How to Build a Competitive Compensation Plan

We all remember the excitement of setting up a lemonade stand as a child. Arranging the cups just so, adding the perfect amount of sugar and lemon, and anxiously waiting for customers to approach. And there was no moment more exciting than when a paying customer dropped a few coins into our jar!

The same is true as adults, now that we’re professionally employed. Everyone loves payday. While compensation is not the only deciding factor when it comes to where you work, it’s a crucial part of our professional lives.

And for HR leaders, determining appropriate compensation for each role and employee in the organization can be a complex process. There’s often some negotiating involved, too, when it comes to hooking the best and brightest job candidates. But the fundamental concept remains the same as when we were kids selling lemonade on the street corner: your employees’ time and effort have value, and it’s important to reward fair compensation for their work.

What is Compensation?

Compensation is the total value your employees receive in exchange for their work. That includes more than just a paycheck. It’s everything from wages and bonuses to healthcare, retirement contributions, and wellness benefits.

It’s one of the most powerful tools you have for attracting great candidates, retaining top performers, and showing your team they’re truly valued.

In larger organizations, compensation can get complex. Pay is often influenced by role responsibilities, experience, location, education, performance, and even industry benchmarks. HR teams use this data to set fair pay ranges and make thoughtful salary decisions that align with business goals.

Compensation also looks different depending on how someone is employed:

• Full-time employees often receive your most robust package—base salary, healthcare, 401(k) matching, stock options, and access to benefits like Wellhub.
   
• Per diemworkers are usually paid a daily rate, often without benefits.
   
• 1099 contractors receive project- or hour-based pay, with no employer-provided perks or protections.

The structure you choose sends a strong signal. It tells your people what matters to your company—and how committed you are to supporting their wellbeing..

What Laws Govern Compensation?

There are several federal laws that govern compensation in the United States. One of the most important is the Fair Labor Standards Act (FLSA), which establishes minimum wage and overtime pay requirements for most employees. The FLSA also lays out requirements and distinctions for exempt and non-exempt employees. This is one of the most complex areas of compensation law, but generally plays out as follows:

• Exempt employees: Typically salaried workers who are paid a fixed amount of money each week, regardless of the number of hours they work.
   
• Non-exempt employees: Typically paid an hourly wage and are eligible for overtime pay.

Under the FLSA, non-exempt employees must be paid at least the federal minimum wage for every hour worked, and must be paid overtime at a rate of 1.5 times their normal hourly rate for any hours worked once they reach 40 in a workweek.

The FLSA is not the only law applicable to employee compensation. For example, the Equal Pay Act of 1963 requires that men and women be paid the same for equal work, and the Americans with Disabilities Act prohibits discrimination in pay based on an employee's disability status. Employers should also be aware of state and local laws that may apply, as these can vary widely depending on the location of the organization.

Types of Compensation

Employers have a wide variety of options when it comes to the types of compensation they can offer to employees.

How to Determine Compensation and Salary Rates

Here are several methods that organizations can use to determine fair compensation and salary rates for their employees:

• Compa ratio: This method involves comparing an employee's current salary or compensation package to the midpoint of the industry or company average for their role. The compa ratio is calculated by dividing the employee's current salary by the industry average or midpoint. For example, if the midpoint salary for a software engineer is $100,000 per year, and the engineer's current salary is $90,000 per year, their compa ratio would be 0.9. A compa ratio of 1.0 indicates that an employee is being paid exactly at the midpoint salary for their job.
   
• Market analysis: Market analysis or research is the process of researching the salaries and compensation packages that are being offered by other organizations in the same industry and geographic location. This can involve looking at job postings, survey data, or working with a third-party compensation consulting firm. By comparing their compensation offerings to those of other organizations, employers can ensure that they are offering competitive salaries and benefits.
   
• Skill-based pay: Under skill-based pay, employees are compensated based on their specific skills and abilities, rather than their job title or level. Employees who possess specialized skills or certifications may be eligible for higher pay rates, bonuses, or other incentives. For example, a nurse who has obtained a specialized certification in oncology nursing may be eligible for a higher rate of pay than a nurse without that certification.

By using one or more of these methods, organizations can ensure that their compensation packages are fair, competitive, and aligned with industry standards. Conducting pay equity analyses on a regular basis can help companies ensure compensation levels within the organization are fair and merit-based.

Creating a Competitive Compensation Strategy for Your Organization (Step-by-Step)

Think of your compensation plan as more than just payroll logistics. It’s a powerful signal. It shows your team what you value, how you reward growth, and how deeply you’re invested in their success. Here’s how to create a compensation strategy that meets today’s needs — and scales for tomorrow’s goals.

Step 1: Start With Your Company’s Vision

Before you talk pay, zoom out. Where is your organization headed in the next one, three, or five years? Are you expanding rapidly? Prioritizing retention? Investing in leadership growth?

Your move: Get aligned with your executive team. Then, write down two to three long-term business goals that your compensation strategy should support. This ensures your pay philosophy grows with your company.

Step 2: Define Your Compensation Philosophy

A clear compensation philosophy brings consistency to every pay decision you make. It should reflect what your company stands for — and what you’re promising every candidate and employee.

Your move: Draft a short, values-aligned statement that outlines how you approach pay. For example: “We pay competitively, reward impact, and prioritize equity across the board.” Share it with your HR team and department leads.

Step 3: Audit What You’re Doing Today

Before you build something new, take stock of your current compensation practices. Look for patterns, gaps, and wins. Where are you strong? Where are you losing candidates?

Your move: Run a compensation audit by role, team, and demographic group. Use compa-ratios to see how current salaries compare to market midpoints. This gives you a solid baseline — and helps you spot equity issues early.

Step 4: Benchmark Against the Market

Your people are checking job boards. So are your candidates. That’s why benchmarking is essential. You’ll want your comp strategy to hold up next to similar companies in your region and industry.

Your move: Partner with a comp data provider or consultant. Look at base pay, bonus structures, equity, and benefits. Pay special attention to roles with high turnover or tough-to-fill pipelines.

Step 5: Build Salary Bands and Pay Ranges

Salary bands are scaffolding for fairness and growth. They help you avoid ad hoc offers and bring consistency to promotions, negotiations, and raises.

Your move: Create bands with clear minimums, midpoints, and maximums. Group similar roles together. Share band guidelines with hiring managers and people leaders so everyone’s using the same playbook.

Step 6: Add in Bonuses, Equity, and Incentives

Variable pay can be a huge motivator — when it’s used strategically. These programs are a great way to reward high performance, align employees with business goals, and attract top-tier talent.

Your move: Decide which roles qualify for variable pay. Then, define how it works. Bonuses for exceeding targets? Equity for leadership? Map it out clearly so employees know how to earn it.

Step 7: Include Wellbeing in Total Compensation

Wellbeing matters — to your team and your bottom line. In fact, 88% of employees say their wellbeing is just as important as their salary. When you include wellbeing in your compensation strategy, you’re building a total rewards package that truly supports the whole person.

Your move: Pair your comp strategy with benefits like flexible schedules, mental wellness tools, or a platform like Wellhub. With access to thousands of gyms, fitness studios, meditation apps, and coaching sessions, your employees get personalized support for every aspect of their health — all in one place.

Step 8: Communicate With Clarity and Consistency

The best compensation plan in the world won’t land unless it’s clearly communicated. Transparency builds trust. And trust builds retention.

Your move: Equip your managers with talking points, host info sessions, and create a central place (like your HRIS or intranet) where employees can learn about pay structure, benefits, and eligibility.

Step 9: Launch, Track, and Adjust Over Time

Markets change. People grow. And your plan should evolve with both. Regularly revisiting your compensation plan helps you stay fair, competitive, and aligned with your team’s needs.

Your move: Reassess your comp strategy once a year. Track offer acceptance, pay equity, internal mobility, and employee feedback. Make small adjustments before you need a total overhaul.

Step 10: Connect Compensation With Long-Term Wellbeing

Your team wants to feel rewarded — and supported. And compensation is one of the strongest signals you can send. When it includes wellbeing, you’re showing employees that their health, their growth, and their time all matter.

Your move: Use your compensation rollout as an opportunity to highlight your wellbeing benefits. Show employees how their pay, perks, and support systems work together to help them thrive.

Wellbeing as Part of Total Compensation

While salary and direct compensation show your team members that you value them, it’s far from the only thing that’s important to your employees. Eight out of 10 workers, in fact, say their wellbeing is just as important as their salary. A compensation strategy that doesn’t include employee wellness is likely to flounder in today’s competitive labor market. 

A total rewards package that also supports workforce health and wellbeing can encompass extensive healthcare options, an employee assistance program, and wellness programs. Wellhub’ all-inclusive program connects employees with thousands of wellbeing partners that can support them wherever they are on their wellness journey. Learn more about how to craft the perfect package by speaking to one of our wellbeing specialists!

References

• Americans with Disabilities Act. U.S. Department of Labor. Retrieved May 31, 2023 from https://www.dol.gov/general/topic/disability/ada 
  Chen, James. (January 23, 2023.) What Is an Exempt Employee in the Workplace? Pros & Cons. Investopedia. Retrieved May 31, 2023 from https://www.investopedia.com/terms/e/exempt-employee.asp
• Chen, James. (April 12, 2023.) Understanding Non-Exempt Employee Status, Pros & Cons, Job Types. Investopedia. Retrieved May 31, 2023 from https://www.investopedia.com/terms/n/nonexempt-employee.asp
• Equal Pay for Equal Work. Office of the Assistant Secretary for Administration & Management — U.S. Department of Labor. Retrieved May 31, 2023 from https://www.dol.gov/agencies/oasam/centers-offices/civil-rights-center/internal/policies/equal-pay-for-equal-work 
  Folwaczny, Michael. (September 30, 2019.) A different way of compensation – Skill-based Pay. LinkedIn. Retrieved May 31, 2023 from https://www.linkedin.com/pulse/different-way-compensation-skill-based-pay-michael-folwaczny
• Indeed Editorial Team. (June 24, 2022.) Everything You Need To Know About Compensation Analysis. Indeed. Retrieved May 31, 2023 from https://www.indeed.com/career-advice/career-development/compensation-analysis
• Questions and Answers About the Fair Labor Standards Act (FLSA). Wage and Hour Division — U.S. Department of Labor. Retrieved May 31, 2023 from https://www.dol.gov/agencies/whd/flsa/faq