Compensation Plan - Definition, Importance & Steps
What is Compensation Plan?
Compensation plan is the complete plan to award individuals for their efforts and to ensure that your employees stay with you and are satisfied over a longer period of time. Compensation plan completes the entire process of deciding the compensation package for the employee, giving it and revising the salaries, wages and incentives with time. It is important as it is a systematic way to plan the compensation for the employees.
Importance of compensation plan
Determining the right balance between the base pay and commission is the major challenge as a well-designed compensation plan helps create a work culture of high performance which ensures personal as well as organizational growth in tandem. Recognizing and rewarding the performance of individuals based on compensation and benefits creates an attractive environment for pulling and retaining top talent among the industry. For eg. A sales compensation plan intends to compensate the salespeople effectively. It is generally an incentive compensation plan that encourages the sales force to land new deals and to upsell to existing clients.
“Going to market is really a fundamental part of planning your business. The compensation plan is how you operationalize the sales force, get them aligned with the business goals, and get them motivated and driven to implement your go-to-market strategy” quoting Jin Stoeckmann, senior practice leader for sales compensation for WorldatWork
Generally companies have a written and documented compensation plan which is adapted and evolves as per the market conditions and competitive pressures. The compensation plan should be clear and distributed to the employee force in order to keep them motivated and goal oriented. The proper utilization of the plan lies in the hand of the line managers and the organizational hierarchies to get the best out of the sales force.
Elements of a compensation plan
A compensation plan should include the following essential elements:
a) Strategy: The company's strategy and the business objective in order to set targets
b) Performance measures: Set benchmarks, performance measures and metrics to help the sales force and to determine the focus areas
c) Payout formula: Determining the fixed and the variable component in order to spell out the gains for the employees
d) Governance: Procedure to resolve questions and conflicts not covered in the plan and might arise at some later
Steps to develop a compensation plan
There are certain steps which can help develop an effective compensation plan. The steps are as below:
1. Based on company objective, what does the company want to pay as compensation has to be decided
2. The incentives should be aligned with the company goals
3. Determine the mode of payment i.e.bank transfers, cash, cheque etc or stocks, shares etc
4. Ensure that the compensation is as per law of that country
5. Allocate compensation and salaries as per the company's budget, market rates, quality of people etc
6. Have provisions for constant revision of compensation and benefits
7. Inclusion of other benefits like healthcare, policies, company stocks etc
Hence, this concludes the definition of Compensation Plan along with its overview.
This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.
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