Give A Structure to Your Salary Compensation Plan

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

Establish Midpoints, Minimums and Maximums for Salary Compensation

Once all the jobs are benchmarked, the next phase in building a salary compensation program is designing the salary structure. Salary structures are designed so that each grade consists of a minimum midpoint and maximum.

The midpoint is designed as an attractive entry level salary compensation.
The midpoint will approximate our market comparison point or again, typically, our 50th percentile. And the maximum represents the maximum value of the job.

We may have a file clerk working for us. He or she maybe the best file clerk the world has ever known. Exceptionally high performer, exceptionally good attitude, comes in early, goes home late, we couldn’t ask for better. It’s still never going to be a six-figure job. There’s a maximum value that somebody can bring in that role and that’s the purpose of salary-grade maximums in a salary compensation structure.

Take your benchmarking and slot it into the salary-grade that has a midpoint closest to the market median. And we also want to make sure that we update our structures on an annual basis at the very least.

The reason for this is that our midpoint maximum maybe perfectly competitive today. But over the course of the year, salary compensation in the market is going to change. So, we need to adjust our minimum midpoint maximum so that they remain market-competitive.

Here’s an example of how we slot a grade into the salary compensation structure.

Again, we want to slot a job into the grade that has a midpoint closest to our market median.

So, we’ve benchmarked job XYZ, a generic job and determine that the market median is $35,455. Compare that in this case which have three grades. Compare that to the midpoint and we find the midpoint closest to the market median. In this case, that’s a midpoint of $35,618. Put job XYZ in with the associated minimum of $27,398, the midpoint of $35,618 and finally the maximum of $43,837.

From a design perspective, you could design structures that have this V-shaped component to them. A lot of organizations have come up a ladder-shaped salary compensation structure. Oftentimes, they’ll have a 50% range spread. Some people think about that or communicate it in terms of a comparatio of 80% and a 120%.

The V-shaped structure changes that slightly. The left side of the “V” represents the minimum of the range, the middle area of the “V” would represent the midpoints and the right side would obviously be the maximum.

At lower levels in the organization, these would be our file clerks, administrative assistants, those types of roles. If we hire somebody with no experience into a file clerk role for example, they can learn that job very quickly even with no experience. By the same token, there’s only so much additional value that can be brought in that role. So, as the result, we would cap it out sooner.

To the right side of that “V”, on the top, a CEO has the ability to continue to gain additional knowledge, continue to gain experience and continue to bring additional value to the organization with that experience. And so, the maximum is created significantly higher than the midpoint.

Another reason for this dynamic is if you think about lower levels within the organization, we may cap some out soon and hire them pretty close to the midpoint. So, their salary compensation falls within a very narrow band.

There’s very little room for growth horizontally within that job. However, there’s a lot of opportunity for additional compensation through promotion. Somebody can go from a file clerk to senior file clerk, to an administrative assistant, to a senior administrative assistant, to an executive assistant, for example, and grow their compensation vertically by taking on additional responsibility.
Edited Remarks from “How to Set Pay Ranges That Are Fair and Effective” by Ed Rataj

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