How to Write a Compensation Plan

If employees are a company's most important resource, then employee compensation is one of the most important expenses. It makes sense to pay employees well for quality work, because employee turnover can cost a business much more than the typical annual salary. On the other hand, overpaying employees can quickly eat into profits and negate the savings from low turnover. Here's how to write a compensation plan that is fair to employees, but within the bounds of good sense.


  1. Image titled Write a Compensation Plan Step 1
    Classify all employees by the type of work they do, whether they have direct reports and whether they are salaried or hourly wage workers.
    • Large companies will probably need to have a few different levels of employee compensation within a classification. For instance, you may have Clerical 1, Clerical 2 and so forth within the realm of administrative assistants, receptionists and clerks.
    • You can also make distinctions between classification levels to account for higher amounts of responsibility and for seniority.
  2. Image titled Write a Compensation Plan Step 2
    Research the market for your industry and region.
    • Keep in mind that employee salaries fluctuate wildly in various areas. For instance, those located within a large city will probably be making more than employees in rural areas.
    • In many cases, large publicly owned companies may pay employees considerably better than smaller, private companies or non-profit organizations.
  3. Image titled Write a Compensation Plan Step 3
    Set a salary or wage range for each classification of employee.
    • The high end of the lowest classification should overlap with the low end of the next classification.
    • Make sure to keep the ranges wide enough to accommodate 3 to 5 percent raises each year for several years. This will keep employees from topping out of their classifications too quickly.


  • The research required to write a good employee compensation plan can be done by contacting the National Association of Colleges and Employers (NACE) through their website,
  • Take employee benefits into consideration when planning your employee compensation. Most companies estimate spending the equivalent of 35-to-40 percent of an employee's salary for insurance premiums, paid time off and other employee benefits.
  • You can also check with colleges or temporary recruiters in your area to get an idea of typical wage scales for certain types of employees.


  • While your classifications and descriptions may be released to your employees, the salary ranges should be kept in the strictest confidence.

Things You'll Need

  • List of employees
  • Management hierarchy
  • Job descriptions
  • Market research for your industry and region

Sources and Citations

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