Use This Employee Compensation Plan to Attract Great Talent

Are you paying enough attention to how you reward employees? Most businesses aren’t, and that’s a huge problem. According to Gallup, increasing their income is the top priority for most job candidates. Expected salaries are also rising, with 37% of people leaving jobs saying low pay is to blame.

Given those stats, an employee compensation plan is pretty imperative. While the most important factor is ensuring you’re offering competitive salaries, without a plan in place, you won’t understand your company’s compensation policies or how to improve them.

The price you’ll pay will be losing the race for top-tier talent, and in a skills-based world, talent acquisition failures can be catastrophic.

Stick with us to learn about the various elements of a great employee compensation plan. Then, use our expert guidance to create a plan that rewards your workforce.

TL;DR — Key Takeaways

• Employee compensation plans define the financial and non-financial benefits you pay employees. They align employee compensation with business goals, ensuring you pay enough to attract talent without going over your budgetary limits.
• Planned compensation ensures everyone is paid according to the value they deliver. This helps improve company morale and boost employee retention, both of which can improve your position in the talent marketplace. It’s also just the right thing to do.
• A robust employee compensation plan has four pillars. First, you need a clear compensation philosophy. Then, you need to consider job architecture and performance and include incentives to reward productive employees.
• Compensation plans feature direct and indirect compensation. Direct compensation includes pay, commission, and bonuses. Indirect compensation includes health benefits, training subsidies, retirement plans, and paid time off.
• Competitive compensation plans rely on market research and strategic planning. You need to be transparent and honest about what employees receive and adjust compensation plans as circumstances change.

What is a compensation plan?

Every company pays its employees, but not all businesses have an employee compensation plan, which is a structured outline that details the financial and non-financial rewards provided to employees in exchange for their work.

Key elements include salary, benefits such as health insurance and retirement plans, bonuses, stock options, and other incentives.

These elements work together to attract and retain talent. They incentivize employees to work harder and build skills. Well-thought-out compensation plans also create a stronger company culture, aligning compensation with company values.

Why employee compensation plans matter

Great employee compensation plans matter because they replace many salary negotiations with a simple, company-wide policy. Other benefits include…👇

Matching pay with market rates

Perhaps the most obvious benefit is that creating a compensation plan requires you to compare current pay with market rates, ensuring you keep up with competitors.

As part of this analysis, you have to consider every role systematically to ensure you’re not accidentally underpaying top employees (yes, it can be accidental and often is, especially in today’s economic landscape where inflation and rapid industry advancements mean salaries are increasing faster than ever before—or should be, at least).

This helps because fairly paid employees tend to stay longer and enjoy better morale. Staff turnover should drop as you retain employees. Expect productivity to rise due to better job satisfaction.

Meeting financial goals

Planned compensation decisions can often help you meet your organization’s financial goals. With sound planning, your compensation packages won’t leap ahead or lag behind your budgetary means.

This is because compensation plans help you determine total compensation levels. Strategists know what you can afford and how much you should pay to retain talent. Confidence in your financial capabilities lets you balance base pay and benefits.

Without that knowledge, you’ll likely turn off elite hires and see staff drift away. It’s even possible to lose talent in some areas and pay more than necessary elsewhere!

Easier recruiting

Compensation plans also make it easier to source talented employees. Better pay attracts better hires—simple as that. Ambitious and skilled job seekers avoid companies paying below market rates (unless they offset low salaries with a targeted benefits package).

Moreover, fair and transparent pay structures show you are honest and open about what you offer. 80% of job seekers won’t apply if salary details are hidden or unclear. Transparency broadens your appeal and positions you as an employer to trust.

Smooth HR

Finally, planning compensation packages makes life easier for human resources teams.

With a plan in place, HR professionals don’t have to negotiate separately during recruitment processes. Plus, existing employees know where they stand and when they are likely to receive a raise. Everything runs smoothly, freeing time for more important matters.

The four pillars of compensation packages

We like to use a “four pillars” approach when structuring an employee compensation plan. The four concepts below are the perfect foundation for a comprehensive compensation package.

Compensation philosophy

The first pillar goes to the root of how you think about compensation. Your compensation philosophy informs the benefits and pay you offer.

Compensation philosophy applies your company values to each compensation decision. Salaries should reflect your approach to career development and company culture. Taking a “big picture” approach helps you consider every department and employee role.

Job architecture

The second pillar of an employee compensation plan deals with structure. HR teams need to know how each role fits into the company’s job architecture.

Create a job architecture plan mapping every internal role. Categorize roles by skill levels, responsibilities, and seniority. Use these categories to assign appropriate compensation.

Performance management

The next compensation plan pillar is about linking pay to employee performance. As noted earlier, your employee compensation plan should reward good work. To achieve this, you need ways to measure performance and feed the results into compensation decisions.

HR professionals have a few options here. Measuring performance against KPIs is a good start, although some roles don’t suit data collection. Alternatives include in-person performance reviews and 360-degree feedback from colleagues. Both techniques provide qualitative data to replace or supplement data analysis.

Incentives

Our fourth pillar of compensation packages is providing suitable incentives. A killer compensation plan must encourage productivity and personal development. There are a few ways to do this.

The most common technique is systematically providing staff bonuses. Bonuses could be monetary or non-monetary—you can mix and match if needed.

• Monetary bonuses include annual payments, payments after set years of service, or commissions. Bonuses suit sales-based roles where you can easily analyze productivity, but variations like relocation stipends can also make life easier.

• Non-monetary bonuses are more wide-ranging. Employee benefits could include paid holidays or extra parental leave. Some organizations provide wellness or gym reimbursement.

Types of compensation

We’ve discussed how to structure a great employee compensation plan, but what about the content? When thinking about content, we find it helpful to distinguish between direct and indirect compensation.

Direct compensation

Direct compensation involves rewarding employees with monetary payments. This sounds simple, but there are various forms of direct compensation. The type you choose should suit the needs of your workforce.

🕙 Hourly compensation

This form of direct compensation means employees receive a set monetary amount based on the hours they work.

Hourly compensation tends to be flexible, suiting sectors where employee turnover isn’t a huge issue. Companies can assign hours as needed, allowing them to compensate for downturns and manage uncertainty. Workers can organize schedules around their non-work activities.

On the downside, hourly compensation is a short-term option. Employees have less certainty about job security, which makes retaining skilled workers difficult for companies, as they usually prefer higher annual salaries to an hourly rate.

💰 Salary compensation

A salary compensation package pays an annual monetary amount to each employee. Salaries are associated with skilled roles, where companies want to secure experienced workers long-term.

Salary compensation packages are predictable and stable. Employers can set salary targets to manage costs and provide the right incentives. Current and prospective employees know what to expect, making it easier to attract and retain talent.

With salaried compensation, companies can also better plan their compensation programs. HR teams can schedule salary increases, and link pay to professional development plans, which isn’t possible with hourly pay.

💵 Commissions

Commissions are payments for specific employee achievements. They are generally limited to sales roles and reward staff for each confirmed sale.

Payments vary by industry. In real estate, listing and buying agents share roughly 5% of every sale. Car dealerships often pay over 25% per sale to motivate sales staff.

One study found commissions boosted pharmaceutical sales by 6-9%. The problem is they only work in sales roles.

Overall, commission can distort pay in companies with a mix of sales, admin, research, or technical employees. Handle commission with care. It’s not always the best solution.

➕ Bonuses

Bonuses supplement regular pay with separate payments. They are particularly common in the tech and financial sectors and can take various forms.

• Performance bonuses encourage innovation and focus employees on performance goals. Microsoft and Google rely on performance bonuses to meet KPIs or recognize achievements beyond the norm. Meta uses them to offset rapid changes in headcount and help employee retention when times are tough.

• Retention bonuses pay current employees to stay with the company. These bonuses are common during turbulent periods. For instance, Twitter used bonuses to support retention efforts when the platform changed ownership in 2022.

• Sign-on bonuses (or “golden handshakes”) attract new hires. Companies typically pay these bonuses to highly skilled employees. The cost is often worthwhile if stellar executives or skilled professionals provide a competitive advantage.

Indirect compensation

Indirect compensation involves non-monetary services or benefits. These employee benefits complement base pay to attract top talent and keep existing employees happy.

There are many variations of indirect compensation. Here are just a few.

• Health and wellness benefits: You could offer general medical insurance or limit costs by providing dental insurance or vision insurance. Covering dependents is even better — but more costly. Affordable alternatives include wellness benefits like gyms, yoga classes, or mental health support.

• Retirement plans: 401(k) plans match employer and employee contributions, giving workers a stake in the company’s long-term prosperity. Generous retirement plans also make employees feel more secure, which encourages commitment and motivation as they build their careers with you.

• Paid time off (PTO): Paid leave gives employees space to explore their passions or build skills. Leave also shows your commitment to work-life balance—a critical way to attract top talent.

• Professional development: Subsidize access to higher education or professional training. Expert-led workshops or mentoring can build confidence and help the company attract upwardly mobile young talent.

• Employee recognition programs: ERPs reward high achievers or exemplary employees with awards and gifts. This is more than internal PR. Recognizing achievements helps employee motivation and promotes a vibrant company culture.

• Work-life balance initiatives: Flexible work hours and remote work support help you stay competitive when attracting younger job seekers. Childcare support or leave to care for seniors covers older employee groups.

How to create a competitive compensation plan

We’ve discussed indirect and direct compensation and introduced the “pillars” approach. Let’s glue everything together with best practices to guide your compensation planning.

Tip 1: Research your market

Every competitive compensation strategy rests on comprehensive market research. Document industry benchmarks for relevant roles. Job descriptions are good sources. Focus on companies with a similar profile and size. Checking global giants is fine, but pay closer attention to your main competition.

Competitor websites are also good sources when researching non-monetary compensation measures. Job seekers will be aware of industry norms. Benefits that appear often should be figured into your company’s compensation strategy.

Tip 2: Think strategically about what you can afford

Compensation shouldn’t just align with your operating objectives. Paying employees well should be a core component of your business strategy. Even so, every company has its limits. Know your limits.

Part of your planning should define a compensation budget. Set limits for the value of each compensation type (or a range of values for every role).

This is important for pay, but it also helps assess workforce needs. Don’t spend money on benefits that nobody wants. Survey your workforce, ask for their opinions, and incorporate staff needs into your compensation measures.

Tip 3: Be transparent about your compensation package

As a rule, a competitive compensation plan is something to highlight and promote—not hide away.

Transparency lets applicants (and the general public) know you take compensation seriously. It also builds trust internally. Employees know they will receive fair treatment in exchange for hard work.

Tip 4: Maintain a dynamic compensation plan

A good compensation plan adapts and evolves. Workforce sizes and demographics change, resulting in new employee needs. Remote work may become more desirable, or parental leave could become a workforce priority.

If your compensation program remains static, you’ll be left behind. Avoid that by scheduling annual compensation plan reviews.

Ask employees if they feel fairly rewarded or have suggestions about improving their compensation package. Audit competitor practices, as well. You may be relatively stingy or paying too much. Regular reviews are the only way to find out.

Competitive compensation is only one part of talent acquisition

Systematic compensation planning ensures fair treatment of all employees, helps attract and retain talent, and keeps pay or benefits within sensible limits. Our plan and tips should help you create a plan that ticks every box.

Creating an efficient compensation program isn’t enough, though. Over the years, we’ve learned that talent acquisition is about more than money or perks (although both are important). Compensation is part of a wider strategy to source the skills you need.

Foster an appealing company culture and pathways for employees to thrive. Help staff achieve a healthy work-life balance and create policies to combat discrimination and promote workplace fairness. In other words, create a holistic recruitment strategy.

We can help with that. Toggl Hire streamlines hiring, allowing HR teams to harmonize recruitment and compensation. Find the right people for every role and offer competitive rewards to sweeten the deal.

To see how it all comes together in the hiring process, sign up for a free account.