We talked a bit about how to come up with a salary range for an individual employee in our article on how to write a job description. In today’s article we are going to continue our series on how to hire and manager with a deeper dive into pay and how to come up with a comprehensive plan for this component of your company’s compensation policy. So let’s get started!

1. How to design an employee
compensation plan
by FitSmallBusiness.com

2. Pay is only One component

3. In 1959 Frederick Herzberg
changed the way we think about
compensation. His work
suggested that a different set of
factors actually motivated people
to do a better job. Things such as:

4. •Opportunity
to learn and
grow within the organization.
•Increased Responsibility
•Achievement
•Recognition

5. With this in mind a “Total
Compensation Philosophy” should
focus on designing a full package
compromised of:
1. Dollar Amount of Pay
2. Benefits
3. The Motivating Factors listed in the
last slide.

6. Step 1: Establish a pay philosophy

7. In this step you should ask
yourself questions such as:
• Do I want to pay more or less than
those companies that compete with me
for talent?
• Do I want to give a lot of other benefits
besides pay, or less benefits so I can pay
more?

8. • How do I want to incentivize
performance?
• Will owners adhere to the same
compensation plan as employees?
Throughout each stage of developing
your total compensation plan, you should
check if the plan serves all three of the
primary stakeholders in the company:

9. • Employees
• Clients
• Owners

10. Step 2: Find out how much the
competition is paying

11. If you haven’t done so already,
you’ll need create a job
description for each of the
positions in your company so you
can compere what you are
paying with the competition.

12. When writing the job description
think about:
•What is the scope and major responsibilities
•How complex is it and what is its impact on
the company.
•What are the knowledge, skills and
competencies required to perform the job.
•What are the education levels and
experience required.

13. After that, you can find out
what others that compete for
the same talent are paying.
The primary ways to do this:

14. • Talk to people within your industry
and ask them what they are paying.
• Use indeed.com’s salary calculator
and advanced search feature at
Carrierbuilder.com
• Look for salary surveys online by
searching “Your Industry + Salary
Survey” on Google.

15. Step 3: Set the salary level/
per hour rate

16. Since competitive compensation
is not a motivator for higher
performance, we generally
recommend paying salaries that
are in line with competition.

17. Unless you feel a role is
particularly valuable to your firm
and warrants paying above the
competition, or that it is not very
important and therefore you can
pay less.

18. Keep in mind that Internally,
salary needs to be fair in the
context of the responsibilities
and experience required to do
this job versus others.

19. Step 4: Set your performance Pay
components

20. With “knowledge” workers, where
creativity is a large part of their jobs,
paying for performance is not the
best.
For these types of workers, providing
them with autonomy, mastery, and
purpose has proved to be a much
better motivator to performance
based pay.

21. For more on the dangers of
performance based pay see Dan Pink’s
video.

22. If you still want to implement a
performance based pay program, here
are examples of the types of things
you want to benchmark against:
• Improving processes and/or results.
• Enhancing customer satisfaction.
• Formulating and implementing new
products.

23. • Providing innovation and cost-savings to
operational methods.
• Performing at a significantly higher level of
complexity for a specified period of time due
to workload demand or similar circumstance.
For more on Performance Based Pay see this
paper by Oracle and this article from
Worldatwork.com

24. Step 5: raises

25. The first thing you want to do when
budgeting for raises is make sure that
your job descriptions and salary
ranges are up to date. If not you
should raise salaries across the board
to get your employees back in line
with the competition.

26. Then you should make sure that
pay is fair internally as well. To do
this rank employees who fall under
each job category from best to
worst performer, and make sure no
one is being paid unfairly in
relation to peers.

27. After making sure that pay
practices are inline from both an
external and internal standpoint,
you can look at rewarding top
performers with raises.

28. Keep in mind that it’s about
percentages, not dollar amount.
Anywhere from 0 - 5% is the norm
for most companies, and
companies rarely raise someone
more than 10% in any one year.
For more on how to handle raises check this article

29. The bottom line

30. With these steps you can design a
pay portion of your employee’s
compensation packages. After you
design it you should make sure
that it meets the following points.

31. • Is simple and easy for everyone to
understand
• Aligns employee, client, and owner
interests
• Will be seen as fair by the employee
when comparing similar jobs both
internally and externally.

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