Explanation:

Compensation plan is the complete plan to award individuals for their efforts and to ensure that your employees stay with you and are satisfied over a longer period of time. Compensation plan completes the entire process of deciding the compensation package for the employee, giving it and revising the salaries, wages and incentives with time. It is important as it is a systematic way to plan the compensation for the employees.
Determining the right balance between the base pay and commission is the major challenge as a well-designed compensation plan helps create a work culture of high performance which ensures personal as well as organizational growth in tandem. Recognizing and rewarding the performance of individuals based on compensation and benefits creates an attractive environment for pulling and retaining top talent among the industry. For eg. A sales compensation plan intends to compensate the salespeople effectively. It is generally an incentive compensation plan that encourages the sales force to land new deals and to upsell to existing clients.