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.
A clear compensation plan not only helps retain employees but also safeguards compliance with wage and hour laws. It can also ensure consistency, fairness and efficiency across the organization.
A recent report from Lighthouse Research & Advisory revealed that 71% of workers see compensation and benefits as a key element of employee experience. A well-designed compensation strategy is therefore more than a budgeting exercise – it’s a tool for engagement, recruitment and long-term organizational stability.
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, including Mercer, Payscale and SHRM, that provide salary information for various positions and different industries. The surveys cover compensation data for “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.
However, be cautious about relying solely on free, unverified online data. While it can provide a snapshot, it may not be comprehensive or current enough for sound compensation planning.
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?
Each compensation decision has long-term implications. A compensation philosophy that defines your desired posture – whether leading, matching, or lagging the market – helps align decisions with business goals.
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?
Poor leverage planning can lead to pay compression, where new hires earn nearly as much as experienced staff in higher roles. This can undermine your compensation management efforts and damage morale.
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.
Pay equity laws also require vigilance. Compliance isn’t optional. Regulators expect companies to ensure equal pay for equal work. Be transparent about intentional differences. For instance, offering a premium for mission-critical or hard-to-fill positions may be justified if it’s clearly tied to your compensation philosophy.
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.
Pay grades create flexibility. Each range typically includes a minimum, midpoint and maximum. This gives managers room to reward high performers while ensuring alignment with your compensation strategy.
A formal compensation structure also makes it easier to create transparent pay practices and helps employees understand how their growth ties to compensation planning.
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).
Common pitfalls in salary structure design
Even with careful planning, companies fall into traps when developing a compensation package:
- Using outdated data: The market shifts quickly. Old benchmarks can cause misalignment.
- Ignoring internal equity: Focusing only on external benchmarks while overlooking disparities within the company undermines pay equity.
- Failing to revisit structures: A salary structure is not static; it should evolve with business needs.
How often to review your salary structure
It is generally recommended to review your salary structure annually. In periods of high inflation or rapid market change, more frequent reviews may be necessary.
Regular reviews can help you align total compensation with evolving job responsibilities and market pay levels. Skipping this step risks falling behind competitors and losing top talent.
Linking salary structure to performance management
Salary ranges and pay grades should work hand-in-hand with performance management. High performers expect their results to translate into direct compensation. If ranges don’t allow for recognition, disengagement follows.
Aligning incentive compensation with business goals ensures employees feel rewarded for contributing to success. This prevents pay compression and makes promotions more meaningful.
Finalizing new compensation plans
A well-structured compensation plan is a strategic advantage. It makes recruiting easier, boosts retention, and keeps salary expenditures predictable.
Strong compensation planning usually include both direct compensation (base pay) and indirect compensation (employee benefit offerings such as retirement plans, health insurance and paid leave). Together, these elements form total compensation – the full picture of what employees receive.
As you finalize, revisit your compensation philosophy to confirm it aligns with your long-term strategy. Your compensation structure should adapt to changing business needs, competitive pressures and regulatory updates.
Done right, a carefully built compensation package balances fairness, compliance and financial sustainability while showing employees they are valued. Want to uncover more about what it takes to build a thriving workforce? Download our free e-book, The ultimate people strategy playbook: Building a winning workforce, to learn more.