Effective employee compensation plans can set the stage for effective recruiting as well as employee retention. This is because the employee compensation plan should articulate a distinctive value proposition that will inspire and guide the team in the right direction.

"Properly developed, this makes a powerful statement internally to your employees as well as externally about what type of a company you are. You’re putting that stake in the ground. You’re establishing a brand identifier that could be very powerful—not only from a retention standpoint, but from an employee attraction standpoint." Chuck Csizmar explained in a BLR webinar.

The compensation plan lays out the overall statements of belief around which to design, administer and communicate reward programs. It becomes the "stake in the ground" that reinforces the culture and management style. It tells employees what you stand for.

8 components of an effective employee compensation plan

1. Statement of overall objectives. This should explain how the rewards program supports the needs of the business, employees, shareholders and/or customers. Each reward element should have a defined role.
2. Relative importance of compensation. The compensation plan should explain how the rewards compare with other company identifiers. In other words, is your company known for something such as technology, culture, size, or leadership? Is your company known for its pay programs? Do you want it to be? Do you consider your compensation plan to be an important part of your company’s reputation?
3. Performance measures. The compensation plan should identify the performance criteria to be rewarded and should define the measurement levels. It should outline the degree that rewards are expected to drive employee actions.
4. Competitive reference points. The plan should describe the comparative group for your rewards package. This might be your industry and/or geographic competitors, for example. The key is to define the program benchmarks.
5. Competitive positioning. Describe your desired position vs. the market described in the last point. For example, do you want to provide salaries consistent with the industry average? Or do you want to establish yourself as a company who provides premium pay over the competition? No matter your position, be transparent and state the intent. If your intended positioning is below the industry average, be sure to explain why. Lack of information will only allow rumors to circulate.
6. Internal equity and consistency. Will your strategy be consistent? Will it apply to all employee groups? Employees will look for fair and uniform treatment without favoritism between groups. You also need to decide whether you will choose between internal and external consistency or try to balance the two.
7. Communication and involvement of employees. How much program information will be disclosed? "While the devil may be in the details, you shouldn’t worry about getting into the weeds over point-by-point program specifics when laying out your rewards strategy statements. The focus instead should remain zeroed-in on establishing and communicating the key elements." Csizmar explained. It should also be understood who has responsibility (HR vs. management) for program design and ongoing administration.
8. Governance. The program should be reviewed and refreshed; the frequency and responsibility for review needs to be established up front.

Chuck Csizmar is a Global Compensation Consultant and the founder and principal of CMC Compensation Group, a professional services provider specializing in analytic, project management, and consultative services for US and international clients.