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Compensation Plans Every Business Should Have

When running a business, one of the most important aspects is ensuring that everyone involved is properly compensated. This includes employees as well as the company itself. A compensation plan…

September 2, 2022

Written by John Wonneberger

When running a business, one of the most important aspects is ensuring that everyone involved is properly compensated. This includes employees as well as the company itself. A compensation plan defines how you will pay employees and what benefits they will receive. 


It also outlines how the company will be reimbursed for its expenses. There are many factors to consider when creating a compensation plan, including the benefits for employees and businesses. In this blog post, we will discuss what a compensation plan is, all the factors that make one successful, and which types of compensation plans are must-haves for all businesses. 


What’s A Compensation Plan?

A compensation plan is a document that lays out how an employee will be paid. This includes their salary, bonuses, and any other benefits they may receive. It also shows how the company will be reimbursed for its expenses. 


There are many different compensation plans, but they all have one common goal: to ensure that everyone involved is properly compensated for their contributions. The most important factor to consider when creating a compensation plan is what you want it to achieve.


Determining Your Compensation Plan Goals

The first step in creating a compensation plan is to determine your goals. What do you want the plan to accomplish? Do you want to attract and retain top talent? Do you want to incentivize employees to reach certain milestones? 


Once you’ve determined your goals, you can start creating a plan to help you achieve them. There are many factors to consider when crafting a compensation plan, but some of the most important ones are outlined below. 


Employee Salaries

One of the most important aspects of any compensation plan is employee salaries. This is the base amount that employees will be paid for their work. It’s important to set competitive salaries that reflect the skills and experience of your employees. 


You should also consider how salaries will be increased over time. Will employees receive cost-of-living increases? How often will they be eligible for raises? Answering these questions will help you create a compensation plan that meets the needs of your employees. 


Bonuses and Incentives

In addition to salaries, many businesses also offer bonuses and incentives as compensation plans. Bonuses can be awarded for meeting certain goals or milestones, such as increasing sales by a certain amount. 


Incentives are typically given as stock options or other equity-based compensation. This type of compensation is often used to attract and retain top talent. 


Benefits and Perks

Another important aspect of any compensation plan is benefits and perks. These are typically non-monetary items that are given to employees in addition to their salaries. 


Some common benefits and perks include health insurance, paid time off, and retirement savings plans. These items can be extremely valuable to employees, so it’s important to include them in your compensation plan. 


What Are The Types Of Compensation Plans?

There are four compensation plans: salary, hourly, commission, and piece rate.



A salary is a set amount of money an employee earns annually. This type of compensation is typically paid in bi-weekly or monthly installments. An employee’s salary is not based on the number of hours worked per week but rather the position they hold within the company.



Hourly compensation is calculated based on the number of hours an employee works per week. This compensation plan allows employees to earn overtime pay if they work more than 40 hours weekly. 



Commission-based compensation plans base an employee’s earnings on a percentage of sales generated. This type of plan can incentivize employees to generate more sales. 


Piece rate 

Piece-rate compensation plans pay employees based on the number of units they produce. This type of plan is common in manufacturing and production settings.


What Are The Key Components Of A Compensation Plan?

There are various components to compensation plans. However, there are a few that are the most important components, and you need to keep them in mind when creating your plan:


Salary and Wages: This is the most basic form of compensation and is what most people think of when they think of a compensation plan. It’s important to consider how much you can afford to pay your employees and whether or not you’re able to offer competitive salaries.


Federal/state pay requirements: You also need to ensure that you comply with all federal and state pay requirements. These can vary depending on the location of your business, so it’s important to do your research.


Benefits: Another key element of a compensation plan is benefits. This includes health insurance, retirement plans, and other perks. It’s important to consider what benefits you can offer and how much they’ll cost you.


Bonuses: Bonuses are a great way to motivate employees and can be based on individual or company performance.


Stock Options: This is a more long-term form of motivation but can effectively keep key employees with your company.


Now that you know the key components of a compensation plan let’s look at why it’s important to have one.


Benefits Of Having A Compensation Plan

There are a few key reasons why having a compensation plan is important:


It helps you attract and retain talent: A good compensation plan can help you attract and retain the best employees. It shows that you’re willing to invest in your employees and value their skills and experience.


It helps you stay competitive: If you want to stay competitive, you need to offer a competitive compensation package. This includes not only salaries and wages but also benefits and bonuses.


It keeps everyone on the same page: A compensation plan clarifies employers and employees. Everyone knows what they’re supposed to be paid and how they can earn more money. This can help prevent misunderstandings and disputes down the road.


Overall, a compensation plan is a necessary tool for any business that wants to be successful. It helps you attract and retain talent, stay competitive, and keep everyone on the same page. Get in touch with accounting services to begin planning your compensation plan.


How Do You Develop A Compensation Plan?

As mentioned before, the first thing you need to do is set your goals –what do you want to accomplish short and long-term with your plan?– Once you’ve established your goals, you’ll need to determine which will work best for your employees (salary, commission, bonus, etc.)


Then benchmark your compensation against similar businesses in your industry. It will give you an idea of what is considered standard practice and help ensure that your plan is competitive. Finally, you need to develop a communication strategy to ensure that your employees understand the compensation plan and how it will work.


What Are Some Common Mistakes Made When Developing A Compensation Plan?

When it comes to creating a compensation plan, there are a few common mistakes that companies make. Let’s take a closer look at some of these mistakes so you can avoid them when designing your plan: 


Not Defining Goals: One of the most important aspects of creating a compensation plan is to have specific goals in mind. What do you want your employees to achieve? How do you want to incentivize them? Without clear goals, creating an effective compensation plan won’t be easy.


Not Communicating The Plan: Once you’ve developed your compensation plan, you must communicate it to your team. They need to understand what the plan is and how it will work. Otherwise, there will be confusion and frustration amongst employees.


Not Reviewing The Plan Regularly: A compensation plan should not be set in stone as your company grows and changes, and so should your compensation plan. Make sure to review it regularly and make changes as necessary.


Developing an effective compensation plan is essential for any business. By avoiding these common mistakes, you can create a plan that will help you attract and retain top talent.


How Can A Compensation Consultant Help You?

If you ask any of the above questions, it may be time to seek out the help of a compensation consultant. Compensation consultants specialize in helping companies design and implement effective compensation plans. They can help you determine what factors should be considered when designing a plan and provide guidance on how to best communicate the plan to your employees.


A good compensation consultant will also have experience conducting job evaluations and market analyses. This knowledge can be invaluable in ensuring that your compensation plan is competitive and fair; if you are unsure where to start or what steps to take, working with professional accounting services could be the best decision for your business.


Start Planning

At Nesso Accounting, we want to ensure that you implement a plan fit for your business. We want to ensure you meet your goals and objectives. We work alongside you to provide a personalized plan to increase your business efficiency. We’ll guide you on how to make your business work smarter, not harder. 


Our Nesso Group team will provide you with various accounting-related issues that can be tailored to your specific needs. We provide expert advice on improving your business efficiency and bottom line. Don’t hesitate to reach out to learn more about how we can help you. 



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