Compensation comprises such elements as wages or salaries, benefits, union perks, employer-provided vendor discounts, work flexibility and paid time off. A company’s compensation plan can promote employee engagement, performance and career development; thus, a thoughtful compensation plan boosts recruitment and retention efforts.

Compensation is tied to critical business elements, including:

• Business goals and budget
• Industry average salaries
• Operating needs

Yet employees sometimes feel that some aspects of direct compensation — pay, bonuses, commissions, stock — are arbitrary and possibly even subject to bias. How can your company ensure that its compensation promotes equity and treats people fairly?

Start with a philosophy

The first step to creating or updating a wage and salary schedule is to have a clear philosophy. What does your company value? How does it express those values? A strategically designed compensation philosophy describes the company’s overarching position on compensation and aligns that position with the business strategy to hire, retain and reward top talent.

Once you have defined your compensation philosophy, you can add three more pillars to your compensation policy: job architecture, performance management and incentives. Develop guidelines for these, focusing on equity.

• Define roles, levels of responsibility and pay within the company hierarchy. Assess how the pay hierarchy will affect the company budget.
• Define how performance will be evaluated.
• Offer opportunities for career advancement by developing seniority grades within each job classification; at the very least, there should be entry-level and senior roles, and ideally positions in between.
• Decide whether you will offer incentives — bonuses and/or equity compensation — to encourage performance and stimulate productivity.
• Budget other benefits. Although not strictly compensation, health insurance, retirement plans, disability income protection, paid time off, paid holidays and flexible work policies are among the basics offered by many companies. Some companies additionally offer assistance with child care expenses or commuting, offer employee relocation packages, provide a company car or supply equipment such as laptops and mobile phones.

Other considerations

In structuring your company’s compensation plan, you may also want to weigh:

• Local versus national salaries. What is fair in your region and competitive in the local market may not translate if your company grows.
• Traditional versus innovative salary structures. Smaller differences between minimum and maximum pay bands, with more emphasis on promotion, may attract newer employees.
• Sales versus other departments. Bonuses for the sales department may be more easily quantified, but others in the company should not be excluded from bonuses. You should outline the frequency of bonus payments and the payout metrics.
• Commissions. Will these be based on volume of services performed, products made or even structured around sales volume?
• Equity in the company. Giving employees an ownership stake in the company allows them to profit as the company grows. If you offer employees an equity share, outline the types of stock and the vesting schedules.
• Updates to the compensation plan. How often will you review the plan? How will updates be communicated to employees?

A well-built compensation plan considers the type of work performed as well as applicable state laws and job market trends. A fair pay environment boosts recruitment, increases worker performance and motivation, and reduces turnover.