What is a compensation plan?
Use the insights gleaned from 17 million job ads and 3,000 workers to craft compensation packages that support your talent attraction and retention efforts.
Any employer’s appeal to candidates primarily hinges on the compensation package on offer.
Our research reveals that 37% of workers are dissatisfied with their current salary, a 3% increase from last year, and 39% are actively seeking new opportunities in pursuit of higher salaries. This presents a valuable opportunity for employers to attract top talent by providing competitive compensation that meets job seekers’ expectations.
In this article, we will explore how to create a compensation package that ensures long-term success through a well-researched planning process.
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What’s included in a compensation plan?
An organisation’s compensation plan is made up of several key elements. This includes:
- Salary: The foundation of any compensation package is your salary planning. Our research shows 72% of workers view salary as the key factor when choosing a job, so aligning this with candidate expectations is crucial.
- Bonuses: For many workers, financial incentives linked to performance is a driving motivator, and in certain industries and job roles this is a non-negotiable for employers who want results.
- Benefits: We found over two-fifths (66%) of UK workers would be happy to skip a pay raise in order to receive their most desired benefit, whether that be financial or non-financial.
- Perks: These can be listed under bonuses or benefits, or be seen as a category of their own. Perks tend to be less fundamental to a compensation plan but can accentuate it and give you an edge over the competition.
Why compensation planning is important
Getting your compensation planning right is crucial for organisational success for a number of reasons. Here are the key ones:
- Attract top talent: It’s a competitive hiring landscape out there, and the best way to edge out your competition and attract top talent is by offering an intriguing compensation package. Having a comprehensive compensation strategy in place can make salary negotiations easier and lead to more successful outcomes.
- Retain staff: Your staff retention rate will likely be closely tied to your compensation strategy. The better staff feel about their compensation, the more likely they are to stick around in the long run. Retention is vital to keeping the right skills and experience in your workforce and reducing the impact and costs of replacing departing employees.
- Improved engagement: Staff who feel they are fairly compensated will be more motivated and as a result more engaged in their work. Boosting employee engagement can have a positive impact on every area of an organisation’s output.
- Improved productivity: Staff who are more engaged also tend to be more productive. In fact, research from the University of Oxford found that happy workers were 13% more productive on average. Productivity is the driving force behind any organisation’s results, so having staff who are motivated and ready to perform is vital.
- Financial planning: Compensation plays a big part in your organisation’s overall financial strategy. Careful compensation planning is therefore important for making sure you can protect the financial integrity of the organisation while being competitive in the hiring market.
Types of compensation plans
There are different types of compensation plan that you can consider and the one you choose will depend on your industry and the roles you’re planning for.
Fixed compensation
Fixed compensation is the norm in many industries, with the compensation package made up of a fixed base salary and set benefits. This type of compensation has the advantage for both employee and employer of being predictable, as it won’t vary unless changes are made following a salary review, for example. This means employers can easily factor it into their budgets and forecasts, while employees know how much they’ll be taking home at payday.
One potential drawback of a fixed compensation package is there is no inherent incentive there to drive up performance. As long as they do their job well enough, staff will receive their fixed level of compensation, but they might not have the incentive to go the extra mile.
Performance-based compensation plans
A compensation plan based around performance is all about incentivising higher productivity and positive outputs from employees. These types of plans can be made up of:
- A base salary
- Earnings by commission (for example, extra earnings for each sale made)
- Bonuses dependent on hitting certain targets
- Profit-sharing schemes based on overall organisational performance
These plans usually have key performance indicators (KPIs) tied to them, and measurable objectives that align with organisational goals. This approach can boost motivation and productivity, but it does require careful planning and may not be suitable for any industry or job role.
You’ll have to think carefully about how a high-performing employee will impact your budgets, and again what happens if employees are way off their targets. Regular reviews and adjustments of these plans are a good idea to maintain their effectiveness and fairness.
Total rewards compensation plans
These are a blend of traditional financial benefits and non-financial incentives that can be used to create a more engaging employee experience. Think of it as a holistic strategy made up of things like:
- Base salary
- Performance bonuses
- Commission
- Traditional benefits
- Training and development opportunities
- Flexible work options
A diverse approach to compensation is useful when addressing the diverse needs of team members across an organisation as there is no one-size-fits-all solution.
Steps to creating an effective compensation plan
So how do you create a winning plan? Read on to explore the steps required for an effective compensation planning process.
Assess organisational goals and budget
There’s no point diving straight in and offering bonuses and profit-sharing. You need to know where your organisation stands financially and how you can offer the best compensation package to employees while staying financially healthy and responsible.
Then, consider how your compensation strategy is going to tie into organisational goals. For example, if pushing sales of your products is the number one goal, you might introduce incentives to get staff pulling in the right direction.
Conduct market research
No organisation exists in a vacuum, and prospective employees may have opportunities to work with competitors. To put together an attractive compensation package, you need to know what similar organisations are offering. Market research is central to this.
You can conduct your research by utilising compensation data from:
- Salary surveys
- Industry reports
- Third-party consultants
Benchmarking salaries and benefits in this way can ensure you make an attractive offer to potential employees while keeping your current workforce happy. Remember to consider factors such as location, which can impact what a candidate might expect to be offered.
Discover how to use salary benchmarking to attract, retain, and motivate talent with the help of our analysis of over 17 million job ads across 23 industries.
Define job roles and responsibilities
Writing job descriptions that accurately reflect the required skills, experience, and expertise for a given tole can go a long way to tying together a compensation plan.
Think about how complex some of the tasks in the job role are and how valuable they are in the hiring market. Work with relevant stakeholders on this to make sure you’re getting a range of perspectives and the plan is aligned across your organisation.
Develop a pay structure
Now you’ve done your research and your benchmarking, and you know how valuable the skill sets within your job roles are, you can define your pay structure.
One effective way to approach this for each role is to think about what you’d offer at the bottom and the top of a salary range. So, for example, you might have a role that pays £24,000 a year for entry-level professionals, and £34,000 for those with some experience at the top of the scale.
If you have regional markets or employees living in different parts of the country, consider the cost-of-living and how this could impact their needs.
Incorporate benefits and perks
Offering the right benefits can be the key to your talent attract and retention strategies. As a result, it’s important to think about which perks are most aligned with the priorities of current and prospective employees.
According to our latest, research the five most attractive benefits for candidates are:
- Flexible hours (41%)
- Sick pay above what’s required (26%)
- Pension contributions (25%)
- Hybrid and remote working options (24%)
- Learning, training, and skills development (22%)
By integrating these and other popular benefits into your overall employee value proposition, you can not only strengthen your appeal to potential candidates but also foster loyalty and satisfaction among your existing workforce.
Employee benefits have become increasingly important for organisations looking to attract and retain talent. Discover how to create a benefits package that stands out in a competitive landscape with the help of our latest research.
Communicate effectively
While crafting an exceptional compensation package is essential, effectively communicating its value can make a significant difference. To help your existing employees appreciate their benefits, consider utilising various communication channels like:
- Employee handbooks
- Internal communications
- Performance reviews
During the recruitment process, it can be beneficial to clarify all components of your compensation package before extending a job offer. Candidates should ideally have a well-rounded understanding of what you offer, which can help them gauge their fit within your organisation.
Measure and review the plans effectiveness
After implementing your compensation plan, it’s helpful to keep an eye on certain metrics to ensure it’s effectively complementing your efforts to attract and retain top talent. For example, you could explore:
- Employee retention rates: Monitoring these can provide insight into how well your package resonates with staff.
- Performance metrics: Evaluating employee performance might reveal the impact of your compensation strategy.
- Employee satisfaction surveys: Gathering feedback through surveys can help gauge how employees feel about their benefits.
- Feedback from employees to managers: Encouraging open lines of communication can yield valuable insights about employee perspectives.
- The financial health of your organisation: Assessing your organisation’s financial status is key to ensuring that your compensation strategy is sustainable.
By staying attuned to these factors and making adjustments as needed, you can ensure that your compensation package remains competitive and continues to meet the evolving needs of your employees. This responsiveness can play a vital role in contributing to the long-term success of your organisation.
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