It's been several years since I wrote about compensation plans. Please understand that if you have more than two employees in your organization, you do have a plan whether you realize it or not.

You see, when you hired employee #3, you had to decide whether to pay them more, the same, or less than the second person in your organization. Intuitively, you looked at the scope of the job, the duties, the criticalness of the output, and you then made a decision as to what to pay the new person.

But there are two reasons why you need to have perhaps a more formal compensation plan.

First, a true compensation plan gives you (and your employees) some structure to this critical money issue. In smaller organizations, individual salaries are often determined solely by a manager/owner. As the business grows, the owner inevitably loses touch with each specific job and struggles to keep current with individual employee performances.

My experience is that employees like to know where they stand in their organization, such as a job description and grade level. They like to know where their salary falls in a range and what performance areas can be improved so they can earn an increase.

Having a compensation plan sends the positive message to employees that you see their pay as important. Or, think of the opposite message - do you really want to come across to your staff that their pay is not all that important to you?

In today's tough labor market, retaining employees is critical to your long-term success. The more engaged and involved an employee feels, the higher chance you have of keeping good employees.

The second reason you need to have a plan is that it can provide both the internal and external equity that you need to sustain your business. As an employer, you need to attract a quality workforce, but you also must keep your costs in line for the sake of your customer.

By having a compensation plan, you can periodically compare benchmark positions with other organizations in the area.

That additional data can help you to find the necessary balance for your company of attractive pay without overpaying.

And this same structure can allow you to look internally to make sure you can differentiate what you pay in one department compared to another. This can be critical if you transfer employees within the organization.

Randy Fox, SHRM, SCP, SPHR, is founder and senior partner of Capstone HR Services, Inc.

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