be realistic — can you afford what you think you need to pay or do you need to recalibrate your expectations i.

Well, you need to create a compensation plan that lets your business survive and lets your employees pay their mortgage or rent and keep up with the cost of living. This is when you could also consider hiring remote employees if you are in a high-cost of living area in order to save money.

Here, we talk about i ndependent contractors versus employees , and then we also talk about where you can find remote and freelancers employees in our job sites article. But you might be competing with that business two neighborhoods over that is selling a similar product or service.

If you can, look them up and see if you can find job postings with salaries attached to them. You can easily do this on Indeed or on Glassdoor. Compensation is certainly tied to culture. One client I did work for created amazing software that is helping to cure cancer, so they could pay less because their work has huge meaning to the planet or to people who work there who have personally dealt with cancer.

Another client was located in a remote location and everyone worked from home. The 6 steps above are designed to give you a step by step process that any company can follow to design the pay portion of their compensation package. Once you have your package designed, give it one final check over to make sure it meets the following points:.

If you answered yes to all 4 of these points, then you are ready to pay your team and get moving forward! Use a time-tracking software such as Homebase to seamlessly track data for all of your employees, for free.

Click here to sign up:. While being a part of FitSmallBusiness, Christy still maintains her HR consulting and recruiting firm that boasts over 30 small business clients spanning the U. Good article, I was looking for a simpler way to explain comp to a small business. Hi Linda, Good point. Thanks for your note! This article and article as a video was great. I am trying to design a compensation model for remote employees and found your site.

This really was a great resource and remembering to keep in mind the employee, customer and owners when balancing a plan is really good advice. You must be logged in to comment. Click the "Log in With LinkedIn" button below to connect instantly and comment.

We spend hours researching and writing our articles and strive to provide accurate, up-to-date content. However, our research is meant to aid your own, and we are not acting as licensed professionals. We recommend that you consult with your own lawyer, accountant, or other licensed professional for relevant business decisions. Click here to see our full disclaimer. Product or company names, logos, and trademarks referred to on this site belong to their respective owners.

When readers buy products and services discussed on our site, we often earn affiliate commissions that support our work. Visit Homebase Step 1: Establish a Pay Philosophy The first step in designing an employee compensation plan is deciding what your pay philosophy will be.

In this step, you should ask yourself questions such as: Do I want to pay more or less than those companies that compete with me for talent? How do I want to incentivize performance? Do I want to have a bonus or commission plan and create an incentive compensation plan?

Will everyone be on the same compensation plan or will managers, my business partners or fellow owners, and myself be on a different plan? Why or why not? Are most of my employees salaried or paid hourly? Throughout each stage of developing your total compensation plan, you should test yourself by asking if the plan meets the needs of all three of the primary stakeholders in the company, which are: Employees — Are you providing fair compensation?

Will employees be motivated to work for you? Clients — Will employees be serving your clients in a genuine way? This can backfire on the business. Owners — Will the pay philosophy keep the business owners motivated and rewarded for their risk and hard work? How Much is Your Competition is Paying? There are three primary ways to do this: Talk to people within your industry and ask them what they are paying. Make sure you describe the duties and responsibilities of the position so you can compare apples to apples.

You could also use a forum on LinkedIn to do this online. With your research in hand, as well as factoring in what your employees consider to be fair, you can then move to step 3: Set the Salary Level or Hourly Pay Rate Competitive compensation is necessary for an employee to be happy, but it is not always a motivator for better performance.

Exceptions to this rule would be: If you feel a role is particularly valuable to your firm and warrants paying above the competition If you have a role that is not very important, and you feel you can pay less If you have a strong performance incentive or bonus system where the employee can receive higher compensation based on good performance You must also keep in mind how salaries will be viewed internally.

Things to Consider When Choosing Salary Versus Hourly Here are some things you will want to think about when deciding whether to pay employees hourly or with an annual salary: Industry and Role Conventions on pay differ based on the industry and position. Fear of Paying People to Do Nothing Both kinds of pay bring up the same fear from small business owners — what if I am paying people to stand around?

You will want to make sure you consider offering the following: Do you want a community-like culture where sales and achievements are shared among teams or all employees together i. Do you want to have a combination of the two, where you perhaps have contests for small bonuses on a weekly or monthly basis? If you decide to implement a pay-for-performance system, such as if you have a sales team or another role that usually has a sales component, you might want to consider how the policy you are creating will: Enhance employee satisfaction Improve company processes or results and customer satisfaction Help with implementing new products or protocols Provide innovation or cost-savings to operational methods Basically, how will a performance bonus system impact your business as a whole, not just your employees?

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