While the adoption of a compensation plan (also known as a pay plan or compensation schedule) is not required by law, an employer may want to adopt a pay plan to avoid conflicts and misunderstandings with and between employees. The employer should be careful to ensure that equal pay is given to employees who perform equal work. Differences in pay can exist, however, to reward tenure and performance.

The most efficient way to make sure that employees are properly compensated is to first create a job description for each position. Then, a salary range is assigned to each position based upon the knowledge, skills and abilities needed to fill that position. The salary range for each position can include several levels or steps so the employer can reward the employee’s performance or continued loyalty to the employer.