Salary structures and compensation policy

by on June 25, 2009 · 0 Comment POSTED IN: HR Info Center

Salary structure and balance is critical in compensation policy

Make sure that you have enough flexibility in your compensation policy built into the structures so you can make good pay decisions. But at the same time, I’m not a fan of making these structures so flexible and so wide that we can, if we choose to, completely lose touch with the market.

Balance the flexibility with market competitiveness in your compensation policy. We don’t want to wax things in too tight. We don’t want to make it a free for all.

Salary grades and compensation policy
Set up a salary grade so that each grade has a minimum, a midpoint and a maximum. The minimum is designed to represent attractive entry-level pay for the position. The midpoint represents the market comparison points. As I said, about 99% of the time, that would be the market median or the point , which half of organizations pay more and half pay less. The maximum represents the maximum value of that job in the organization.

We may have a file clerk working for us. And he or she may have been with us for 20 or 30 years. They may be a top performing file clerk. We set up the maximum because in that role of file clerk regardless of the level of performance, regardless of the experience, it should never be six-figure job. There’d be a disconnect between the value that we get out of that person in that role and what we’re paying them. And so the maximum would be designed to represent the maximum value of the job to the organization.

Annual salary structure reviews should be the norm for your compensation policy
Salary structures should be updated on at least an annual basis to ensure that they remain market competitive. Designing the minimum to represent attractive entry level pay, that’s as of today. A year from now, two years from now, five years from now, that’s no longer going to be attractive entry level pay, that’s going to be below market and make your compensation policy ineffective. People tend to expect salary increases. The market tends to move in an upward direction when you’re talking about salaries. And so, by adjusting those structures, by adjusting the minimum, midpoint and maximum, it ensures that we remain market competitive into the future.

The market pricing link to the salary structure in compensation policy. This is a very simplistic example where we upgrade one, two and three with a minimum, midpoint and maximum. As we discussed, minimum’s entry level and midpoint is, in this case the median or approximate to the market median, the maximum is the maximum value of the job.

We have job X, accountant, receptionist, whatever it is – it’s job X. We go through the market pricing process and we say, “Based on quality data, based on the appropriate geography, the appropriate industry, all of those variables that we’ve talked about so far, we statistically validated, we’ve run our standard deviation analysis and we say the market median(midpoint) for job X is $30,000.

Our compensation policy methodology for placing job X into the salary structure is very simple. We simply say, which salary grade in has a midpoint closest to our market median? In this case, that would be grade two with a midpoint of $32,000

And so, job X would be placed into grade two with the appropriate minimum of $28,000 and a maximum of $36,000. So this is how we take our market data, our salary structures that we’ve created and brought them together.

From the Rapid Learning Institute webinar: “How to Set Pay Ranges That Are Fair and Effective” by Ed Rataj

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