Compensation Plans, Packages, & Recent Compensation Trends

This informative guide contains everything you need to know about creating potent compensation plans, including recent compensation trends to enhance the attractiveness of a position to potential hires. Read on for a detailed breakdown, and we highly recommend using the search function (Ctrl + F on Windows, command + F for Mac users) to skip ahead to the most relevant information for your business.

Creating a Strong Compensation Plan

The business of employment is ever-changing. The labor market ebbs and flows, workplace laws evolve, and business needs fluctuate — sometimes from one extreme to another. Still, some things have remained constant. Among them is the value of employee compensation.

Compensation plays a significant role throughout the employment life cycle. It’s a draw for attracting and securing qualified candidates during the hiring process. And it’s key for helping employers to keep high performers on board by remaining competitive within the talent marketplace. To achieve these outcomes for your company, you’ll need an intelligently designed, well-built compensation plan. In this guide, we’ll show you how to develop one.

What is a compensation plan?

A compensation plan is a formal written document describing the company’s position on total rewards provided to employees for services rendered. A good plan addresses the following:

• Who (i.e., which employees) is/are to be compensated.
• What types of compensation will be provided (e.g., salaries, benefits, bonuses, etc.).
• Why the compensation is offered (e.g., standard pay package, employee incentives).
• How much (i.e., the amount and/or value of each type of compensation).
• How often (i.e., the frequency of the specific compensation).

Once implemented, a strong and competitive compensation plan should:

• Support your business strategy and your operational and workforce needs.
• Keep you competitive within your industry.
• Attract and retain high-performing, qualified talent.
• Improve employee performance and job satisfaction.
• Help define your competitive market position in terms of base pay, incentives, and benefits.
• Help establish a total rewards plan based on your compensation budget, competition, and business conditions.

Types of compensation

Before you develop your compensation plan, be sure you understand the different types of compensation. Categorically, there are 2 overarching types: direct and indirect.

Direct compensation

Direct compensation refers to salaries and wages paid by employers to employees for work performed. It is monetary — such as base pay, variable pay, and differential pay.

Base pay

This is the employee’s hourly rate or an annual salary, without additional pay like overtime or incentives. It’s the foundational amount that you offer new hires. Generally, this amount increases or decreases over time based on the employee’s performance.

Base pay can be a solid indicator of the value your company places on an employee’s role and contributions. Moreover, a few factors must align for base pay rates to be effective. The organization and employees must view them as sustainable, externally competitive, internally equitable, legal and defensible, and easy to understand.

Variable pay

Variable compensation is pay that isn’t automatically set for the same amount every time. Variable pay may hinge on various factors and is usually based on reaching desired outcomes. An individual’s, team’s, or company’s performance is typically the basis for variable compensation. This structure is often used as part of a sales compensation plan.

Increasingly, organizations are offering variable pay based on employee performance or results achieved. Variable payment can increase employee engagement, productivity, and earning potential. For the employer, it risks less of the payroll budget.

Variable pay is incentive-driven. It can take the form of short- and/or long-term incentives, including:

• Commission plans
• Profit-sharing plans
• Stock options and stock-based plans
• Deferred compensation
• Signing bonuses
• Cash recognition awards

Some jobs are a mix of base and variable pay. For example: salespeople who receive salary plus commissions.

Differential pay

Also called “premium pay,” differential pay is extra wages paid to employees for working undesirable shifts (i.e., nights or weekends). It can also apply to employees working under adverse conditions (such as unusually cold weather). Differential pay is typical in the manufacturing industry.

Indirect compensation

Indirect compensation refers to the benefits an employer offers employees, whether voluntarily or mandatorily. These often include:

• Health insurance, health savings accounts (HSAs), and flexible spending accounts (FSAs)
• Employer assistance program; wellness benefits
• Retirement plans; matching contributions
• Paid holidays, vacation time, and other paid time off
• Educational and development programs; tuition assistance
• Disability, life, and supplemental insurances
• Fringe benefits and perks, such as discount programs and company-provided equipment, vehicle, or lunches

Now that you know what constitutes “compensation,” let’s move on to creating your compensation plan.

8 steps to building your compensation plan

1. Define your underlying compensation philosophy

Your company’s compensation philosophy is its moral position on pay and benefits based on your company values. Its consistent framework helps guide your principles about how you dole out money. It also informs what compensation stands for at your company. Ultimately, it’s about paying people the appropriate rate for the work they’re doing and the experience they bring.

Your compensation philosophy will be unique to your company. Best practice dictates adopting a fair compensation policy indicating that one’s pay should match their merits, tenure, and skill sets. It remains unbiased in terms of age, gender, race, religion, or protected categories. It should stay competitive with other similar roles in similar geographic areas. Fair pay also ensures compliance with employment laws.

2. Know what you want to achieve

This helps you figure out what skills you need on staff and how to prioritize new hires accordingly. It also helps inform incentive strategies to drive intended outcomes among current employees.

For example, if you need to plug talent gaps, you may take the following steps:

• Write down your business goals.
• Rank the goals based on priority. What objectives must you achieve vs. those you’d like to achieve?
• Define what’s/who’s needed to achieve those goals. Who are the people, and what skills and experience levels are required to achieve the goals?
• Document your “people gaps.” Wherever you’re missing talent, record the gap — you must write out where your business is missing key hires. This demonstrates your ability to anticipate human capital needs. It also buffers the People Operations team from finger-pointing when key business goals are missed.
• Devise a compensation strategy for each gap. You can utilize compensation benchmarking tools to inform your talent costs. Also, you may want to offer higher pay rates for more urgent roles.
• Share your results with your leadership team. Let’s assume you’ve defined your talent gaps and estimated the costs to fill them. The final step is to make strategic recommendations on filling the roles. This could be an internal change in roles and responsibilities. It could also entail attracting, recruiting, and hiring new people.

3. Conduct a job analysis for all positions in your company

A job analysis gives you the knowledge to set appropriate pay ranges for each position. The analysis involves carefully observing the role to determine the following:

• Its duties and responsibilities
• Its importance compared to other positions
• The qualifications required to execute the role
• The working conditions for performing the job

4. Obtain pay rates for all positions, and develop pay ranges

You’ll need to understand the going rates for all roles, including salaried employees, hourly employees, and any open positions. You can reach out to your personal network or research info from the U.S. Bureau of Labor Statistics. Either way, you will likely need to dig further for more meaningful data.

A more reliable solution is to leverage compensation benchmarking tools available from platforms like Indeed, Glassdoor, Salary.com, LinkedIn Salary, and Zenefits. Salary benchmarking tools offer actual, real-time salary data for specific jobs in specific geographic regions. In addition, they can provide median wages and salary ranges based on quartiles and estimate salary changes. This info helps project whether demand for the role will increase or decrease.

5. Decide which benefits to offer

This decision of which benefits to provide as part of your compensation plan is driven by several variables, including:

• Full-time vs. part-time employment
• Exempt vs. nonexempt employees
• What benefits your competitors offer
• Which benefits you’re legally required to provide or offer
• The benefit needs of your workforce
• What benefits you can afford to provide

6. Do not overlook the power of incentives as part of your total compensation plan

Incentives are the perks (typically monetary, but not always) used to motivate existing employees. Examples include bonuses, company stocks, paid holidays, and gifts or vouchers. They should tie as closely to performance as possible.

Take note that not all incentives are created equal. Poor incentives fail to motivate staff and may put your company at risk for high employee turnover. Conversely, employers who leverage strong incentives can see an increase in revenue, profits, productivity, and employee retention.

• A soundly constructed incentive compensation plan covers the following:
• Determining the target employees
• The requirements for earning an incentive
• The rewards employees can expect for achieving the goals or standards
• All related timelines for earning and payment of the rewards

Your incentive compensation plan should support efforts that move the business closer to its goals. Ensure that it’s clear and potentially achievable by all without favoring any particular subgroup. Finally, it should make sense fiscally and within your business’s infrastructure.

7. Stay in tune with your compensation budget

Your compensation budget gives you a sense of how many people and what level of experience you can afford to hire. It also helps inform current employees’ raises, promotions, and compensation adjustments.

Your budget helps define the following:

• The total number of people you can afford to put on your payroll
• The extent of and types of incentive strategies you can use
• Salary ranges for various positions
• The mix of total compensation (salary, benefits, and perks) you can provide to each worker
• The combination of worker types that are best to keep (contract, full-time, part-time, etc.)

8. Take applicable laws into account

Consider the federal, state, and local laws relevant to your business when drafting a fair compensation plan. Some of the most common compensation-related laws include the following:

• Title VII of the Civil Rights Act
• Americans with Disabilities Act (ADA)
• Age Discrimination in Employment Act (ADEA)
• Fair Labor Standards Act (FLSA)
• Equal Pay Act (EPA)
• Affordable Care Act (ACA)
• Employee Retirement Income Security Act (ERISA)
• Family and Medical Leave Act (FMLA)
• State and local wage and benefits laws

Specialized compensation plans

Depending on how your business is structured, you may need to create specialized compensation plans. Let’s look at the different considerations for executives and salespeople.

Considerations for executive compensation plans:

• The organization’s long-term and short-term goals
• What your direct compensation will be, typically based on industry, organization size, and sales revenue
• Annual incentives and bonuses, typically based on executive performance and a percentage of profits
• Long-term incentives. These are typically offered to select leaders who directly influence organizational performance and success
• Incentive stock options and restricted stock grants
• Special benefits and additional compensation, such as supplemental health and wellness benefits, non-qualified retirement plan, and company-provided vehicle

Considerations for sales compensation plans:

• Will you offer salary and commission, or only commission?
• Will the plan consist of salary and incentive, or only salary?
• Will incentive earnings be allocated as a dollar amount, or a percentage of base pay or sales generated?
• Does the plan meet both your organizational needs and your budget?
• Does the plan facilitate ongoing corporate growth and increased profits?

What if you don’t have enough money for your compensation plan?

When you calculate total compensation, you may be surprised at the cost of offering your ideal compensation package. Don’t panic if you can’t afford top dollar (or even median rates) for critical positions. This doesn’t necessarily mean you won’t be able to hire top talent or keep star employees. It just means you need to get more creative.

For example, let’s consider a smaller business that may not have big pockets. They may have the strategic advantage of being more agile than large corporations. They can be more flexible in incentivizing work from both monetary and non-monetary standpoints. Financial perks (like performance-based bonuses, profit sharing, or earning equity in the company) and non-monetary incentives or perks (like flexible work hours or career opportunities) can be value-adds for employees.

Lean into that flexibility and develop a total compensation package that delivers real value to your ideal workers. To define its value, you can even allocate a dollar amount to each non-monetary benefit.

Crafting or updating a compensation plan can be especially daunting for small to midsize businesses. Regardless of your business size, it’s essential to align with prevailing conditions. When the goal is attracting and retaining talent in a tight applicant market, creating a structured compensation strategy or updating your current plan to meet demand is crucial.

Aligning your compensation plan with market conditions

If you experience high turnover and exit interviews net a consistent theme — leaving for higher wages — you already know you need to adjust to the market. Even without attrition, periodically verifying you’re in line with the market is advisable. Turnover is expensive. You want to ensure the talent you rely on is satisfied and not considering a move.

Accessing wage data

There are many resources for businesses to determine market conditions. The U.S. Department of Labor publishes wage data by occupation annually. They list virtually every job category in the country. If employees work under a collective bargaining agreement (CBA), the local union can advise on prevailing wages. But geography and local conditions can significantly affect compensation and benefits variances.

Many businesses feel increased pressure to refrain from discussions about salary history, whether or not legislation prohibits them. Numerous companies publish salary ranges in job postings and on their websites. LinkedIn now lists salary ranges, and Google’s structured data for job searches includes base pay and location. Many employers are publishing ranges to attract talent. Wondering what a specific role should be paying? A quick search of comparable openings in your area could give you the information you need. Compensation in the age of pay history bans

Even if you’re not in a jurisdiction that prohibits discussing salary history, there’s a good chance you will be soon. To date, 9 states and 32 local jurisdictions have banned salary requests, and legislation is pending around the country.

These can create a problem for employers. Salary bans purportedly aim to create pay equity. They assume that if 2 new hires have the same job descriptions and perform the same work, they should receive the same pay. But let’s suppose 1 new hire has more qualifications, as in knowledge, experience, skills, etc. Shouldn’t that person be compensated at a higher level even though they do the same job?

If previous qualifications factor into performance, they may. An example may be an inexperienced retail associate compared to someone with several years of customer care experience. It might be advisable to create a compensation program with position levels and upgrade staff as they meet milestones.

Forecasting compensation costs

Remember to include future wages and benefit costs as you craft your compensation plan. Think in terms of total compensation vs. salary alone. Factor in annual wage increases, incentives, or bonuses planned at the top of the range. As employees meet goals, you’ll be ready to reward them accordingly.

In a good market, a structured compensation plan is necessary to attract and retain the best talent you can afford. In a tight market, a comprehensive plan may be mission-critical.

You must offer competitive wages and benefits in today’s tight labor market. Whether recruiting new employees or bolstering employee retention, a solid compensation plan is critical to finding and keeping top talent.

Employees today seek a good work-life balance and job security. Regardless, salary and benefits are often communicated as the top motivator. That means a regular review of your compensation package should be a top priority. But how do you do it? Let’s take a look.

When is it time to evaluate your company’s compensation package?

If you haven’t examined your compensation package in several years, it’s past due. A lot can change with perpetual shifts in compensation trends. What might have been effective 2 years ago may be outdated compared to what your competitors are doing. To remain competitive amid the flux, most companies are wise to do an annual review of their own compensation plans. Typically, this would occur around the time you’re planning next year’s budget so you can discuss and incorporate any necessary adjustments.

In a tight labor market with wage inflation, you may need to review your company’s compensation package more often. This could be the case if, for example, you have a high employee turnover rate. Exit interviews may reveal that compensation is a significant reason workers are leaving. If your job offers are getting turned down regularly, it may be another sign to evaluate your compensation plans. Consider making it part of your business strategy to schedule important compensation conversations with new, veteran, and exiting employees for the insights you otherwise wouldn’t receive.

Key areas to review when evaluating your compensation plan

Often, employees think primarily about base salaries when assessing compensation. In business, though, compensation goes far beyond the base salary. When reviewing your compensation plan, you must assess total compensation and working arrangements.

Total compensation

Remember that total compensation, or “compensation packages,” may include any combination of the following:

Pay: Base wages, commissions, bonus payments, stock awards, and other financial incentives and rewards

Benefits: Paid leave, sick days, holidays, and health, workers’ compensation, and other insurance coverage

Retirement savings: 401(k), matching contributions, pensions, etc.

Programs and perks: Employee assistance, gym memberships, childcare assistance, and more

In recent quarters, benefits beyond wages have reportedly accounted for an average of about 1/3 of total compensation, according to the U.S. Bureau of Labor Statistics. Many employers provide workers with an annual total compensation statement outlining the company’s contribution beyond the base pay employees receive.

Working arrangements

While not directly a type of compensation, you may also want to examine your working arrangements, particularly regarding remote work. Employees are placing a high priority on flexible schedules or workplaces. They may be willing to trade higher pay for flexible work arrangements. It’s worth considering how this added “benefit” might fit into your larger compensation plan.

How to do an audit of your compensation plan

A comprehensive review, or compensation analysis, will look both internally, at predetermined compensation metrics, and externally for important insights when developing and/or reevaluating your compensation plan. Here are a few areas to review.

Pay audit

The first place to start is to conduct an internal review. A pay audit involves verifying employee compensation and identifying any pay disparities to ensure your pay is equitable for employees.

This process helps you see areas where employees are not paid fairly. There should be a logical reason for employee salary ranges. An audit helps ensure there is no discrimination, especially among protected classes of employees. It also helps you comply with employment laws. Before conducting a pay audit, discuss it with your legal counsel to ensure you approach the process correctly.

Benchmarking

For recruiting and employee retention, you need to offer competitive compensation. This will require you to do a little research to benchmark your business against current conditions.

There are several resources you can use for competitive benchmarking, including:

• The U.S. Bureau of Labor Statistics
• Online job boards
• Industry-specific studies
• Third-party organizations

If you outsource your payroll to a company, you may want to check to see if it offers benchmarking services. When benchmarking pay ranges for employees’ wages, you also have to keep in mind your geographic location and your competitors. Some areas have higher living costs, so comparing them to less-expensive areas may be unfair.

When it comes to competition, you’ll also want to broaden your definition. In many cases, you aren’t only competing against others in your industry for high-quality employees. For example, someone in IT may have opportunities in a wide variety of businesses. Your compensation package must be competitive across industries.

Benefits analysis

Benchmarking must go beyond employees’ salaries. By comparing benefits against others, you can identify any troublesome gaps or shortfalls. Most analyses start with health insurance, one of the most-desired benefits for many employees. There can be significant differences between plans, so taking a deep dive and weighing factors beyond cost is essential. Also consider other health and wellness benefits in support of a healthy organization.

Doing a benefits and compensation analysis doesn’t only ensure you have a competitive benefits package. It can also help you identify areas for improvement and avoid foreseeable compensation issues down the road.

Compensation management software

Compensation management software is a planning system that helps employers, managers, and HR personnel to streamline data and budget-planning. Some companies even hire a Certified Compensation Professional for the role. Compensation management software provides the right tools and information for better assessing and refining company compensation strategies. This enables employers and compensation managers to develop competitive employee compensation packages.

Automation, integrations, and other compensation software features also help HR professionals save time, operate more efficiently, cut costs, and more.

What is compensation management?

Compensation management is the process of ensuring that an organization’s salaries and bonuses remain competitive, appropriate, and equitable. It also involves managing company benefit programs to make sure they meet the needs of the current workforce. Compensation managers are responsible for working with employment data and keeping up with complex benefits administration rules and regulations.

Compensation management plays a large role in HR because it can impact employee retention, the hiring process, company performance, and team engagement. Compensation managers are an important asset to the company’s success. If salary, bonuses, and benefits aren’t managed properly, employees might find much better comp packages elsewhere, performance and job satisfaction could decline, and several other factors could negatively impact the business.

According to TechTarget, the process for creating compensation packages and benefits are changing. “Wellness incentive programs, in particular, are having a major impact on employee compensation packages.” HR professionals need to be flexible to handle new and existing benefits as the workforce continues to evolve. Flexible work options, maternity or paternity leave, adoption reimbursements, and similar incentives are a few compensation package inclusions gaining popularity. So, it’s no longer just about the money.

What are the objectives of compensation management?

Compensation management programs are designed to keep salaries and benefits competitive to help both employers and employees. A comprehensive strategy helps the hiring managers make attractive offers to new talent based on data and current market trends. A compensation management plan also comes into play when giving raises or bonuses to top performers.

The objective is to make informed compensation decisions based on salary market data, industry, company size, job role, and location. Although there is value in compensation data analysis, it’s important to make compensation decisions according to the employee’s performance, qualifications, and potential. Offering the appropriate compensation (ie a package that is comparable to other companies in your field and location) can help lower turnover rates as employees will have less incentive to leave based on salary alone.

Another main benefit of compensation management is ensuring compensation equity. Determine if there is a gender wage gap at your company, or a wage gap based on other characteristics, such as race or ethnicity. Oftentimes data will reveal biases or discrimination that HR leaders or businesses owners are either ignoring or unaware of.

Finally, it can help save your company money by highlighting those you may be overpaying in comparison to market rate.

What should I look for in a compensation management software?

If you’re wondering how to analyze data, keep up with workforce trends, and manage compensation all on your own, don’t fear. You’re not alone. Managing every aspect of the process manually might feel impossible. That’s why many HR managers turn to compensation management software for help.

An effective software solution can help with budgeting for employee salaries, provide salary information according to a specific job role, and more. The software is designed to give managers a 360-degree view of employee data needed to make staffing decisions.

A compensation management feature is typically included in a human capital management software. When looking for a software, find out if it’s compatible with your current suite of digital HR solutions.

HRlab recommends choosing software that has a legal component for identifying potential compensation issues. It’s critical to abide by corporate policies, and state as well as federal regulations when implementing a compensation plan.

Data access is another important feature to consider. What sources is the software pulling data from? It’s crucial that the source of data is large enough to signify statistical significance, and that it’s reliable (that is, not randomly reported, nor self-reported).

Along with access, the reporting component should be straightforward and easy to use. Whether you need to segment budgetary distributions or see where the money is going as a whole, an easy to use reporting feature is critical.

Workflow automation is also important to consider. Micah Fairchild from HRlab writes, “truly functional compensation management systems activate workflows and provide necessary notifications for efficient data delivery.” A reliable software should simplify the entire process for employees, managers, and all of HR.

6 Forward-Thinking Compensation Trends

What do employees want in a new job in 2023? In recent years, the focus has been on a better work-life balance, more PTO and vacation time, shorter workweeks, and the ability to work remotely as needed. Some of these benefits options became hot topics following what’s now referred to as the Great Resignation. In its wake emerged the need to attract new talent in order to compensate for ongoing labor shortages.

Today, the employment landscape looks a little different. But it’s still important to have a robust compensation package to help secure new hires to fill your open positions. You may be wondering just how big your total compensation package should be to stay competitive with other organizations. A good place to start is with the U.S. Bureau of Labor Statistics.¹ According to BLS, total employer-to-employee compensation costs for civilian employees averaged $41.86 per hour in September 2022. Wages and salaries accounted for 69%; additional benefits accounted for the remaining 31%. The average was higher for government workers. Here, we’ll cover 6 employee compensation trends for the year ahead.

1. More pay transparency

Pay transparency is going to be a factor in 2023 as pay equity continues to be in the forefront. Pay gaps are often due to educational differences and differences in employee experience levels and hours worked. Still, your company may be asked to explain any that apply to current employees and new hires. Therefore you might consider demonstrating elements of fair compensation by listing salary ranges in job ads.

You might also create an internal company page that lists salary information for years of experience, education, training, and employee status. This could include additional info. pertaining to salary increases, hourly wage increases, monetary bonuses, and other incentive compensation.

2. Monetary compensation that accounts for the cost of living and inflation

Reportedly, salaries are expected to increase in 2023. The Fed may be trying to keep inflation low by raising the interest rate. Still, inflation was at 7.1% in November ’22, according to Statista. Employees will want types of compensation that account for the rising costs of food, housing, utilities, and even cars. A competitive salary or wage that addresses cost of living and other factors will enhance cash flow despite tough times.

3. More flexible hours

In order to attract the best employee for your open position, consider adding flexible hours to your job offer. Many employees will still be looking for positions that offer alternative ways to work. That will include staggered start and end times and in-office, hybrid, and remote work options. By providing multiple ways to work, employers enable employees to best optimize their time and productivity.

4. Health coverage to include medical, dental, vision and mental health

As the importance of physical and mental health remains in the forefront, employees are bound to continue seeking robust healthcare plans. This means that your company will need to look into offering comprehensive medical, dental, vision, and mental health benefits.

5. Company cultures that support employee growth and well-being

Employers who think they can’t find good employees because no one wants to work might be fooling themselves. The truth for some companies is that they can’t retain talent because no one wants to work for them.

Every day, companies are outed for any combination of off-putting attributes. These can include toxic company culture, bad pay practices, off-kilter work-life balance, and unprofessional compensation practices.

Some employers seek objective means for learning what past and current employees really think about their workplace. Those interested can search online for reviews or take an honest look at employee turnover and why employees say they’re leaving.

Looking ahead, expect employees to continue to gravitate toward companies that are known for desirable qualities. Those include having positive company cultures of inclusion and that focus on individual employees’ growth and well-being.

6. Employee training and advancement

Are you preparing your employees for the next stages of their career and advancement within your company? In 2023, employees will be looking for companies that take career advancement seriously. That means they’ll be interested in those offering both ongoing on-the-job training and external sources of training. They will value compensation for advanced degrees and classes that can help them hone and advance their skills.

Having a comprehensive compensation strategy ready for the year ahead can help you mitigate the effects of ongoing labor shortages by attracting top talent to your organization. Ultimately, a good mix of desirable employee benefits in your compensation plan can help you increase employee engagement, satisfaction, and productivity while reducing turnover and the need to replace workers.

Creating and maintaining a compensation plan that works for your business

A strong compensation plan is the backbone of a healthy and thriving business. Your compensation system as a whole should be reflective of your company’s values, company culture, and strategy. Establishing and sustaining a compensation plan that helps recruit and retain talent also requires regular evaluation and monitoring. It’s important to remain competitive within your industry and with other companies vying for the talent you seek.