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Salary structure: How to create a solid compensation plan


Compensation is your biggest expense and is increasingly complicated in today’s business climate.  With a low unemployment rate and high inflation, it’s now more important than ever to get compensation correct in order to retain your current employees, as well as make your recruiting, hiring and promoting efforts more focused and easier to execute.  The best way to get a temperature of your current compensation and stay on top of this ever-changing environment is to analyze your current compensation practices and develop a solid salary structure.

Having a solid salary structure can also make it easier to manage your salary expenditure. If you’re considering creating or updating a salary structure, here are a few tips to help you get started.

1. Establish value for each position in your company

The first thing you should do is figure out the value of each position in your organization. Take a look at market pricing – what other companies are paying for similar jobs.

There are a variety of commercially–available salary survey sources that provide salary information for various positions and different industries. The surveys cover “benchmark jobs.” These are common jobs in the market where duties and responsibilities are generally defined.

Once you have identified the benchmark jobs that “match” (i.e., have similar duties and responsibilities) to the positions in your organization. You can extract the market rate data and analyze it based on simple comparisons – the dollar and percentage differences between what employees are paid at your company and what the market rates are for similar positions – and more advanced statistical procedures.

2. Consider your company’s competitive posture

The competitive posture of a company is its overall salary level compared to market average (i.e., median) across the benchmark jobs. Are the salary rates for your employees currently above, below or comparable to the rates of your competitors? You should decide what competitive posture is in the best interest of your company.

For example:

  • Do you need to pay at a higher-than-market level so to retain your current employees?
  • Do you want to pay at a higher-than-market level to attract more quality candidates?
  • Do you need to pay lower-than-market level because that’s all your company can afford?

3. Define compensable leverage for your company

Compensable leverage refers to how much more or less salary rate increases in your company, overall, compared to the market rate increase for higher-paid positions in the organizational hierarchy.

For example, when employees are promoted to a higher position within your organization, will they receive an increase in salary rate that is similar to, greater than (i.e., higher leverage) or less than (i.e., lower leverage) the rate increase provided, on average, in the market?

It’s important to determine the desired compensable leverage for your company. This will allow you strike a balance between providing attractive salary increases to employees for promotional opportunities and maintaining an affordable salary practice.

4. Look at external inequalities

This means determining whether there are some employees with salary rates that are disproportionate, more or less, and inconsistent with your company’s overall relationship to the market across all jobs. Inequitable salary rates within a company – both positive and negative – are likely to be perceived by employees as unfair, causing pay dissatisfaction.

You’ll want to think about:

  • Are there certain divisions or departments where employees are paid a premium or a deficit compared to the market rates for their jobs?
  • Is your company’s salary practice more competitive for higher-level jobs than lower-level jobs, or vice versa?

Note: Sometimes these practices are acceptable if the positions in question have a significantly great-er/lesser “strategic” importance to your company than it has to competitors.

You’ll want to do a systematic analysis of all of these things mentioned in steps one through four. This will help you have a good basis for creating your salary structure.

5. Develop a salary structure for your organization

Using the information you’ve gained from doing the market analysis of salary rates, you can now develop the salary structure for your company.

You should also decide if you want to offer a specific salary range – with a minimum and maximum rate – for each position, or if you want to create pay grades in which multiple positions with similar market rates are grouped together within the same range.

6. Get your current employees up to par

Now that you have established a salary structure, possibly with pay grades, then you’ll want to look at your current employees’ salary rates compared to the range to see if anyone is being paid below the minimum rate or above the maximum rate. This involves determining whether the salary rates of any employees should be adjusted to achieve market alignment (i.e., your desired competitive posture) as created through the structure.

If an employee is being paid below the range minimum, it’s recommended that you increase the salary rate, either immediately or incrementally over time, until it hits the minimum rate. If an employee is being paid above the range maximum then it’s recommended that you suspend (i.e., freeze) the person’s next salary increase until market movement warrants an adjustment.

Another option is to get creative and find other ways to compensate the person. This might include establishing incentive or bonus plans (i.e., variable pay).

Still not sure where to start? Download our free e-book, HR outsourcing: A step-by-step guide to Professional Employer Organizations (PEOs), to learn how a PEO can help you develop a salary structure that best fits your organization, goals and employees.