How to Write a Compensation Plan

by Contributor; Updated September 26, 2017

How to Write a Compensation Plan. The compensation plan that you write for your company must provide your managers with an important tool to get the most out of those who report to them. A well-crafted company compensation plan is one that rewards productivity in a fair, effective and efficient manner. It should allow you the flexibility to respond to company needs, but protect you from constantly having to respond to individual circumstances.

Write A Compensation Plan That Will Stand the Test of Time

Step 1

Include every form of compensation that is generally available to your employees when you write your company's compensation plan. This includes, if applicable, salary, bonuses, productivity and merit incentives, wages and overtime, compensatory time, paid time off and related buyback arrangements, 401k plans and other retirement benefits, stock options and other profit sharing plans, health benefits, tuition reimbursement, the value of on-site benefits such as company childcare and other fringe benefits.

Step 2

Specify your company's policy regarding hours of work, break time, overtime and compensatory time and paid time off including holidays, vacations, sick leave and personal days in your compensation plan. While your compensation plan is not a quid pro quo contract, it is the right place for you to state clearly what your employees are being paid for, in terms of work time.

Step 3

Establish minimum or base compensation grades and steps within your company based on job title, job description, qualifications and education, employee status as salaried or hourly wage, professional experience and length of service. These minimums reflect what you will pay in salary and wages.

Step 4

Supplement base compensation with bonuses and merit or productivity incentives that allow you maximum flexibility to reward performance. Structure these elements of your compensation to encourage every long-term employee to anticipate that performance will be rewarded without ever tying your hands or creating a sense of entitlement among your employees.

Step 5

Emphasize the dollars you spend on after-tax benefits, such as health coverage, so that your employees understand that you are contributing these dollars as part of their overall compensation and that an after-tax dollar is much more valuable to them than a pre-tax dollar.

Step 6

Reflect your company's workplace, industry and geographical environment in setting levels and steps of compensation. You want to pay what you need to attract the best employees, but with cost-of-living differences a company based in Charlotte does not need to pay its employees what they would need to make if they were based in Palo Alto.


  • Select and implement benefit policies carefully so that you can be confident in your benefit vendors' reliability and appeal to your employees and in your company's capacity to continue funding the benefits for the long haul.

About the Author

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