Employee compensation may seem like a straightforward decision; however, there are many factors that come into play when determining an employee’s compensation. While each organization is unique and may have special factors that must be considered, all organizations should have a thorough compensation plan that tells its employees exactly how their compensation is determined.
To develop a compensation plan, organizations should do the following:
Perform Market Research - This includes performing compensation benchmarking by analyzing compensation data for similar roles at similar organizations within your region. Organizations can also look at what competing organizations are offering in order to ensure their compensation packages are competitive.
Develop a Compensation Philosophy - Determine your organization’s compensation philosophy - will your organization offer compensation that is above, below, or at market rate? You will also need to determine the organization’s position on linking performance to compensation.
Consider Organizational Strategy - Ask questions like: What is the financial health of your organization? What budget constraints must you consider? You also need to consider the organization’s overall business strategy, mission, and vision. Align your employees’ compensation with the organization’s budget and strategy.
Tie in Employee Performance - Organizations should link compensation to performance in a way that is clearly communicated with employees so that employees know exactly how and when they may earn merit-based increases, one-time bonuses, or other incentives. If employees’ contributions to organizational goals are rewarded, this should be clearly laid out in the compensation plan.
Understand Legal Compliance - When developing a compensation plan, it’s important that organizations understand minimum wage laws. This includes local, state, and federal minimum wage laws and regulations. Organizations must also ensure compliance with non-discrimination laws by adhering to equal pay standards and eliminating compensation bias.
Review Total Compensation- Consider other forms of employee compensation when determining salaries. This may include benefits such as health insurance, retirement plans, paid time off, and reimbursements. If your organization offers profit-sharing, performance-based bonuses, and/or stock options, those should also be considered when reviewing total compensation.
Once established, an organization’s compensation plan should be reviewed annually and updated as needed. While there may be times when a compensation plan remains unchanged, it’s often necessary to make updates to compensation plans in consideration of the following:
Changes to employee benefits
Inflation and changes to the cost of living
Legal compliance, including changes to the minimum wage
Changes in the organization’s funding or budget
By developing a thorough compensation plan, organizations can attract and retain talent in accordance with their financial and strategic goals.
If your organization needs support in developing a compensation plan, reach out to Cause Capacity to learn more about our project-based HR support.
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