Compensation Plan | Meaning and Definition

Compensation plan meaning 

A compensation plan is a document that lays out an employee’s payment terms and conditions. This includes their salary, wages, commissions, bonuses, and other forms of income. It also specifies the dates on which these payments will be made and how often they will be paid. Those advantages, in turn, aid in the reduction of recruitment and training costs. 

The compensation plan should also include information on eligibility requirements, vacation and holiday pay, sick days, and any other benefits that the company offers. It’s essential to make sure that both employees and employers are clear on what is included in the compensation package to avoid surprises down the road. 

What does an effective compensation plan include? 

It’s important to include several key components that will illustrate company integrity, ignite employee motivation, and attract top talent to create an effective compensation plan. 

These include base salary, bonuses, benefits, and equity. Base salary is the set wage that an employer gives to an employee for their work – this should be commensurate with the skills required and market rates. 

Bonuses can be given out periodically (monthly, quarterly, annually) and are often based on individual or team performance goals aligned with the company’s overall objectives. Benefits are usually health-related (health insurance, dental/vision insurance) but include things like paid time off and 401k matching. 

HR professionals should develop a fair compensation strategy based on external market data and internal company information. HR may use benchmarking with comparable organizations to figure out how to create an appealing pay package by using benchmarking.