Explaining compensation plans to employees

Explaining compensation plans

Originally published by Payscale

How well do your employees understand your compensation plan and philosophy? Clearly communicating compensation plans to employees is worth the effort. It can lead to harder-working, more loyal, and more satisfied employees.

“But it’s complicated!” you say.

You’re right. Let’s talk about what your organization can do to make compensation plans more transparent to your employees.

Defining Compensation Plans

Explaining compensation to an employee should be simple. In its most basic form, compensation addresses what are known as “extrinsic rewards,” which are rewards that are provided by the organization in the form of financial, material, or social rewards.

The reason compensation plans are so difficult to define is because there are so many factors that go into developing them. The world of compensation has unique definitions, designs and functions. How do you make them easy for a non-HR savvy employee to understand?

Here are a few ideas on how to communicate your compensation plan to employees.

Pay grades – how to explain basic pay

Many organizations, including the military, use compensation plans that are based upon pay grades or pay scales. Organizations usually design these by looking at the positions in their company, and identifying such basic factors as education needed, tasks involved, skills used, and abilities required.

Developing a set pay scale makes compensation more clear because it delineates to the worker what their base compensation will be based on their time in a position. The military, for example, uses a multi-axial approach, meaning that people in the military are paid based on their rank, and their time in service at that rank.

A transparent compensation model like this can make communicating with subordinate employees somewhat daunting, because they might know what you earn in a base year salary. But, this type of device works well because employees know immediately from the start what their base income is, as well as where they might be financially several months or years in the future. This method of delineating and communicating compensation grades works for most positions, but not all (e.g. CEO or sales positions).

Compensating differences – seeing the glass ceiling

Employees can be motivated by knowing there is a lot of room to grow in their industry or job position. The pay they start out at can be influenced by how much their base salary can grow. For example, their pay may start low, but have a lot of room to expand with experience. Alternatively, if more years of work won’t make them better at their job, they may get their highest pay right from the start. It’s important that they understand this fact.

As an example, jobs involving manual labor pay higher initial wages than those jobs requiring additional schooling. This is because the job ladder for manual labor jobs tends to be short, or even non-existent.

Much in the same way that established pay scales provide advanced knowledge of extrinsic rewards to come, employees who are provided their own job ladder within their career field may understand why there is an initial compensation difference between their own job and someone else’s.

Identifying wage differentials – what is the theory of compensating wage differentials?

What are wage differentials? According to the book Microeconomics, wage differentials are those differences in wages between various workers or groups of workers, or even differences between workers within a career field.

For example, a worker with many more years of experience than another worker might make significantly more than a worker who is just beginning in the same field, even if both of their jobs require the identical tasks. Although not always confined to experience, there are certain qualities in a worker – experience, education, certifications – that might create wage differentials within the same job field.

It is important, in some manner, to identify and document when a wage differential is appropriate, so as to prevent both confusion and a sense of inequity on the part of those who don’t understand it.

A recommendation would be if there is a group of workers who have specialties in your workplace, e.g. different types of surgeons, it would be helpful to identify and support your pay practices for them through the use of job titles. The job titles can help set apart those who are considered more advanced in their career expertise.

Benefit summaries – explaining total rewards to an employee

How well do your employees understand their total compensation – namely, the amount of money spent on them by the company – outside of base salary?

To communicate total compensation to employees, some organizations use what is sometimes referred to as an “annual benefit summary.” What this summary does is provide a detailed list of costs incurred by the organization to retain, train, support, and reward a member of that organization. There is nothing complicated about it, it just requires some research on the part of the person who is developing it.

For example, an HR professional wants to write an annual benefits summary for an employee who currently receives a base salary, a company profit sharing bonus, fully paid medical/dental, and free parking.  It would be very simple to build an annual benefit summary for that employee. The HR professional would simply put together a list of their benefits and annotate the cost that the company pays for each benefit on an annual basis.

This tool is useful for communicating compensation to employees, and sometimes eye opening for the employee, especially when they see how much an organization spends on fringe benefits. We’d dare to say that the average employee has a very foggy view of what the business spends on their behalf for a benefit like medical insurance.

Of all the ways you can clarify and communicate your compensation plan to your employees, the summary of benefit is perhaps the most straightforward.

Here are a few additional tips to keep in mind when explaining compensation plans to employees:

  • Develop compensation plans for your positions that account for education, skills, tasks, and responsibilities in such a way that they make sense to an outside observer.
  • Explain benefit packages in a manner that reminds employees that they are not intrinsic to the position itself.
  • Make compensation predictable. Through the use of either an established pay scale, or even the pay-for-performance approach, employees can gain an understanding of their base pay and set goals beyond it.
  • HR professionals and accounting professionals should make themselves readily available to explain compensation plans to employees. This not only increases the employee’s insight into what their company provides them, but also provides the professionals a chance to gauge the current applicable compensation plans against various job niches and titles.


Payscale is an online compensation and benefits information company. It offers real-time, data driven insights for employees and employers.


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