Last Updated September 12, 2024
What is a Compensation Agreement?
A Compensation Agreement is a contract between an employer and an employee that records a change in wages or earning potential.
It’s an important document when managing and retaining employees. When you change your employee's compensation, this agreement can cover complex amendments like a new commission formula to a simple hourly wage increase.
A Compensation Agreement is also known as a:
- Remuneration agreement
- Salary agreement
- Wage agreement
Compensation Agreements versus Employment Contracts
An Employment Contract covers employment terms such as hours, notices, and responsibilities. It’s agreed upon and signed when you’re onboarding a new employee. It may also outline the initial probationary period and compensation employees receive when they begin the position.
You introduce a Compensation Agreement during an employment term. It’s a supplementary form to an Employment Contract, as the agreement doesn’t replace the whole contract. It simply updates the compensation terms for a current employee when you change wages, bonuses, and non-monetary compensation.
When do I use a Compensation Agreement?
You can use a Compensation Agreement when you make changes to your employee’s earnings. These changes can include:
- Raises: When you give an employee a raise or they complete a probationary period, use a Compensation Agreement to document new earnings. For example, your employee may start at minimum wage and receive an hourly increase after a strong evaluation.
- Promotions: When you offer an employee a promotion, your agreement will outline the new wages or salary as they move up in the company. The agreement may also include new non-monetary compensation, like paid vacation days, that their new position offers.
- Commission changes: When an employee’s commission rate changes, a Compensation Agreement can outline a new commission formula or percentage they’ll earn. This kind of compensation can be for employees such as salespeople, agents, or advisors.
LawDepot’s Compensation Agreement template asks you to provide a start and end date for compensation changes. If you’re looking to make a permanent change to an employee’s contract or compensation, use our Contract Addendum or create a new Employment Contract.
Why should I use a Compensation Agreement?
A Compensation Agreement is a key part of employee management. It documents the changes you are making to an employee’s earning potential. It goes on further to help with managing employees to:
Create transparency
An agreement clarifies the compensation changes taking place for an employee. It ensures both parties know what is expected for wages, salary, paid time off, and more in return for the work provided.
Motivate and retain staff
Providing compensation details can encourage employees to continue providing quality work. Bonuses and new potential earnings laid out during a promotion or following a yearly review may promote employee retention.
Avoid disputes
Having agreements in writing greatly benefits you and your employees as it clearly defines the compensation they can expect.
You should avoid verbal agreements as they’re difficult to prove later if a conflict occurs and is taken to court. Either party may recall the terms and wages differently, which can delay any resolution. Overall, written agreements provide a legally valid record to protect you and your employees.
How to write a Compensation Agreement in 4 easy steps
LawDepot’s Compensation Agreement template is customizable to make it easy for you to document your employee’s new compensation. Once you select the date of the original Employment Contract, complete the following steps.
1. Provide the parties’s details
Give the full details for you and the employee receiving a change in their compensation. Employer’s details can be an individual or organization.
2. Include the compensation details
Next, provide all the details about your employee's new compensation. This includes:
- How your employee will be paid (e.g., hourly or salary)
- How much your employee will earn
- How often your employee will be paid (e.g., at the end of the month or bi-weekly)
If there are additional changes, such as vacation time and overtime, be sure to include these details to create a thorough agreement.
3. Select the agreement period
Continue with selecting a start and end date for your agreement. Include how your employee’s compensation will be set following the end of the agreement. This can be according to your employer's policies or employment agreement.
If you have an existing Compensation Agreement, provide the date for that contract. Your newly signed agreement will terminate the older one.
4. Add any additional clauses and signing details
Finally, complete your agreement with any additional clauses and a signing date, if you’ve determined one. Our template lets you include any additional clauses that may apply to your situation.
