---
name: compensation-plan
description: "Designs compensation plans with salary bands, bonus structures, equity frameworks, and market benchmarking for competitive hiring."
allowed-tools: Read Write Glob
metadata:
  author: matthewhitcham
  version: "1.0"
---

# 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

| Input | What to Ask | Default |
|-------|------------|---------|
| **Roles to compensate** | "What roles are you designing compensation for?" | No default |
| **Business stage** | "What stage is your business? (bootstrapped, funded, profitable)" | Bootstrapped |
| **Budget** | "What is your total compensation budget?" | Flexible |
| **Hiring market** | "Where are you hiring from? (local, national, global)" | National (remote) |
| **Current pay** | "What are you paying now for similar roles?" | No default |
| **Competitors** | "Who are you competing with for talent?" | Small businesses and startups |

**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.
