Forms of Compensation

Guide

How to structure employee compensation?

Many employee compensation structures exist, yet no one size fits all. Designing your structure enables you to reward effort and incentivize growth internally efficiently. Externally, it helps your business become competitive, which is instrumental in retention as well as make your recruiting exercises easier to execute.

There are four factors to consider when making a compensation structure. They include:

  • Performance
  • Reward
  • Costs
  • Growth

An excellent compensation structure rewards performance within the appropriate budget to promote growth. You should strike a balance between satisfying your employees and maintaining the overall health and growth of your business. So, how do you do this?

Tips to help you create an excellent salary structure

1. Lay down your compensation philosophy

A compensation policy acts as the map for the development of your salary structure.  For large organizations, they integrated this philosophy in their corporate strategy that guides the compensation plan.

2. Identify each position and its value in your company

What jobs do you intend to fill and how important is each to your business? Once you identified the most critical roles, gather the market pricing and note the prevailing rates for a similar position in the market.

Acknowledging the value of each position, whether it is a higher level or lower level, helps you know whether to pay a premium or a deficit to the market rates. Of course, you pay premiums for positions that have significantly strategic importance to your company than it has to competitors. Also, it is fairly fine to go for a deficit for others that are not as much important. That’s why no size fits all.

3. What’s your company’s competitive edge?

Decide on your salary rates based on the market average. You can decide to offer slightly more or slightly less than the market median or average. The decision should always be in the interest of the health of your business. Also, there are different types of compensation, including salary, commission, bonuses and other benefits. It is up to you to decide which one best gives you an advantage.

4. What’s your compensation increment?

You need to have a guide on how you will promote hardworking staff, whether it is in terms of commission and bonuses, or a promotion. It is advisable to preempt the desired compensable leverage to enable you to balance providing compensation and rewarding effort.

5. Develop the compensation structure

After your systematic analysis, you know which positions are at the core of your business and those you need, albeit their insignificance. You also know the prevailing market rates, so it time to put together this information to come up with your compensation structure. Remember, your compensation plan must meet the minimum standards set via federal labor law, the Fair Labor Standards Act (FLSA) to be precise.
There are various components of a compensation system you will have to consider when coming up with your structure. They include:

  • What positions are you going to pay salary, wages or commissions?
  • What is your bonus structure?
  • Health Insurance
  • Retirement Plan.
  • Life and Disability Insurance
  • Any long-term incentives for long-serving employees?

It is up to you to decide the minimum and maximum compensation packages, but you should factor the above-listed components as well.

6. Implement your compensation structure

Now, with a new employee compensation system, it is time to implement it, which calls for review of your old system. Of course, some of your employees will get a raise while others contend with a pay cut, depending on the new rationale. The best way to implement the structure is to increase the salary over time until you arrive at the target rate. Meanwhile, you will freeze salary increment of those earning range maximum until you achieve the desired level. The bottom line is you will adjust their wages as desired in the compensation structure.

That’s it! But compensation plans in human resource management is one of the toughest tasks. If you are still stuck, you can talk to a compensation specialist to help restructure your compensation plan.

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