How to build a compensation plan

A good compensation plan combines several models and objectives and is adapted to the organisation's culture, the type of employee and the field of work

Many organisations still reward their managers and employees based on their compliance with one central goal. On paper it makes sense, but economically this view is misleading and may cause more harm than good.

The choice of one goal, on which management is rewarded, may result in its preference over other equally-important organisational goals. Choosing a revenue growth target may encourage managers to increase revenue at any cost – even when it does not improve profit margins and may even create losses for the organisation.

Another reason for the problematic nature of the concept is that each player in the organisation gives a different meaning to compensation. The shareholders associate rewards with the economic performance of the company. Managers see it as a financial expense that requires supervision and control on the one hand, and a tool for improving the performance and motivation of employees on the other.

For employees rewards are a source of income that affects their quality of life and are an expression of the organisation's appreciation. Accordingly each will relate to the target differently, and a cohesive measure to accomplish the goal will not be achievable.

Organisations that have understood how problematic this model is have begun to build reward programmes based on a number of models that combine a variety of organisational goals and cater to a broad range of employees and fields. These include: income, expenses, output, learning, satisfaction and organisational affinity. Even if the goals are different they will intertwine each other; they will create a system of checks and balances to ensure that achieving one goal doesn't obstruct another.

To create a healthy reward system with this mindset, the compensation infrastructure must first be configured. Understanding the principles enables the creation of models adapted to the needs of different types of employees on the one hand, and the organisational agenda on the other.

How to build an infrastructure for a healthy rewards programme

1. Map out the compensation groups and mix them up

Distinguish between monetary compensation and non-monetary compensation. The monetary compensation group will include the amount of money given to the employee for their short- and long-term work, including wages, bonuses, incentives, cost of living allowance, position allowance, pension provisions and medical insurance. The non-monetary compensation group will include equal benefits in terms of their importance: personal recognition and appreciation, professional development, challenge and status. Those engaged in the remuneration process must be aware of the relationship between the two groups, how to deal with each differently, and their value to the organisation and the individual.

2. Build a reward strategy that matches your organisation

Types of compensation are not determined randomly, but rather within the framework of strategic planning that corresponds with the organisational agenda: economic and business goals, organisational climate, managerial patterns and work processes. For example, an organisation that promotes unique technology will build a reward system that encourages goals such as innovation and creativity.

3. Characterise the model based on types of employees

Distinguish between a plan for employees, managers or directors, and differentiate between different branches of employment. For example, a compensation plan for a sales force would not be appropriate for production workers. Early characterisation will allow you to predict what is effective or ineffective in the incentive programme, prevent resource waste and build a reward system that matches the target audience.

4. Create a target-based reward

Rewards, bonuses and incentives should encourage specific results. Accordingly, a good reward plan should be tied to business goals. Therefore it is important to understand the type of target you want to reward. For example: income, service, production operations or sales.

5. Measure

A good compensation programme will always be based on measurable results. Once the target has been identified the method of measurement can be determined. Alongside classic models like KPI and SMART, there are unique technologies that can help organisations maintain an ongoing relationship between goals, results and performance.

6. Keep it simple

Albert Einstein said: "If you can't explain it simply then you do not understand it well enough". For this reason, along with the prerequisites of legality and transparency, the model of reward you have built should be simple. You need to be able to calculate it quickly and communicate it to employees so that they understand it easily and can actually implement it.

Ravit Oren is an organisational leadership expert, an academic lecturer and researcher, a corporate HR executive, a public representative of the Israeli Labor Court and a board member in public and governmental companies