A clearly written compensation letter tells an employee exactly where he stands with your company. In the letter, compensation is not just the employee's salary. Compensation means everything the employee gets for working at your company. This includes salary, benefits, bonuses and time off. While an employee rarely questions his compensation letter if he is getting more than he feels he is worth, if the opposite is true, the letter will serve as proof of your commitment.

Write the current date at the top of the letter, single space, and write the recipient's name and address.

Insert the salutation. Keep it formal. "Dear Mr./Ms. Smith:" is the appropriate format.

Write an introduction, identifying the company, the individual or governing body that approves the compensation and the recipient. Indicate the reason the compensation is being instituted or changed (e.g. "for exemplary service over the past three years").

Detail the compensation in bullet points. Each bullet should be an individual aspect of the compensation. For example, "Your base salary will be $75,000 per year, payable in biweekly installments over 26 pay periods," is one bullet point. "Your bonus shall equate to 10 percent of your overall sales at the end of the previous calender year" is another.

Write the date the compensation goes into effect.

Insert any conditions, caveats or restrictions on the compensation. Make them clear and direct to eliminate any confusion.

Sign the letter. Print your name and title below the signature. Make a copy for the recipient's file and provide him with the original.