Employee Compensation Plans: The 4 Main Components

Many small-business owners are under the false impression that simply setting a pay rate is all that’s required in terms of employee compensation. If only it were that easy, though. The term “compensation” may sound like a simple work-for-pay arrangement, but there’s actually quite a bit more thought that goes into it. If you’re going to attract and retain employees, you’ll have to offer a full compensation plan. Here are the four main parts to this package.

Hourly Wage or Salary

First, the obvious: Employees’ pay will make up the bulk of their compensation plan. But choosing whether to offer an hourly wage or a salary is an entire process of its own. Employees on an hourly wage are classified as non-exempt and paid one and a half times their hourly rate for any overtime. (These are generally non-managerial employees.) Salaried employees are given an annual wage that is divided evenly among the number of paychecks they are to receive throughout the year. An employee on salary usually does not receive any overtime pay.


Pay raises, bonuses and incentives are all key factors in a compensation plan. Employees are particularly attracted to jobs that offer a base wage or salary with the opportunity for additional earnings based on performance because this allows them to see both financial security and earnings growth potential simultaneously. The problem is, many employers paint a foggy picture of incentives. It’s best to outline, in detail, any benchmarks and accomplishments that will trigger a bonus, raise or commission. If you can give exact percentages, figures and dates, even better.

Health Benefits

Health benefits are part of a compensation plan because you are paying a portion of employees’ health care cost when you give them the opportunity to sign up for health insurance through your company. This can also include any combination of dental care, vision care, short-term disability coverage and long-term disability coverage. Health care is an enormous expense for an employer that employees should not take for granted. The employees’ share of the premium is deducted from their gross income before taxes.

Retirement Savings

Lastly, a comprehensive compensation plan usually includes some type of retirement contribution, such as a 401(k) plan in which the employer matches a percentage of earnings that employees contribute out of their paycheck. For example, if an employee puts 7 percent of his or her income into retirement savings, the employer will match 50 percent of the total or 3.5 percent of the employee’s gross earnings. This type of plan usually has a vesting period of one to five years, meaning the money becomes available to the employee in percentage increments over that span of time.

These are only the basics when it comes to creating a competitive employee compensation package.  Payroll Solutions also offers a full-service platform from pre-hire to retire for employees.  Contact Rebecca Yinko today for more information and insight on how to create and manage an effective compensation plan or to learn more about our full-service platform.