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BEST PRACTICES FOR SALARY STRUCTURE DESIGN

Effective salary structures provide a framework for administering compensation programs and ensure that pay levels are both externally competitive and internally equitable.   Many design elements of salary structures are standard and common practice.  But some elements may vary depending upon company size, complexity or industry and types of jobs.  Most companies use market-pricing with current salary survey data for benchmark jobs to create and adjust salary structures.  Very few companies rely solely on the point-factor method, which assigns point values to jobs within a company.  But some companies blend market-based and point-factor approaches when designing their salary range structures.  Point factor systems can be costly and timely to administer and today many companies find that market pricing alone is the easiest and most effective approach.

Salary structures group benchmark jobs into salary grades (or levels) and most companies base the salary range associated with each grade on the salary survey median. The median is considered ‘at market’ and so becomes the salary range midpoint for the jobs assigned to a salary grade.  If a company wants to pay above market, they will select a salary survey percentile higher than the median such as 60th percentile and if they wish to compete below market, perhaps 40th percentile.  The market position may be the same for all jobs or may vary depending upon the importance of the job to the organization, but the vast majority of organizations will consistently target the median. 

The number of salary grades within a salary structure depends on the company’s organizational structure, the number, type and ranking of different jobs and levels of jobs within the company.  Every salary range has a minimum, midpoint, and maximum. The minimum or minimum range is often used as the starting salary, and merit increases move employees to the midpoint of the salary range as they become more senior and more experienced. The maximum is the highest rate paid for a position in that grade and it is advisable to cap at the maximum until such time that an update of the salary structure moves the maximum upward.  Some companies will give lump sum increases that do not add to base salary to well performing employees who are at the maximum. 

Traditional salary structures contain numerous pay grades with a relatively small distance between each range mid-point. Traditional structures are a hierarchal system where employees can be promoted from one pay grade to another. Traditional structures can provide a reasonable level of control over internal compression and salary expenditures.  Broadband salary structures consolidate jobs and job levels into fewer pay grades with wider salary ranges. Broadband structures are more prevalent in flat organizations that have few levels and also with small companies that do not have a compensation staff.   Additionally, many larger organizations will have more than one salary structure.  For example they may have one structure for administrative staff and one for managerial staff and another for the executives.  There also may be variances on the structure for different city markets.

The total distance from minimum to maximum is called a range spread and generally will increase as salaries and position levels increase.  In traditional structures, lower grades/ranges have smaller spreads typically between 30 and 60 percent. This assumes that it takes more time to learn, grow and advance into higher level jobs than it does the lower level positions.  In addition, the differential between each grade midpoint should be consistent. For hourly and non-officer employees, the differential between each salary grade midpoint may be 15 percent while the midpoint differential for higher grades could be 20 to 30 percent.

At WageWatch our compensation consultants are focused on your organization’s compensation needs and ready to help you ensure that your compensation programs are supporting your company’s business strategy and objectives and that your pay practices are fair, equitable and non-discriminatory. We can provide your business with compensation surveys and salary reports to help you establish a budget for your merit pay program, including bonuses and incentives. Our innovative company is a leader in the collection of data for surveys and salary reports, which allows us to provide services to a wide range of industries in both the private and public sector. To learn more about our compensation surveys, salary reports and other services, please call 480-237-6130 or contact us online.

This entry was posted on Wednesday, July 9th, 2014 at 2:07 PM and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.