When running a company, coming up with the right compensation plan is critical and can be challenging. You might want to consider a tiered compensation plan so your employees will earn money based on what tier they fall into. A tiered compensation plan is commonly used when you run a business that has employees who are represented by a labor union. These plans can help you cut down on costs and make employees happy.

Step 1.

Determine the number of tiers that you will break your compensation plan into. For example, you may want two or three tiers, depending on how many employees you have and how big your company is.

Step 2.

Set the criteria for each tier. For instance, new employees may all go into the first tier. Then after three years of service, employees might be able to work their way up into the second tier. After six years of service, employees can get into the third tier if their level of performance is up to par. Regardless of how you set up the tiers, you must clearly define when employees move from one tier to another.

Step 3.

Assign payment and benefits to each tier level. For example, employees on the first tier might earn $10 per hour, while employees on the second tier might earn $15 per hour. Employees on the second tier might receive health insurance for free, while employees on the first tier have to pay a certain amount for coverage.

Step 4.

Explain the tier compensation structure to your employees. If you are starting a new business, you can simply provide the details to all of the new employees and outline the tier structure. If you are implementing a tiered structure into an existing business, you need to explain how the plan differs from the existing compensation plan. In many cases, you may need to stick to your original compensation agreement with existing employees and then apply the tiers to new employees.


Make sure the tiers are competitive for your industry. If you want the best employees, you will have to be willing to pay them for their service.


Avoid vague wording about when and how employees can move up to another tier.