Compensation plan is a very necessary  incentive for employees to fulfill their designated goals. They are also what determines your company’s competitiveness when hiring talent.

But how do you develop the right compensation plan for your business?

Here is a quick guide:

1. Do your research

You want first to be informed on what is obtainable in other organisations similar to yours. The three items you should be interested in are base pay, short-term incentives, and long-term incentives. To stay competitive, your company must at least, match the industry rate.

2. What’s your budget?

Your compensation plan needs to fit into your budget, especially as a startup. While you want to avoid offering a meager compensation plan if profits are high, you don’t want to offer something that would choke your cash flow.

Perhaps most important of all is the need for consistency in your compensation plan. Whether a business is doing well or not, pulling benefits or bonuses may cause resentment among your staff. So be realistic when designing compensation plans. For this reason, consider the next point.

3. Consider performance-based compensation plans (with a base salary)

A lot of employers today, adopt performance-based compensation plans to boost productivity and maximize their return on investment in compensation. These types of plans are designed to reward employees who  are efficient and productive. Which is genius actually as the “carrot” is always dangling before your staff.

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The advantages are numerous. Employees are motivated to increase their productivity, job security increases as the company’s greatest cost (which is payroll) rises and falls automatically along with the company’s performance. And finally, it fosters better team spirit as everyone is focused on revenue, profit, and savings.

This method has several pitfalls, though. For one, you may set performance targets too low. Another common mistake is to use the wrong metrics in determining an employee’s performance. So, you’ll want to do your homework in setting up performance measuring systems.

4. Mix it up a bit

Include both short and long term options in your compensation plan. Ideally, your plan should have benefits that reward employees in the short run, such as bonuses and commissions. It should also have long-term benefits, such as stock options and healthy retirement plans if you can afford it.

Compensation doesn’t have to be strictly pay-raises. A health plan or a dental plan is worth considering as well as family-oriented benefits, like onsite childcare or daycare reimbursement.

5. Communicate your compensation plan clearly

Be clear when putting your compensation plan into your company policy book. Ensure employees understand from day one, how the system will benefit them and the company.

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As you develop your compensation plan, here are some pitfalls to avoid:

1. Doling out large base pay packages with small incentive opportunities

The purpose of compensation plans is to encourage employees to maintain a high level of productivity. So avoid a case where you’re offering employees large base pay packages, while the incentives are relatively minimal. When you consider that the recommended range for short-term incentives is 30-50%, you may want to dial back that base pay package a peg or two.

2. Compensation packages that focus on short-term goals

A good compensation plan will not jeopardise long term goals for short term ones. That way employees are not tempted to make decisions that generate short-term results (and provide them a generous bonus), but are detrimental to the organization over the long term.

3. Offering a commission-based system with no base salary

Apart from a few industries, like sales, this system of compensation is not very favorable.

A base salary means you can expect certain things from employees such as adhering to company policies, protocols, and systems, putting the needs of the company first and generally being a team player. The higher the base salary, the higher the implied expectations of the employee on this front.

The lower the base, the more implied freedom she has to do things her way. An employer who has employees on a full commission has little, if any, authoritative ground to stand on when it comes to dictating how things should be done. Employees are likely to see themselves as independent contractors with all implied freedoms.

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But then again, that may be what you’re going for. It’s your company, so choose accordingly.

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