6 Steps to a Simple Compensation Plan for Your Small Business
Compensation plays a crucial role in attracting, retaining, and motivating employees within your small business. Labor costs can account for as much as 70% of total business costs; this includes employee wages, benefits, payroll and other related taxes. Yet, many small businesses lack a compensation plan. Having a compensation plan provides you and others a clearer picture of your small business allowing you to make better decisions.
Creating a compensation plan can often seem like an intimidating task, especially for small business owners with limited resources and expertise. Being proactive about developing a compensation plan before the need to hire is key. In this blog post, we'll guide you through the process of developing a simple yet effective compensation plan that aligns with your business goals and budget.
Step 1: Define Your Compensation Philosophy
Take the time to define your compensation philosophy considering factors such as your company's values, culture, and financial constraints. Clearly outlining your compensation philosophy will serve as a guiding principle throughout the plan development process. Your compensation philosophy should answer the following questions:
Are you aiming to offer competitive salaries to attract top talent?
Are you focused on rewarding great performance and incentivizing results?
What milestones must be met for compensation increases and bonuses?
Who in the company owns the compensation process?
Step 2: Conduct Market Research
Next, conduct market research to understand prevailing compensation trends and benchmarks within your industry and the geographic location for which you are hiring. Online resources, industry reports, and salary surveys can provide valuable insights into typical salary ranges for various roles and experience levels. Salary.com, Payscale.com, and Indeed.com are great online tools for conducting salary market research. Check with your local chamber of commerce also as they generally offer wage surveys you can participate in or purchase to help benchmark your rates against other organizations in the area. Use this information to ensure that your compensation plan remains competitive and aligns with market standards.
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Step 3: Determine Salary Structures
Once you have a clear understanding of market benchmarks, determine the salary structures for different roles within your organization. Aim to strike a balance between offering competitive salaries and staying within your budgetary constraints. Consider the following factors:
Expertise needs: Determine the help and expertise that your company needs.
Budget: Assess how much you can dedicate to a compensation budget monthly and annually. Consider variable compensation components such as commissions, bonuses, and profit-sharing.
Job responsibilities: Responsibilities should be defined as exempt or non-exempt level work as defined by the Department of Labor.
Skill requirements: Define what skills are required, desired, and preferred for success in the position.
Experience: Determine what experience is required, desired, and preferred in terms of years of experience and the type of functional experience to be successful in the position.
Job Description: Write a job description that includes the essential functions of the job, skills, and experience for the position. Never hire someone without a job description for the role the employee is hired.
Pay ranges: Determine a pay range for each position to include a minimum, midpoint, and maximum pay rate for each position.
Salary.com, Payscale.com, and Indeed.com are great online tools for conducting salary market research.
Step 4: Factor in Performance Metrics
Providing performance metrics accompanied by additional incentives can help motivate employees to achieve specific goals and align their efforts with business objectives. In addition to the variable compensation mentioned, consider performance bonuses, annual performance increases, on-the-spot bonuses, or gift cards. Be sure to establish clear and measurable performance metrics to determine eligibility for incentives.
Step 5: Communicate Your Compensation Plan
Transparent communication is key to the success of any compensation plan. There is a growing trend amongst employees to discuss their pay with each other (which is a protected activity as outlined by the National Labor Relations Act), so be sure to be transparent about compensation. Read our previous blog post that provides all you need to know about pay transparency.
Craft a compensation policy to clearly outline the details of your compensation plan to employees, including how salaries are determined, performance expectations, and any opportunities for variable compensation. Encourage open dialogue and address any questions or concerns that arise to ensure that employees understand and feel valued within your organization.
Step 6: Review and Adjust Regularly
Finally, remember that developing a compensation plan is an ongoing process that requires regular review and adjustment. Periodically evaluate the effectiveness of your compensation plan against business objectives, market trends, and employee feedback. CPR recommends that small businesses begin by reviewing market data twice a year, then move to annually, then every two years. Make necessary revisions to ensure that your compensation plan remains competitive, fair, and aligned with the evolving needs of your business.
Conclusion
Developing a simple, yet effective compensation plan is essential for small business owners looking to attract, retain, and motivate top talent within their organizations. By following these steps, you can create a compensation strategy that supports your business goals and fosters a positive employee experience. Remember, your compensation plan should reflect the unique needs and priorities of your small business while remaining competitive and fair in the eyes of your employees.
Disclaimer: The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only. Information on this website may not constitute the most up-to-date legal or other information.
