Compensation and incentive plan: What is it and how to create it?

Although, increasingly, other aspects such as flexible compensation are gaining importance, remuneration remains a fundamental aspect in choosing a job. That is why it is essential for companies to have a compensation and incentive plan, detailing how employee compensation works.

But, in contrast to a few years ago, an employee’s compensation is no longer limited to his or her month-end salary. Therefore, this compensation plan can be an advantage in terms of attracting and retaining talent, if it is properly prepared and communicated.

In this article we tell you what a compensation and incentive plan is and the process to follow to develop one for your company.

What is a compensation and incentive plan?

A compensation plan refers to a document that details how employee compensation will be managed. This compensation is not only the salary at the end of the month, but also includes all those activities to which employees have access by the fact of working in the company. It is therefore a document that should be linked to a company’s flexible compensation plan.

But a compensation plan is more than just a list of all the benefits the company offers its employees. After all, there are different ways to determine an employee’s compensation, whether through hourly pay or through the achievement of objectives. This information, as well as the company’s objectives and the strategy it will employ to achieve them, should also be included within the plan.

Finally, the development of a compensation plan must take into account that internal conflicts may arise within the company because of compensation. This is why most compensation plans also include a section on governance, detailing mechanisms for resolving potential conflicts that may arise. Therefore, it also acts as a crisis management plan, in a way.

How to create a compensation and incentive plan?

1. Set objectives

When creating a compensation and incentive plan, the most important thing is to know why it is necessary to implement it. These objectives can be: to improve the company’s revenue, to improve talent attraction, to increase customer ticketing, to improve upsell and cross-sell…

This step is fundamental, since the objective pursued will determine the compensation plan that ends up being implemented. Likewise, it will also influence the way the plan is managed once implemented, as well as the way its results are analyzed.

2. Choose the compensation plan that best suits your business.

There are different types of compensation plans:

• Economic incentive plan: The company offers direct remuneration in exchange for the fulfillment of certain objectives, such as sales commissions, salary increases, financing….
• In-kind incentive plans: The company offers non-monetary benefits to its employees. In general, these are not subject to the fulfillment of any objectives, but are provided as a matter of course. These benefits can be language training for employees, gifts, activities with the team…
• Non-salary plans: These compensation plans are more oriented towards improving corporate culture. They refer to flexible schedules, vacations, working environment…

Based on your objectives, you will have to choose the most appropriate compensation plan. It is possible to develop two (or three) of these plans at the same time, but you will need to work on them separately. For example, if a company is looking to improve sales, the financial incentive plan is the most appropriate. But, if it is looking to improve talent attraction, a non-wage plan or an in-kind incentive plan will be more effective.

3. Determine the amounts and terms of the incentives

When implementing a compensation plan, it is essential to analyze the monetary amount that the company can afford to pay for the fulfillment of a given objective. This figure will be subject to the income from the achievement of the target in question and the base salary that employees already have.

A good way to manage these amounts, in the case of economic compensation plans, is to do so by paying sales commissions, providing a fixed % of the final ticket of the customers achieved. In this way, employee motivation will increase significantly, directly influencing the company’s up-selling and cross-selling.

On the other hand, it is not appropriate to implement conditions within non-economic plans: it is more appropriate that they are implemented equally for all employees.

4. Communicate the plan

Once the compensation plan for your company has been drawn up, it is time to communicate it to all employees concerned. The best way to do this is through a meeting, where both the conditions and the possible remuneration that employees can obtain for achieving their objectives are set out.

Even so, certain companies may have complications when it comes to holding a face-to-face meeting. For these cases, the most appropriate is to hold a telematic meeting, through GoogleMeet or a similar application. It is also possible to communicate the plan via e-mail, but it is a longer process, since it is common for doubts to arise on the part of employees.

5. Monitor the results

To know the effectiveness of the communication plan, it is essential to monitor the results as it is being implemented. In this way, the company will be able to determine whether the compensation plan is helping to achieve the objectives set.

To do this, it is necessary to decide on certain KPIs, indicators of the success of the actions. These can be sales growth, increase in average ticket sales, staff recruitment, etc. It is even possible to measure employee job satisfaction through surveys. Whatever your objective, it is essential to know if the plan is working. If it is not, the strategy will have to be re-evaluated.