How to Create a Salary Compensation Plan

by Jason Brick; Updated September 26, 2017
Portrait of businesspeople

A well-written salary compensation plan can be a very valuable tool. It clearly communicates to employees how they can get the most out of their efforts for the company. It also provides valuable inspiration as employees can see exactly how to get from where they are to where they want to be. In general, you want to avoid exact dollar amounts when writing a salary plan. Instead deal in percentages. For example: "Employees successfully completing these job metrics qualify for a three-percent raise in gross salary."

Step 1

List all benefits that exist independent of experience or performance. These usually include health insurance, retirement benefits and employee perks such as wellness benefits or subsidized parking.

Step 2

Set baseline salary ranges for each job position. These need not be part of the published plan, but can help you work out mathematical models of how pay raises and bonus plans can scale.

Step 3

Decide on how you will measure employee performance. Salary raise structures usually work best with a graded increase potential (i.e., "A" employees get a high raise, "B" employees get a small raise and "C" employees get no raise). Include experience and time in job among your performance criteria, as all employees need the occasional raise to deal with inflation.

Step 4

Define the specific metrics you will use to judge each aspect of employee performance you intend to measure. Once you have chosen the metrics, set the standards by which employees will qualify for pay raises.

Step 5

Define the timing of employee assessment. Typically, this is either time based ("Employees will be reviewed twice per year at six-month intervals") or accomplishment based ("Employees will be assessed for pay raises upon accomplishing X").

Step 6

Set up an appeals process. If an employee feels he has received an unfair review, studies show even the illusion of being listened to will help with that employee's morale. A step-by-step review process for contested assessments will make real listening systematic.

Warnings

  • Consult with your company lawyer before drawing up any compensation plan. Employment law is complex even without delving into the esoterica of retirement benefits and insurance. The penalties for making a mistake can be severe.

References

  • "The E-Myth"; Michael Gerber; 1995
  • Interview with Bartt Brick, Vice President Electronic Banking, US Bank (Retired)

About the Author

Jason Brick has written professionally since 1994. His work has appeared in numerous venues including "Hand Held Crime" and "Black Belt Magazine." He has completed hundreds of technical and business articles, and came to full-time writing after a long career teaching martial arts. Brick received a Bachelor of Arts in psychology from the University of Oregon.

Photo Credits

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