Is Your Compensation Fair? How to Create a Compensation Plan That Works for Everyone

What counts as fair compensation for employees? Here is everything you need to know about competitive compensation plans.


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how to create a compensation plan that works for everyone

The Society for Human Resource Management discovered that compensation and pay is the second-most contributor to job satisfaction. This means that company compensation packages, benefits and all, matter more than ever.

But it’s not just about providing an average package anymore. Employees are increasingly looking for fair compensation. For companies to remain competitive, they will need to dig deep into their compensation strategy to figure out if they are hitting the mark.

Still, many employers are wondering what fair compensation is and how to improve their packages. The good news is, it isn’t as complicated as it appears.

What is fair compensation?

If compensation is the total amount of payment an employee receives from their company, fair compensation is essentially providing the “right” salary in relation to the value the employee brings to the organization. The problem with “fair compensation” is that it is rarely clear-cut.

Calculations for fair compensation are based on:

  • Industry – Which industry you are in significantly affects wages — from how much you pay employees to how you pay them. Is an hourly rate normal or an annual salary? Most of this comes down to how your industry operates.
  • Years of experience and education level – Next, the level of experience also affects pay grade. Those with 10 years of experience or additional degrees bring that expertise to the role, and therefore, tend to be paid higher than someone with one year of experience.
  • Job performance – As the employee moves through the company and becomes a top performer, they are more likely to be eligible for pay increases.
  • Employee location – Wages and salaries are also affected by geography. It generally costs less to live in Tennessee than California, for example, and pay tends to be adjusted accordingly.
  • Supply and demand – Positions that are difficult to fill due to high demand and a low number of candidates also end up relying on higher wages to attract and retain candidates.

You may also want to consider the difference between minimum wages, fair wages, and living wages. A living wage is calculated based on the amount an employee needs to support themselves without needing a second job. Living wages vary based on employee location.

No matter what your salary ranges are, you’ll want to also consider things like benefits and perks.

But no matter what your salary ranges turn out to be, you’ll also want to consider other forms of payment, such as benefits and perks. Health insurance, investment options, bonuses, and development opportunities are all additional forms of compensation that can improve the quality of your total compensation plan.

5 tips for providing better compensation packages

Designing a stellar compensation package can help you to retain top talent, reduce the costs of turnover, and increase employee engagement. But it takes a bit of legwork to get started. To create a compensation plan that makes a difference, follow these 5 tips:

1. Get executive buy-in

First things first, it’s hard to implement any meaningful strategy without the executive team on board. It’s critical that management understands that competitive compensation plans will save them big bucks in hiring and retention.

If you have data or feedback from exit interviews that highlight the true cost of employee turnover due to poor compensation and employee benefits, use it. The more hard data you have that links compensation strategy to business goals, the more likely it will be that executives vote yes to raise wages.

2. Gather market data on compensation

You may have already done this to prepare for your board meeting, but at some point, you’ll need to do in-depth market research to understand the current trends in employee compensation plans.

There are several free sites that offer information about base pay, salary ranges, and other critical compensation information. For example, the United States Bureau of Labor Statistics offers wage data at the federal, state, and metropolitan levels.

3. Fine-tune your budgeting

Before you start setting pay ranges and choosing incentives, it’s important to understand how much you can really spend on each employee. In addition to taxes, payroll, and other administrative costs, you should also factor:

  • Merit pay – This is a performance-based bonus or base pay increase. Merit pay is usually offered if employees meet or exceed goals and expectations.
  • Equity pay – This type of pay comes in the form of company options, stock, and performance shares. It may be used to supplement pay if the salary is below market averages.
  • Promotional development funds – Organizations may set aside 1⁄2 to 1% of employee salaries to fund programs to streamline promotions or career development. While not a type of pay, this form of compensation can help employees climb the corporate ladder.
  • Other pay options – There are other compensation options that can be used as an incentive. Some of these include sign-on bonuses, overtime pay, and hazard pay.

4. Consider benefits and perks

Not everything is about the base salary or bonuses. According to a recent Zenefits study, 50% of employees stick with their current employer due to health insurance.

For human resources teams, this means it’s critical to budget for key benefits. Some common and in-demand benefits and perks include:

  • 401(k) matching
  • Retirement planning services
  • Life insurance
  • Disability insurance
  • Paid time off for sick leave or vacations
  • Flexible work hours
  • Work from home options
  • Mental health support

5. Conduct pay audits

Review and audit your compensation plans regularly to ensure there are no discrepancies.

HR teams should review and audit their compensation plans regularly to ensure there are no discrepancies. An audit should investigate the effectiveness and competitiveness of salaries, bonuses, incentives, and equity programs for all employees. This includes inspecting packages for unintentional discrimination, such as ensuring there is no wage gap between men and women.

Currently, the average female worker earns 81.6 cents for every dollar her male co-worker makes. Workers of color also face significant wage gaps. For example, black men make 87 cents for every dollar their white counterparts make.

When conducting your pay audit, you’ll want to ask yourself the following questions:

  • How much does someone earn when they enter the company and how does their payment change over time?
  • Does every position have its own pay grade?
  • Do employees have room to negotiate their pay, and if so, how does negation affect their salary?
  • Do all employees have the same opportunities to access raises and promotions?
  • Are the criteria for providing rewards consistent?
  • How does the company determine who deserves a bonus or another reward?
  • Are there differences in pay between genders, races, ethnic groups, etc?
  • How do employees feel about their compensation packages?
  • Are the current compensation packages on par with current market rates?

Next steps to creating a competitive compensation plan

Researching and developing an amazing compensation plan that pays dividends to companies as well as employees doesn’t have to be difficult. But there are several factors to consider. To keep everything straight, consider using our checklist and guide to get more done, faster than ever.


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