How to Build Compensation Grades in a Fair and Competitive Way

Compensation grades are essential for matching your organization's pay with its goals and values. However, building one can be a complex process, considering factors such as job duties, market rates, and internal fairness. These grades categorize jobs based on these factors, setting the right salary range for each grade.

Understanding how to create and manage compensation grades is important for ensuring fair and competitive pay in your organization. In this guide, we'll discuss what a pay grade is and how to build one for your organization.

What is a comp grade?

Compensation grades are a systematic method used to organize and value various job positions within a company. They are based on factors such as complexity, responsibility, and required skills, and they ensure pay equity by setting salary ranges for similar jobs. This system simplifies compensation by providing a structure for starting salaries and raises based on performance or experience.

Related article: What Is a Salary Grading Scale?

What is the difference between compensation grade and scale?

The difference between compensation grade and scale is that pay grade groups jobs based on experience, skills, and responsibility, while the compensation scale defines the salary range for each grade with a minimum, midpoint, and maximum. In short, the grade tells you the category, and the scale tells you the pay range for that category.

Why is it important to build compensation grades?

As mentioned, compensation grades are important to ensure fair and competitive pay in a workplace, but this is just the tip of the iceberg. Here are some benefits of building pay grades:

• Transparency and employee satisfaction. Compensation grades create a clear pay structure in an organization. This transparency can make employees happier because they understand how their pay is decided and can see a clear path for career growth.

• Efficient hiring and budgeting. Pay grades help organizations set competitive salary ranges for new hires, ensuring that job offers fit within the organization's budget.

• Career path development. Compensation grades link to career paths in a company. Employees can see how their pay might go up as they advance, which can motivate them to develop professionally.

• Internal equity and reduced pay disparity. Setting clear pay ranges for each grade helps organizations reduce pay gaps among employees.

• Compliance and legal protection. Creating pay grades based on job responsibilities, skills, and experience can ensure compliance with labor laws, protecting organizations from legal challenges related to pay discrimination.

Factors affecting compensation grades

Compensation grades, or pay grades, are determined by factors that help organizations create fair and competitive salary structures aligned with their goals and resources. Key factors include:

Job worth

This factor considers the importance of a job within the organization. Jobs that require more responsibility, skills, and have a bigger impact on the organization usually receive higher pay grades.

Employee's worth

When deciding an employee's pay grade, we look at their performance, skills, experience, and how they contribute to the organization. Employees who perform well may get placed in higher grades to show their value to the organization.

Internal equity

Internal equity means that pay levels within the organization are fair and consistent. Pay grades should be set up so that similar jobs are paid similarly, which helps promote fairness and morale among employees.

Budget constraints

Organizations need to think about their finances when deciding on pay grades. Budget limits might prevent them from offering higher grades or raises, so they must find a balance between competitive pay and being financially responsible.

Organizational structure

The organization's size, complexity, and industry can affect how pay grades are set. Larger organizations or those in competitive industries may have more complex pay structures to fit different job levels and roles.

Labor market

External factors like the job market can affect pay grades. Organizations might change their compensation grades to attract and keep talented employees in a competitive market.

Cost of living

The cost of living in an area can affect pay grades. Companies in areas with a higher cost of living may need to offer higher pay grades so employees can afford to live well.

Competitiveness

To attract and keep the best employees, organizations need to offer competitive compensation grades compared to what other companies pay for similar jobs.

Legal and regulatory requirements

Following labor laws is critical when setting compensation grades. Organizations must make sure their pay practices meet legal requirements for minimum wage, overtime, and pay fairness.

How to build fair and competitive compensation grades

Building fair and competitive pay grades means balancing internal equity (fairness within your company) and external competitiveness (attracting and retaining talent in the market). Here's how Salary.com's Compensation Software can help:

1. Step 1: Define your organization's salary structure

   The first step in building fair compensation grades is to define your organization's salary structure. This means choosing how many pay levels you'll have, how wide each level will be (the difference between the lowest and highest salary), and whether you'll have a simple or more complex structure. The aim is to be fair inside your company and attractive compared to other companies.

2. Step 2: Conduct a job evaluation

   Job evaluation is a way to figure out how valuable each job is in a company. It analyzes various factors such as skills needed, the responsibilities, and the qualifications required for each job. This process can involve methods like analyzing job details and ranking jobs based on their importance to the company.

   Compensation Software includes a Job Range Wizard feature that uses benchmark internal pay ranges and actual employee salaries against updated market rates. This helps ensure your pay practices are fair internally and competitive externally.

3. Step 3: Do a market analysis

   Market analysis means looking at how much other companies pay for similar jobs in your industry and location. This helps you set competitive salaries that will attract good employees. You can do this by using salary surveys, comparing your salaries to others in the industry, and keeping up with trends.

   The tool provides HR-reported compensation market data for over 15,000 job titles in 225 US industries. Organizations can scope fair and competitive data to their industry, company size, and location. The best thing is that the market pricing information is updated monthly by Certified Compensation Professionals.

   Also, Compensation Software includes Minimum Wage Data to help you stay updated on minimum wage changes across the United States, including at the state, city, county, and municipal levels.

4. Step 4: Develop salary ranges

   After evaluating jobs and analyzing the market, you'll create salary ranges for each level of pay. These ranges should include the lowest, middle, and highest salaries for each level. This helps you make fair salary decisions.

5. Step 5: Set pay grades

   After setting your salary ranges, you'll put each job into a group based on its importance. This keeps similar jobs in the same pay group, making sure people are paid fairly. These groups help you manage salaries and make sure everyone is paid fairly for their work.

   With Compensation Software's drag-and-drop editor, you can easily adjust ranges, move jobs, and create new structures. You can also forecast costs for changing structures or adjusting individual pay.

6. Step 6: Establish salary administration guidelines

   Salary administration guidelines are rules for managing salaries in your organization. They include things like how and when salaries are reviewed and adjusted, how promotions affect salaries, and how other salary decisions are made. These rules make sure everyone is treated fairly and decisions are made consistently. They also help managers and employees understand how salaries are set and how decisions are made.

7. Step 7: Communicate and implement

   Lastly, you must inform everyone about the pay structure and rules and make sure they're followed. This includes explaining how salaries are set and giving them chances to talk about and understand their pay. Good communication builds trust and openness in how your organization pays people. It also makes sure employees know how their work affects their pay.

Compensation Software can create Total Compensation Statements, summarizing an employee’s total compensation in a ready-to-present format to offer a comprehensive view of their package.

Creating fair and competitive compensation grades doesn't have to be hard. With the right steps and knowledge, you can develop a system that matches your organization's objectives. By evaluating jobs thoroughly, using Salary.com's Compensation Software for market data analysis, and ensuring fairness internally, you can set up transparent grades that benefit both your employees and your organization as a whole.