Create a Competitive Compensation Plan

As the job market grows, competition does too, and it is more important than ever for employers to create environments that attract candidates. Great employees may have multiple offers on the table when they are looking to make a career move, which is why it is important to have a competitive compensation plan. Employers can be a bit selfish these days when it comes to what they want to see in employees and it can sometimes cause them to miss out on great candidates. Any job agreement has to be mutually beneficial, so put yourself in the candidate’s shoes… what would you want to see from a compensation package?

Step 1: Evaluate the Competition / Market Research

When developing a competitive compensation plan, it only makes sense to do your research so you know what competitive is. You’ll want to do some in depth market research and evaluate fairness. Whether they have other offers on the table or not, most candidates will compare the offer to their current package, this not only includes base salary, but also commission structures, bonuses, stock, and other benefits like 401k and medical/dental insurance.

You will want to do some comparisons internally as well. Which department will this person be in, who will this person report to and what is there compensation as well as will this person have any direct reports and if so, what do their packages look like. A great way to do this is by using a company organizational chart, where each level of employee has a specific grade level or salary range in which they should be.

Here are some tips for doing your research:

  1. Connect with people in your industry at events and conferences or trainings and see what they are paying for roles with the same type of responsibility
  2. SHRM (Society for Human Resources Management) is a great collaborative environment for things like this.
  3. Use tools and salary guides found online to get insight into today’s compensation standards
  4. Indeed offers a salary calculator
  5. Glassdoor
  8. Search for salary surveys online – Companies like Linkedin often put out an annual job market survey’s like this

Step 2: Develop a Pay Philosophy

Some companies are true believers in having a strong base pay, whereas others want to reward behavior and rely heavily on commission and bonuses. Other organizations believe in motivating employees with amenities like onsite childcare, free lunches and gym memberships. It is important to decide what your philosophy will be and what type of incentives you may want to offer employees to round out a total compensation plan.

In this step, you’ll want to consider the responsibilities of each employee and what their keys to success will be. It is common to offer heavy commission based compensation plans for sales employees because their job relies on making sales. This same compensation structure probably won’t work for someone in the human resources department. Here are some things to consider:

  1. Do I want to pay more in salaries or do my employees benefit from other incentives?
  2. Do I want to pay more or less than the competition? If less, how will I attract employees? Do I have a better location, work environment, etc.?
  3. What is the goal for this role and what will motivate them to be successful?
  4. Will everyone have the same compensation plan or will there be separate plans for different departments and grade levels?

Step 3: Distinguish between Salaried Employees and Hourly Workers

This is where each individual job will need to be laid out and expectations clearly defined. Will the person be a full time exempt employee or a part time non-exempt employee required to clock in and out. First, let’s define exempt vs. non-exempt.


Employees that are salaried employees that are excluded from minimum wage, overtime regulations, and other rights and protections. Typically, only professional, executive or outside sales positions are exempt.


Employees that are not exempt from FLSA requirements and must be paid at least minimum wage for each hour worked and provided overtime pay for hours worked beyond 40 each week.

Read more about exempt vs. non exempt here


When paying hourly, overtime will kick in once an employee has reached their 40 hours for the workweek. For each additional hour worked, they will receive 1.5 times their hourly rate. For some states, there is a double overtime rate that will kick in after a certain amount of hours have been reached. See overtime rates by state here.

Fear of Paying People to Do Nothing

This is an extremely common fear, especially for small business owners when trying to debate whether to pay hourly or salary. The truth is there are pros and cons to each but the only way to prevent employees from taking advantage is to have strong management who clearly and consistently communicate expectations.

Step 4: Create a Guideline for Consistency

As mentioned in step 1, you will want to have some internal guidelines to know what the pay range should be across each department and each employee level. There are a few ways to do this, but the easiest is to create your own internal grade levels. For example, Grade 1 would be an unskilled or unpaid intern level position, Grade 2 would be an entry level position with a pay range anywhere from $20,000 to $30,000 per year and so on and so forth. Keep in mind that this may change within each department or it can be the same across the board.

As you are developing these grades, you will want to define the responsibilities and requirements. A Grade 2 will not have any supervisory responsibilities and may only require an Associates Degree whereas a Grad 3 might have some supervisory responsibilities and require a Bachelor’s degree. In general there should be approximately 25% differential between each job grade.

Of course, there may be some exceptions from time-to-time. For example, if you feel a role is particularly valuable and warrants paying more or if the person is not a full-time exempt employee.

Step 5: Promotions and Pay Raises

It is a good idea to know ahead of time what the evaluation structure will be for employees and how often they will be considered for promotions or pay raises. There will always be opportunity for advancement when the company expands or when a person exits the organization, but if this is not the case, there should be a clearly defined guideline.

First, you will want to develop some sort of performance evaluation and decide how often employees will be reviewed, annually or semi-annually. Lay out a series of general criteria and maybe ask for managers to set specific goals that should be met by each evaluation point. It is extremely important to be fair and consistent here.

Next, decide whether an employee who entered at the top of their pay grade will be able to move to the next pay grade without receiving additional responsibilities. The average increase is 0% to 5% per year for promotions and pay raises. Also keep in mind that the typical annual cost-of-living increase is 3%.


The steps above should provide you with a good jump-off point to developing a strong compensation plan. The key things to remember are:

  1. Is it consistent and fair?
  2. Is it easy for everyone to understand?
  3. Does it align employee goals and motivators?
  4. Does it meet your budget and cultural goals?