Developing a Compensation Plan

This is usually the single largest component of a compensation package. Salary should be tied to a person’s skills and experience. Subsequent increases need to be based on an employee’s performance, value and contribution to an organization.

Typically, companies perform annual performance evaluations. Each position should have its own discrete salary range which follows from the job evaluation. The range has a minimum, which is the lowest rate the company will pay an employee in the position; a job rate, which is the rate paid to an employee who is fully developed and performing at a satisfactory level; and a maximum, which is the highest rate the company, will normally pay an employee in the position.

While there is a minimum wage set by federal law for most jobs, the actual wage paid is entirely between you and your prospective employee. Companies update the salary structures depending on market movement. Consult salary surveys and trade association to learn the most current practices, cost ratios and profit margins in your business field and to set them at the right price.

 Wage levels are calculated using position importance and skill required as criteria. Salary structures and its pay ranges are not static. Another reason why salary structures may change is restructures or downsizing. If the organization changes, the salary structure should reflect those changes.

Understanding your company’s salary structure and your position in it gives you a clearer picture as to where you’re standing and what you can do to move either up the ladder or outside to be paid fairly. Remember that salary structures and pay ranges are only reference points. Your skills and performance can have an impact beyond this reference.

When a person is promoted or a position is reclassified to a higher job rate you should review the individual’s salary and make a recommendation to the owner or person in charge. The salary review should include an examination of the individual’s qualifications and experience in the context of the new or revised requirements of the position. The salary will not be less than the minimum of the salary range for the position.

Wage levels are calculated using position importance and skills required as criteria. Learn the rules and regulations regarding employee pay.

Bonuses. Employee bonuses, which are usually paid in a single lump at the end of the year, are one way of providing performance incentives. Profit-sharing plans are a more formal way of doing this, but they’re not as effective for rewarding individual performance and compensating employees for meeting their goals.

Long-term incentives. Stock options or stock grants help retain valuable team members through your organization.

Schedule. Includes holidays, vacations, sick days and personal days. An employer unable to offer competitive salaries may close part of the gap by offering more time off or flexible work hours.

Retirement plans. Most small companies put savings plans in place because they are easy to administer and less expensive than traditional pension plans. Many employees like these plans because they maintain some control over the amount of their contribution and how the money is invested.

Health insurance. Benefits that have great value to employees. Employer-sponsored health insurance that gives them peace of mind in knowing that they won’t be denied coverage, even if they have existing health problems.

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Life and disability insurance. This is also a benefit that usually costs less when it’s purchased by an employer rather than an individual.

Other compensation. Other incentives motivate employees and give your company a competitive advantage such as employee assistance programs, which can provide everything from psychological counseling to legal assistance; discounts on company products; use of a company cars; clothing allowance; tuition reimbursement; weight loss programs; gym subsidies.

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