Designing a Well-Rounded Compensation Plan

Compensation is a hygiene factor that is essential for employees. The absence of a well-developed compensation plan can have a negative impact on an employee’s motivation, thus impacting performance.

With 80% of best-in-class employers offering health insurance and effective compensation reducing organizational attrition by 56%, the benefits of well-rounded compensation plans cannot be denied (Source).

Another point to consider is the changing preferences for compensation. For example, Millennials want better pay and benefits, but are not demanding perks. Also, since millennials are in their late 20s and 30s, they want more time with family or want leaves of absence available to them for taking care of aging parents. Therefore, a well-rounded compensation plan should include many aspects rather than just money.

What Does a Compensation Plan Include?

A compensation plan includes more than just money or even healthcare benefits. Some of the factors of the multifaceted compensation plan are:

Fair Compensation

One essential component of a compensation plan is a fair base salary. Paying employees above the industry average is a great way to increase job satisfaction. However, it is not the only component that impacts job satisfaction.

A fair compensation plan also includes a fixed raise per year. Also, added roles and responsibilities mean an increased pay expectation, which if not met can result in demotivation and reduced performance.


Benefits like childcare, healthcare, and travel expenses are a great addition to a compensation plan. This is because it increases the purchasing power of the employee as some of their expenses are covered in the plan.

For women, especially mothers, benefits may also include flexibility in work schedule and hospital coverage when delivering.

Learning and Growth

This aspect of compensation may not be viewed in monetary terms. However, its alignment with the employees’ personal professional goals can assure lower turnover and employees equipped with skills and knowledge to better perform their jobs.

Learning and growth are also associated with promotions, therefore, employees who receive adequate learning and growth opportunities while on the job tend not to switch and also showcase improved performance.

Paid Time off

Another form of benefits that is part of the compensation plan is paid time off. This may mean offering holidays and leaves that are paid. For mothers, it can be adjusted to offer paid maternity leaves for up to some months.

This helps in retaining employees that are an asset to the organization.

Insurance coverage

Insurance is probably one of the most common forms of benefits in compensation plans. Insurance coverage again reduces the level of expenses, thus increasing the value of the base salary.

This insurance can include healthcare insurance, life insurance, or asset insurance.

Stock Options

A common form of compensation for upper-level employees is stock options. This compensation aspect is also connected to better performance since employees believe that their performance will determine the valuation of the company, thus the value of their stocks.

Recognition Bonuses

Another common form of compensation is offering bonuses around the holiday season or for recognizing the employees’ performance.

At times companies do not offer cash-based compensation. Vouchers and gift cards may be used to compensate the employee since putting a monetary value to the reward is not satisfying in the long run.

How to Design an Effective Compensation Plan?

An effective compensation plan does not necessarily include all of the aspects mentioned above. This is because the quantity of the compensation does not determine its effectiveness. The following tips help in designing an effective compensation plan:

Conduct an Employee Survey

One way to determine what your employees will be most motivated by is by conducting a survey. The survey can be as simple as assessing whether they are parents, how many members they have in their family, are married, expecting, or have other roles and responsibilities.

Just doing this can help assess the types of compensation plans that can be offered. For example, if the workforce consists of a large number of women who have children, offering them childcare benefits, healthcare insurance for the family, and maternity leave alongside the basic salary amounts to a good mix of compensation elements.

Conducting an Exit Interview

If your company is facing high turnover, chances are that you are not diagnosing the problem correctly, designing an exit interview can help in understanding what can be changed in the compensation plan.

For example, some of your employees may be quitting because of a toxic work culture in which the boss does not stop contacting them when the employee is on leave or weekends. This is an issue to address and one that has a direct connection to the compensation element of paid time off.

Assessing the Industry Average

In order to become an employer of choice, it is important to top what the industry is offering. This does not only include the salary but additional benefits and perks which may be attracting a higher number of candidates and more talented employees.

Also, the industry average can be assessed through exit interviews, although it is important to conduct them strategically so they can serve their purpose.

What not to do

A trial and error method is one of the issues that companies face when designing compensation plans. A trial and error method may result in exceeding the budget. It may also impact employee morale since an inconsistent compensation policy reflects badly on the organization.

Offering fixed salaries and benefits to employees that contribute directly to sales and company performance is also a wrong way to go about the compensation strategy. In this case, a commission-based salary along with base pay is the right way to motivate these employees.

It is not a good practice to always offer cash-based incentives and rewards. This is because the marginal utility of money decreases over time. Therefore, the same amount of reward offered consecutively will not yield the same boost as the first time.

·Celebrating small wins in the workplace with a cake or company-sponsored lunch or dinner is better than cash-based rewards if the employees are already being adequately compensated with the base pay.

Summing it Up

All in all a compensation strategy should entail what the employees want and the type of job they are doing. Those who are working in jobs like sales or those in upper-level positions should be offered commission-based pay or stock options to further tie their interests with the company goals.

There are a lot of ways the compensation elements can be mixed and matched, but many of these are not valued in monetary terms, but rather in terms of the work culture and satisfaction that the employees receive from it.

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