How To Develop a Compensation Package in 11 Steps (+ Free Templates)

With 83.4% of employees ranking compensation as the top factor in job satisfaction, the pressure is on HR to deliver. Discover how a well-crafted total compensation package can be the game-changer your organization needs to attract and retain top talent.

When HR professionals struggle to find, hire, and retain employees, the competition for talent is becoming more challenging by the day. This is especially true when one of the first things employees look at before even receiving a job offer is their compensation package. In fact, 83.4% of employees rank compensation as the top factor in job satisfaction.

With nearly 40% of mid-career professionals prioritizing mandatory paid leave and over 80% seeking comprehensive healthcare benefits, it’s clear that designing a thoughtful compensation package is key to talent attraction and retention.

So, how do you craft a total compensation and benefits package that resonates with a diverse workforce? In this article, we’ll look at what makes total compensation packages appealing, provide examples, outline steps for developing a competitive compensation strategy, and include several templates to help you get started.

What is a compensation package?

Think of a compensation package as a bundle of rewards creatively put together to recognize employees’ contributions and inspire their best work. This is more than an employee’s monthly salary. It includes health insurance, retirement schemes, vacation days, bonuses, equity shares, and additional benefits such as flexible work schedules or educational stipends. Sometimes, it may also offer opportunities for career development, recognition for performance, or contribute to a positive work culture.

Consider a candidate drawn to a start-up offering below-average salaries. The start-up, however, offers an appealing compensation package with generous stock options, a culture that supports remote work flexibility, and 40 vacation days annually. Collectively, these features make the package highly attractive to the potential employee.

As the new world of work evolves, it’s important to continually refine and adapt these compensation strategies to align with emerging skills and knowledge. It’s about crafting strategies that not only meet legal standards but also foster a culture of recognition and growth. This package is essential for attracting, retaining, and motivating top talent, as well as for developing your employee value proposition.

The importance of a good compensation package

• Attracting top talent: A strong compensation package makes open roles attractive for top candidates, allowing your company to competitively recruit skilled employees who suit your needs.
• Retaining talent: A good compensation and benefits strategy encourages current employees to commit long-term, reducing turnover and preserving institutional knowledge, saving your organization significant costs.
• Enhancingemployee moraleand satisfaction: An attractive total rewards strategy motivates your employees to perform at their peak while fueling a positive emotional connection to the organization.
• Achieving internal and externalpay equity: Fair pay makes employees feel good about their salaries compared to the market.
• Leverage during union negotiations: Extensive compensation plans show good-faith efforts to support employees, granting leverage when boards seek to give and take with union representatives.

Paying attention to these details when creating your compensation package will foster a culture of appreciation and equality within the business. When employees feel that they’re being appropriately compensated, they feel happier and more productive in their jobs.

What to include in a compensation package

Creating an adequate compensation package requires a thorough assessment of what your organization can provide. The goal is to showcase to potential and existing employees the complete picture of the benefits they’ll receive by joining your organization.

When this information is effectively communicated to employees or prospective candidates, it highlights your company’s unique offering compared to others. This is especially important when candidates are comparing multiple job offers.

Compensation packages aren’t just about the money. Competitive compensation packages include both direct compensation (cash) and indirect compensation (non-cash) rewards.

Direct compensation

• Base salary: Offering competitive pay is the number one contributor to attracting and retaining talent.
• Retirement savings: Contributions to retirement plans, such as the 401(k) plan in the US, are a key factor in long-term financial security for employees.
• Paid time off (PTO): Generous PTO policies can significantly improve employee wellbeing and productivity.
• Health insurance: Offering comprehensive health insurance is important for supporting employees’ physical and mental health.
• Performance bonuses: Bonuses tied to performance metrics incentivize and reward high achievers.
• Profit-sharing: Sharing a portion of profits with employees can boost morale and promote a feeling of collective ownership.
• Stock options: Providing stock options aligns employee interests with the company’s long-term success.
• Travel reimbursement: Covering travel expenses acknowledges employees’ effort and time spent on business travel.
• Relocation bonuses: Offering relocation packages will help you attract talent from a wider geographic area.
• Wellbeing subscriptions: Subscriptions to services such as gym memberships, the Headspace meditation app, Plum online therapy, or Juno points demonstrate a commitment to employee wellness.
• Home office stipends: Support for remote work setups through home office stipends reflects the evolving work environment. For example, you can provide a lump sum on a virtual card, allowing employees to order what they need.

Indirect compensation

• Career development: Opportunities for professional growth are a major draw for career-oriented employees. This can include subscriptions to Udemy, paying certifications, or even in-house company mentorship programs.
• Flexible work arrangements: Hybrid, remote within the country, or globally distributed remote setups are highly valued options for their flexibility and contribution to improving work-life balance.
• Corporate discounts: Discounts on products or services are a tangible perk that employees can enjoy regularly.
• Employee recognition programs: Recognizing employee’s achievements fosters a positive workplace culture. This can include competitions, bonuses, and promotion cycles.
• Free meals: Providing free meals at work is a convenient and appreciated benefit.
• Company car, cell phone, and laptop: Providing essential work tools like a company car, cell phone, and laptop enhances job performance and convenience.

Factors affecting compensation packages

Compensation packages are influenced by a variety of factors, which can broadly be categorized into internal, external, and personal factors. Here’s a breakdown:

Internal factors

1. Company size and financial health: Larger companies or those with better financial performance tend to offer more competitive compensation packages. Financially healthy organizations have more resources to offer higher salaries, bonuses, and benefits.
2. Job role and level: The complexity, responsibility, and required skills of a job significantly impact the compensation offered. Senior-level roles or those requiring specialized skills typically command higher pay.
3. Internal equity: To maintain fairness, companies often ensure that compensation is equitable among employees performing similar roles or holding similar levels of responsibility within the organization.

External factors

1. Market rates and industry standards: The prevailing market rates for similar roles in the industry heavily influence compensation. Companies must stay competitive with market rates to attract and retain talent.
2. Geographic location: Cost of living and local market conditions in different regions or countries affect compensation. Salaries tend to be higher in locations with a high cost of living.
3. Regulatory environment: Laws and regulations, such as minimum wage laws, overtime regulations, and tax policies, also impact compensation. Companies must comply with these regulations, which can vary by country or region.

Personal factors

1. Experience and qualifications: An individual’s experience, education, and skill level play a significant role in determining their compensation. More experienced or highly qualified candidates often command higher pay.
2. Career stage: An individual’s stage in their career (e.g., entry-level, mid-career, senior-level) often determines the type and amount of compensation they are offered.
3. Personal preferences: Some individuals may prioritize certain aspects of compensation over others, such as work-life balance, flexibility, or non-monetary benefits, influencing the overall package they accept.

Develop your skills:

Design impactful compensation packages

Crafting a competitive compensation package that attracts top talent require new approaches.

In AIHR Compensation & Benefits Certificate Program, you’ll learn how to develop a Total Rewards strategy.

This program covers everything from compensation analysis to building data-backed benefits strategies. You’ll learn how to design flexible and inclusive packages that meet diverse employee needs while staying aligned with your organization’s objectives.

How is a total compensation package tied to HR strategy?

In a recent Forbes Advisory survey, 40% of employers observed that employees often leave their roles in search of positions with more advantageous benefits. Additionally, the survey highlighted that 62% of companies have updated their benefits packages in the last year. These current statistics should be an important note for organizations that are rethinking their employee benefits.

• Organizational goals: HR professionals can tailor compensation packages to align with the broader strategic objectives of the organization. For instance, if a company prioritizes innovation, the package might include bonuses for creative contributions or stock options to encourage a sense of ownership and long-term commitment.
• Attracting and retaining talent: By offering competitive salaries, benefits, and perks, HR can position the company as an employer of choice in the market, which is essential for sustaining a high-quality workforce.
• Employee engagement and satisfaction: The survey also highlights how employees prioritize life outside of work. Nowadays, they want benefits that provide better work-life balance and professional development. For example, 20% of workers express a desire for employer support in their career advancement, while 51% consider flexible hours a major concern for in-office work.
• Compliance and equity: You must ensure the strategy applies to legal and regulatory requirements, such as equal pay and minimum wage laws. A fair and equitable compensation package minimizes the risk of legal issues and promotes a positive company culture.
• Adaptability to market changes: Your strategy needs to be flexible to adapt to changing market conditions, such as the current economic shifts or changes in industry standards. A dynamic compensation strategy allows a company to remain competitive and responsive to external factors. For example, if you feel that the budgets need to be cut, ask employees what they prioritize and make the change accordingly.

Compensation package examples

To demonstrate how a comprehensive compensation package can be structured, let’s examine this example. These Excel and PDF templates highlight various components of compensation, providing a clear representation of what an ideal package might include.

Compensation package template Excel

Compensation package example PDF

Developing a total compensation package in 11 steps

1. Align with strategic goals: Ensure the compensation and benefits package aligns with the organization’s strategic objectives. Misalignment can lead to unintended outcomes, such as encouraging short-term gains at the expense of long-term risks.
2. Tailor to specific objectives: The approach to compensation should vary depending on the company’s strategic goals, which may focus on growth, turnaround, business transformation, competing as a private organization, or aligning with owners in the absence of equity options.
3. Choose appropriate metrics: Select metrics that reflect the business strategy and current circumstances, and regularly review and adjust these metrics to maintain relevance.
4. Set clear targets and incentives: Establish specific numerical targets for key metrics and implement a payout curve that allows for various outcomes, ensuring flexibility and fairness in rewarding employees.
5. Incorporate companywide objectives: Base compensation plans on achieving overall organizational targets, with potential adjustments for individual performance.
6. Balance short-term and long-term incentives: In situations like turnarounds or aggressive growth strategies, balance the need for immediate results with long-term sustainability and growth.
7. Adapt to business changes: Be prepared to adjust compensation plans in response to changing business conditions, such as market fluctuations or internal challenges.
8. Consider alternative incentives: Explore different forms of compensation, especially in private companies, such as above-market cash compensation, phantom equity, or multiyear cash incentives based on cumulative performance metrics.
9. Foster long-term orientation: For companies where traditional equity isn’t an option, use alternative methods like profit-sharing or economic-profit-sharing programs to align employee interests with long-term company goals.
10. Address contemporary challenges: Adapt executive compensation to address current business challenges, focusing on areas like employee health and safety and company liquidity.
11. Revisit and adjust: Continually review and update the compensation plan to ensure it effectively serves broader stakeholder interests and remains aligned with evolving business strategies and conditions.

On a final note

It is clear that creating an excellent compensation package is much more than just deciding on salaries. It’s about aligning pay and benefits with the company’s main goals, finding the right mix of immediate and future rewards, and always staying within the law. The real magic happens when a compensation plan not only draws in top talent but also speaks to what employees want and need. By keeping the project up-to-date, making it easy for everyone to understand, and tailoring it to different roles, companies can build a skilled, committed, and satisfied workforce.

FAQ

A good compensation package includes a competitive salary, benefits (such as health insurance, retirement plans, and paid time off), bonuses or performance incentives, equity options, and other perks like flexible work arrangements or wellness programs. It should align with industry standards, reflect the employee’s experience and skills, and offer opportunities for growth and financial security.

A fair compensation package includes a salary and benefits that are competitive and equitable within the context of the company’s sector and location. It involves balancing budgetary constraints with the need to attract and retain talent. A fair package is one that not only meets legal and industry standards but also recognizes and rewards the unique contributions of each employee, supporting their professional development and overall wellbeing.

When creating a compensation package, it’s essential to consider various factors. These include the company’s financial position, industry benchmarks, the specific role and its importance to the company, the qualifications and experience required, and competitive market dynamics. Legal considerations, such as compliance with labor laws and industry regulations, are also critical.