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Organizations develop and implement salary structures to provide Figure 1: Job Evaluation Structure
a framework for administering their employee compensation
Company Jobs to Evaluated Jobs Arranged in
programs. Effective administration of a compensation program
Be Evaluated a Job-Worth Hierarchy
requires a balance between the pay levels for employees
inside the company—internal equity1—and the pay levels Job 10
Non- ob 6
7
those employees could command in the company’s recruiting ob Job 9
kJ
Benc
markets—external equity2. ar Non-
J
hm Job 8
nc Benchmark
hmar
Be Job 7
How to Develop a Salary Structure Job 9
k
k
Most companies determine their employee pay levels by e n c hmar Be Job 6
B 0 nc
Job 1 Be Jo Jo ma
h
evaluating market pay levels for the majority of their jobs. Ben nc b 5 b 1 rk Job 5
chm
ark hm
Compensation professionals call these “benchmark jobs.”3 J ar
Be Non ob 8 k Job 4
In contrast to benchmark jobs, non-benchmark jobs are not nc -
h
Job mark
evaluated for the purpose of determining market pay levels, 3 Ben Job 3
rk chm
usually because market data is unavailable. c h ma Job ark
e n 4 2 Job 2
B ob
J
The market pay levels for all benchmark jobs can be arranged Job 1
from highest to lowest to assess the relative value of each job.
The company’s non-benchmark jobs are then slotted in between salary structure is a process of identifying groups of jobs that cluster
comparable benchmark jobs to create a job-worth hierarchy that together by virtue of having similar values.
incorporates both the external value and the company’s internal
value for all jobs in relationship to each other. The job-worth Figure 2 illustrates this process as a means of creating salary ranges
hierarchy forms the basis for grouping jobs of similar value and that compose the structure. Salary ranges are created with minimum
establishing the classifications that compose the company’s and maximum values that represent the range of pay in the
salary structure. marketplace that the company has targeted in its competitive pay
policy.4
Figure 1 illustrates the process of evaluating company jobs to
create a job-worth hierarchy. The challenge illustrated in Figure 1 Business Considerations for Pay Structure Design
is to assess the value of all company jobs based on external and Business considerations for pay structure design include strategic
internal factors as a means of arranging the jobs from highest issues, competitive practices, the organizational culture and the
to lowest value. A company can construct its salary structure affordability of pay. The key strategic issues to consider are the
once the job-worth hierarchy has been completed. Building the objectives of the company and the extent to which salary will be used
to attract and retain employees capable of achieving business success.
1
Internal equity is a fairness criterion that implies an employer’s pay practices correspond to each job’s relative value in the organization.
2
External equity is a measure of an employer’s compensation levels compared to other employers within its recruiting market. As a fairness criterion, external equity implies that the employer compensates at
levels that correspond to prevailing external market rates, as determined by the job’s market range. External equity must be balanced with internal equity.
3
Job evaluation is a formal process used to create a job-worth hierarchy within an organization. The two basic approaches are the market data approach and the job content approach. Most job evaluation
processes use a combination of these two basic approaches.
4
Competitive pay policy establishes the strategic and philosophical principles that guide design, implementation and administration of an employer’s compensation programs to attract and retain talented
employees. Compensation strategy supports an organization’s business objectives and specifies what programs will be used and how they will be administered. Compensation philosophy ensures that
compensation programs support business needs and organizational culture.
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Figure 2: Process of Building Salary Structure The “range spread” is a characteristic of salary structures that
describes the distance between the minimum and the maximum
Evaluated Jobs Arranged in Jobs Assigned to salary range values. Most structures are fan-shaped with smaller
a Job-Worth Hierarchy Salary Ranges
range spreads for lower ranges and wider range spreads for the
Job 10 higher-level positions. Essentially, spread reflects the range of
salary opportunity for the jobs that are assigned to the range, from
Job 9
minimum to maximum salary values.
Job 8
$36,000 - $54,000
Job 7 Figure 3 illustrates a salary range with a 50 percent spread. To
Job 6 calculate range spread, use the following formula:
$30,000 - $45,000
Job 5 (Grade Maximum - Grade Minimum) / Grade Minimum
Job 4
$25,000 - $37,500
Job 3 A salary range with a spread of 100 percent would be twice as
wide as the one shown in Figure 3. In general, wider ranges apply
Job 2
to jobs that have larger salary values (e.g., executive jobs), whereas
Job 1 narrower ranges apply to jobs with smaller salary values (e.g.,
clerical jobs).
Also consider the salary practices of competitors by studying Figure 3: Illustration of Range Spread
compensation surveys with data showing how they structure their
Maximum $45,000
salary administration programs. Organizations with a dynamic
culture tend to place less emphasis on base pay in favor of variable
pay, which has greater impact on employee behavior for achieving
business objectives. By contrast, organizations with static cultures
50 Percent
place emphasis on base pay because they can reasonably predict Midpoint $37,500 Range
business performance and employee behaviors. Finally, consider Spread
the organization’s financial resources with regard to its ability to pay
employees in the form of salaries, which are fixed costs.
Figure 4 illustrates a completed salary structure for the staff of implement broadband salary structures in an attempt to achieve
a hypothetical human resources department. Study the salary the following human capital management objectives:
structure to identify characteristics discussed in this section.
• Broader workforce skills
Figure 4: Hypothetical Salary Structure for Human • Career development among employees
Resources Department Staff • Support a new culture or flatter organization structure
Actions compensation professionals suggest for resolving red-circle Pay compression can occur when the pay rates of several
rates include: employees, despite clear differences in capability, are in a cluster.
This means highly capable employees are paid similarly to
• Freezing the employee’s pay until the salary falls back inside employees with less skill and experience. This eventually creates
the updated range morale problems, particularly for the more capable employees.
• Reducing the employee’s pay and paying the excess in
the form of a bonus Eligibility for company compensation programs often is tied to
• Reviewing the employee for promotion into a higher the salary range assignment for an employee’s job. For example,
salary range companies often use the salary range assignment for jobs to
determine employee eligibility for participation in incentive plans
In contrast to red-circle rates, green-circle rates occur when the and certain benefit plans. Therefore, an organization might have to
employee’s salary falls below the range minimum. Green-circle rates reexamine the eligibility criteria for other compensation programs
can be caused by : when traditional structures are updated or broadband structures
are implemented. n
• Adjustments to the salary structure subsequent to a recent
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