Although today’s employees seek challenge, growth and recognition, competitive compensation packages are still a high priority to many. And when used to reward exceptional performance, employee pay practices can be that much more effective. When employees are compensated based upon the efforts they put forth and the contributions they make to the company, they are more likely to continue to work hard and demonstrate their commitment. But when employees come to expect pay increases “just because”, their performance is likely to remain marginal.Compensation plans are important for attracting and retaining talented employees. But, pay structures are only as effective as their designs. In order to reach its goal of motivating employees to consistently contribute to the company’s bottom-line, a compensation program must be fair, competitive, and have a performance-based focus.

Below are some guidelines employers should follow when creating and administering a compensation plan:

1. Job descriptions. First things first: you want to start with the fundamentals. The foundation of any compensation program is a job description. Writing job descriptions will help to determine the various qualifications needed for each job incumbent as well as the essential responsibilities that are required for each position. Job descriptions make it possible to classify and evaluate jobs in terms that make comparisons possible, which is especially useful when determining pay grades and salary structures. Need help creating job descriptions? Check out our Job Description Wizard; it will walk you through the process of creating professional ADA compliant job descriptions in no time!

2. Do your research. Check industry and regional salary surveys and compare your pay practices to competitors in the same geographic area. This will allow you to evaluate your pay practices and determine how you pay your employees compared to how your competitors pay their employees. Based on this analysis, you can determine if adjustments to your pay practices are needed.

3. Distribution. Determine how you will pay your employees. Focusing merely on base pay isn’t recommended and certainly isn’t motivating to your employees. It’s best to distribute employee compensation between hourly pay, benefit plans, merit increases, and bonuses. Base pay should be the same for all employees holding comparable positions; same with benefit plans. However, when distributing merit increases and bonuses the most important variable should be performance ratings.

4. Regular performance reviews. Performance must be measured regularly and reliably in order to reward employees accordingly. A clear system for performance ratings, with defined criteria that is understood by all employees is essential. If employees are unclear on what’s expected of them it doesn’t give them a fair opportunity to perform in accordance with company standards. Objective performance data should then be used in order to determine pay increases and other rewards.

5. Be objective. Make sure your compensation planis fair and free of bias. When compensating employees, employers should use the came standards for all employees with similar performance levels, years of service, and job responsibilities. This can eliminate any possible negative feelings over an inconsistent or ambiguous compensation program.

6. No guarantees. Incentive programs and bonus plans need to have well communicated guidelines and should never be conveyed as an automatic guarantee or an implied promise. Employees expecting to receive a bonus are not likely to be motivated to work very hard. Communicate to your employees (and better yet, demonstrate to your employees) that only those that go above and beyond will receive bonus and incentive-based pay.

7. Don’t under-estimate other forms of recognition. While bonuses and pay for performance isa welcome benefit for many employees, a simple “thank you” or other small forms of recognition can also go a long way in motivating your workforce.

8. Promote “total compensation”. While performance-based pay is certainly important for promoting employee efficiency and commitment, so is your company’s emphasis on a “total compensation” program.By stressing benefits such as health insurance, day-care assistance, tuition reimbursement, paid time off, flexible work schedules and similar company perks, your employees will see the total value in working for you.

To be effective in motivating your employees, a compensation program should focus on performance. Rewarding hard work and dedication serves to reinforce that behavior throughout your workforce. Be sure to consistently recognize your top performers, and not just monetarily, in order to ensure your employees continually contribute to the company’s success.

In addition to having a performance-based focus, in order to motivate and retain talented employees, your compensation plan must also be fair, equitable, and competitive.