Compensation Plan

When to Use This Skill

Use this skill when you need to:

• Design a compensation structure for new or existing roles
• Create salary bands, bonus structures, or contractor rate frameworks
• Benchmark compensation against market rates
• Build a transparent pay philosophy for your business

DO NOT use this skill for payroll setup, tax guidance, or benefits administration. This is for designing the compensation strategy. Consult an accountant or HR professional for legal compliance.

Core Principle

COMPENSATION IS A STRATEGY, NOT A REACTION — A CLEAR PAY PHILOSOPHY ATTRACTS THE RIGHT PEOPLE, RETAINS TOP PERFORMERS, AND PREVENTS AWKWARD NEGOTIATIONS BASED ON WHO ASKS LOUDEST.

Phase 1: Context

Understand the business and hiring needs.

Required Inputs

GATE: Confirm context before designing the plan.

Phase 2: Build Structure

Design the compensation framework.

Pay Philosophy

## Compensation Philosophy

**Our approach:** [Choose one]
- Lead the market (pay above average to attract top talent)
- Match the market (pay competitively to retain good people)
- Lag the market (pay below average, compensate with equity/flexibility/mission)

**Pay transparency:** [Open / Banded / Confidential]
**Review frequency:** [Annual / Biannual]
**Adjustment basis:** [Performance / Market / Cost of living / Combination]

Salary Band Template

## Salary Bands: [Role]

| Level | Title | Band Low | Band Mid | Band High | Rationale |
|-------|-------|----------|----------|-----------|-----------|
| 1 | [Junior/Entry] | $[X] | $[X] | $[X] | [Market data source] |
| 2 | [Mid/Standard] | $[X] | $[X] | $[X] | [Market data source] |
| 3 | [Senior/Lead] | $[X] | $[X] | $[X] | [Market data source] |

**Band placement criteria:**
- Band Low (25th percentile): New to role, developing skills
- Band Mid (50th percentile): Fully competent, meeting expectations
- Band High (75th percentile): Exceeding expectations, hard to replace

Contractor Rate Framework

## Contractor Rates: [Role]

| Experience | Hourly Rate | Project Rate Equivalent | Retainer Rate |
|-----------|------------|----------------------|---------------|
| Junior | $[X]-$[X]/hr | $[X] per project | $[X]/month |
| Mid | $[X]-$[X]/hr | $[X] per project | $[X]/month |
| Senior | $[X]-$[X]/hr | $[X] per project | $[X]/month |

**Note:** Contractor rates should be 25-40% higher than employee equivalent to account for no benefits, self-employment taxes, and variable work.

Bonus Structure (if applicable)

## Bonus Framework

| Type | Eligibility | Target | Metrics | Frequency |
|------|------------|--------|---------|-----------|
| Performance bonus | All team members | [X]% of base | [Individual performance rating] | Annual |
| Revenue share | [Roles] | [X]% of revenue above $[target] | [Revenue metrics] | Quarterly |
| Project bonus | Project-based roles | $[X] per project | [On-time delivery + quality] | Per project |
| Spot bonus | Any team member | $[X]-$[X] | Manager discretion for exceptional work | As earned |

GATE: Present compensation structure for review.

Phase 3: Market Benchmarking

Validate the plan against market data.

Benchmarking Sources

For solopreneurs and small businesses:

• Glassdoor, Levels.fyi, Payscale (free salary data)
• LinkedIn Salary Insights
• Industry-specific salary surveys
• Job postings for similar roles (check listed ranges)
• Peer network conversations

Benchmarking Template

## Market Comparison: [Role]

| Source | Low | Median | High | Our Band | Position |
|--------|-----|--------|------|----------|----------|
| [Source 1] | $[X] | $[X] | $[X] | $[X]-$[X] | Above / At / Below |
| [Source 2] | $[X] | $[X] | $[X] | — | — |
| [Source 3] | $[X] | $[X] | $[X] | — | — |

**Assessment:** Our compensation is [above/at/below] market for this role.
**Adjustment needed:** [Yes — increase by X% / No — competitive as-is]

Total Compensation View

Do not compare base salary alone. Show the full picture:

## Total Compensation: [Role]

| Component | Annual Value |
|-----------|-------------|
| Base salary/rate | $[X] |
| Bonus (target) | $[X] |
| Benefits value | $[X] |
| Equity/profit sharing | $[X] |
| Perks (learning budget, equipment, etc.) | $[X] |
| **Total compensation** | **$[X]** |

Phase 4: Maintain

Keep compensation competitive and fair over time.

Annual Review Process

## Compensation Review Cycle

1. **Month 1:** Collect market data and update benchmarks
2. **Month 2:** Review individual performance ratings
3. **Month 3:** Propose adjustments based on performance + market
4. **Month 4:** Communicate changes and update records

Pay Equity Check

Annually review for unintended disparities:

• Are people in the same role/level paid consistently?
• Are there gaps correlated with gender, race, or tenure?
• Are contractors being paid fairly relative to employees?

Compensation Communication

When communicating pay decisions:

• Explain the philosophy ("We aim to pay at the 60th percentile for your role")
• Show how their pay fits within the band
• Connect raises to specific performance or market changes
• Be transparent about what drives pay decisions

Anti-Patterns

• No structure — just negotiation — without bands, the best negotiators get paid the most, not the best performers.
• Ignoring the market — paying 30% below market and wondering why you cannot hire or retain talent.
• All base, no variable — variable pay (bonuses, profit sharing) aligns incentives. All-fixed pay does not.
• Secret compensation — opacity breeds distrust. At minimum, share the band structure even if not individual salaries.
• Comparing contractor and employee rates directly — contractors cost more per hour but less in total (no benefits, taxes, overhead).

Recovery

• User cannot afford market rates: Compensate with flexibility (remote, hours), equity, profit sharing, or accelerated growth opportunities. Be transparent about the trade-off.
• Current pay is below market and team does not know: Plan a correction over 2-3 review cycles. Immediate jumps are ideal but may not be feasible.
• User has no idea what market rate is: Use 3+ free salary data sources and average them. Imperfect data beats no data.
• Team member finds out they are paid less than a peer: Address it immediately. Either justify the difference (performance, experience) or correct it.
• User only has contractors: Build a rate framework instead of salary bands. Same principles apply — consistency, market benchmarking, and transparent criteria.