The first steps to building an effective compensation system

written job descriptions and on target salary ranges are the starting point for a compensation system

Here’s the first step with building a compensation system. Let’s assume you’re starting from scratch. You want to benchmark your jobs and create a salary structure to start your compensation system. What does that mean? You look at every job and describe it in market type terms.

For a corporate compensation system, the jobs need to be written up in a way not only to describe what you’re doing internally but also in a way that can then be linked up to the marketplace. This job is quarter administrative assistant, a quarter copywriter, and half account analysis

Job descriptions in a compensation system
Start by describing the job in terms that reflect the market. Then you look at the market and you take half of the one job plus a quarter of the other and a quarter of the other. You match it to the market in those terms. This allows you to figure out what people are being paid in companies of your size, in your industry, in your geographic areas, pay as a minimum or maximum, midpoint for each job.

Now, by the way, you may have to buy some of this data. Very seldom can you get it for free. But if you’re part of an industry association, you may get it for being a member. And a lot of these numbers are more generic. So, they may come from other local organizations or you can get them from big national firms or websites.

Salary ranges in a compensation system
You bunch these people into groups that share similar salary ranges. So you can actually have an accountant 3 being in the same pay range as an engineering 1. Certain kind of engineers right now may be real hot. And they could be paid as much as a third year accountant or a fifth grade analyst.

Create 5 to 15 distinct salary levels. See even really, really large companies don’t have an infinite number of salary ranges. They got a lot of different jobs. The biggest companies I’ve seen don’t go beyond 20 levels in terms of pay. I’d say most of you are going to be in 8 to 12, 13 range. Some could be more. Some could be less. Realize that these salary ranges overlap.

And once you get this set up and you say, “This is what these people in these jobs ought to be paid”, realize that you want to recalibrate salary range for your compensation system about every three years. In three years, all that information is out the window.

But in the meantime, unless the market is really on fire for your particular area, each year we kind of adjust the compensation system a little bit. And in the past, we’ve kind of been moving it up 3%, 2%, whatever you think the market’s doing and bearing in mind that if you underestimate the market, you can start losing people. If you overestimate the market, you’ll have problems bidding on work and being competitive with your peers.