A company's pay structure is the method of administering
its pay philosophy. The two leading types of pay structures are
the internal equity method, which uses a tightly constructed
grid to ensure that each job is compensated according to the jobs
above and below it in a hierarchy, and market pricing, where
each job in an organization is tied to the prevailing market rate.
needs job descriptions for all its positions so that people know
where they fall within the organization. A pay structure helps answer
questions about who's who, what each person's role is, and why people
are compensated differently. It also helps human resources personnel
to fairly administer any given pay philosophy. For example, a company
might want to pay everyone at market; or pay some people at market
and some above it. Opportunities for incentives are also dealt with
in the pay structure. For example, people with strategic roles will
likely have opportunities for higher incentives.
Many firms have one or more in-house compensation consultants who
can set up a pay structure consistent with the company's pay philosophy.
Small organizations and other companies without the resources to
hire a compensation consultant can either train someone in how to
set up a pay philosophy, or outsource this service.
with a payroll budget
When setting up a pay structure, most companies start with a payroll
budget. Senior management usually sets payroll budgets during the
budget for merit increases is generally kept separate from the overall
budget to allow for market adjustments. Companies research what
merit increases and salary movements historically have been (approximately
3.5 percent on average in recent years) and then project the budgets
for market adjustments and merit increases.
turnover is high, a company may have to move people's salaries more
quickly than if turnover is low and there is more time to implement
the pay structure.
the value of each job
Once it is known how many jobs are to be priced and the total amount
allocated to spend, a company should benchmark as many jobs as possible.
Benchmarking means matching an internal job to an external job of
similar content. Make sure to benchmark jobs to job content, rather
than job title. For example, a bookkeeper and an accountant I may
seem similar, but a comparison of the job descriptions should reveal
the job to which isreally being matched.
benchmarking, the market value goes to the job, not to the person
filling it. Price "spaces, not faces." In order to make the best
use of an organization's resources, it is important for a company
to acquire survey data for similar companies. Salary Wizard Professional
(for small businesses) and CompAnalyst (for large businesses) are
a great place to get data that represents organizations of similar
size, industry, and location.
small companies people are often called upon to fill hybrid jobs
- for example, a person might be asked to be both HR manager and
office manager. It is important to review the data for each of the
components of the hybrid job, and develop a market price accordingly.
for benchmarking jobs
surveys that are appropriate for the positions being surveyed:
right job, right geographic area, right company size, etc.
general. Job descriptors such as those found in compensation surveys
and in Salary.com products are not intended to be all-inclusive
job descriptions. They are generic descriptions that best describe
the essential functions of a job, rather than the application
of that job in a specific company.
job descriptors based on content, rather than job title.
closely. A job descriptor should be at least 70 percent of an
incumbent's current job responsibilities.
as many matches as possible.
the job function, not the person.
judiciously. Job descriptors can be blended, but no more than
two descriptors per survey should be combined to represent an
the level guide. Surveys have a variety of ways for describing
and representing different levels for different jobs.
employees as much as possible in benchmarking jobs.
internal equity method to create salary ranges by pay grade
internal equity method of structuring pay involves creating a series
of grades or bands, with wide ranges at the top of the pay structure
and narrower ranges at the bottom. Each grade represents a different
level within the company.
must determine how many grades are required, choosing a reasonable
number based on how many employees work in the organization today
and the variety of jobs at the organization. The number of grades
can always be expanded later. A company of 30 people might start
with 10 grades, although small companies normally do not benefit
from pay grades as much as larger companies because of the frequent
instance of hybrid positions in small companies.
should also give each grade a spread, so that people can move within
their grade as they progress in their jobs. Additionally, creating
a minimum and a maximum for the whole company is recommended. The
midpoint of the lowest grade should reflect the lowest value of
the lowest job in a benchmarking study. The midpoint of the highest
grade should reflect the highest value of the highest job.
one grade to the next, there should be a 15 percent midpoint progression,
meaning the midpoint of one grade should be about 15 percent higher
than the midpoint of the grade below it. This is to ensure that
promotions are accompanied by meaningful pay increases.
jobs are then slotted into the pay grades. Some positions are often
forced into a grade, and some grades won't be fully aligned. Ideally
companies look for a narrow margin of approximately 5 to 10 percent
between the market median and the midpoint of the grade.
data may not be available for all jobs. Such jobs are often slotted
into comparable grades for the company according to the scope of
the job, the responsibilities, the size of the budget the position
handles, etc. For example, if a suitable benchmark for a financial
manager cannot be found, the job is slotted into the rough equivalent
of the HR manager if they are equally valued at your organization.
is the pay practice of creating large ranges and control points
within a grade to give people wide latitude to move within their
job without outgrowing the payscale. However, studies have shown
that after five to seven years of doing the same job, people no
longer improve dramatically in that job. A pay philosophy might
take this principle into account by stipulating that no one will
be paid more than 120 to 130 percent of market, regardless of how
well he or she performs.
nonexempt jobs are compensated in traditional pay grades. These
jobs benefit from a more structured approach to pay.
market pricing to relate jobs to external forces
An alternative to the traditional grid-based pay structure is the
market pricing approach, which is rapidly becoming the prevalent
method of pricing jobs. With the market pricing approach, people
are compensated in relation to the market value of their job, regardless
of their level in the organization. The market may suggest, for
example, that certain information technology workers should be paid
more than chief technology officers.
pertinent value in the market pricing method is not the midpoint
of a grade, but the midpoint of that job in the market, along with
the employee's comparatio, or salary divided by the market rate.
Over time, the employee's pay should move closer to market as performance
moves closer to expectations for that job. Under the market pricing
method, the salary for a job may still be capped at120 to 130 percent
unions also typically do market studies in collaboration with the
human resources department or with a third party. A company striving
to compete with the possibility of a unionized workforce might pay
more than the union's market study recommends.
plainly about the numbers to save time
Hiring managers should know what they can afford to pay, and they
should be able to communicate that range to candidates.
recruitment and retention so critical to the success of a business,
it is to everyone's advantage for a hiring manager to disclose a
salary range up front. Even in a telephone interview it may help
get the right candidate in the door if the manager reads the job
description and discloses the pay range. And if candidates have
done thorough salary research, the conversation about compensation
is likely to begin with market data anyway.