Developing a Compensation Scheme

Compensation is usually the biggest cost for small companies. We asked Paul R. Dorf, managing director of Compensation Resources Inc., a benefits consulting practice based in Saddle River, N.J., what a small business should focus on when drawing up a prudent compensation plan. His step-by-step guide:

Develop a philosophy of compensation. Ask yourself what sort of plan - the mix of cash and other incentives in the package, for instance - will help you attract employees who will help you accomplish your business goals. So, for instance, if your business plan calls for aggressive growth, you'll want your compensation scheme to reward efforts that support it.
Write clear job descriptions and use benchmarking data to find out what those positions are worth in the marketplace.
Develop an internal procedure for evaluating the performance of employees.
Set up an effective salary-administration program. Benefits are usually the same for all employees, but salary incentives should be tied to performance. People who produce more should get paid more.
Make sure that you communicate your compensation plan to employees. To do that effectively, it must be will-conceived, clearly documented, and simple. Make sure employees understand what their benefits cost.
Try the plan out for awhile. Make sure it helps you attract and motivate employees to reach you company goals. If it doesn't, see what changes would make a difference.
Review the plan every year to make sure that it remains competitive and achieves the results you want. But don't change it too often - that's disruptive, and will erode the plan's credibility among employees.