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Best Practices for Designing Salary Structures

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.

Technical Considerations for Pay Structure Design Minimum $30,000


Technical considerations for pay structure design include the
number of range levels, width of the ranges from minimum to Midpoint differential is a characteristic of salary structure design
maximum values (i.e., range spreads), the distance between that describes the percentage difference between the midpoint
adjacent range midpoint values (i.e., midpoint differentials) and the values of adjacent salary ranges. In general, if the company’s job
degree of overlap between adjacent ranges. evaluation approach doesn’t discriminate finely between levels, the
result will be fewer salary range levels. Another factor to consider
The number of ranges in a salary structure is a characteristic that in concluding midpoint differentials is the company’s policy with
describes the number of hierarchical levels needed to distinguish regard to the cost of promoting employees into jobs at higher
the value of jobs in the organization. The number of ranges required salary range levels. For example, a policy that limits promotional
to compose a complete structure is determined by the following salary increases to eight percent, but with a midpoint differential of
considerations: 15 percent, could result in salaries for promoted employees falling
below the new grade minimum salary value.
• The number of skill and/or responsibility distinctions evident
in the organization’s job-worth hierarchy The degree to which ranges overlap each other’s salary values is
• The number of supervisor-subordinate relationships in the a function of midpoint differentials and range spreads. Analyze
company’s organizational structure range overlap after decisions have been made about midpoint
• The degree of emphasis on career development and progression differentials and range spreads to ensure there is a reasonable
• The resources available to administer the pay program progression between the range levels that compose the salary
• Generally, the more range levels, the more administration structure; then adjust if necessary.
required

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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

Salary Salary Range Values Range Spread


Range
Jobs Assigned Midpoint Broadbanding is a compensation management response to
by Range Differential
Label Min. Mid. Max. $ % changing business conditions. In broadband salary structures,
Compensation employers reward employees who demonstrate substantial
G Analyst II; HR $36,000 $45,000 $54,000 $18,000 50% N/A capability improvements with a salary progression in lieu of
Generalist II
promotions that penetrate more deeply into the banded range
Compensation
F Analyst I; Benefits $32,800 $41,050 $49,200 $16,400 50% 9.6% over time. Whereas the design characteristics of traditional
Analyst II structures emphasize internal and external equity, broadbanding
Benefits Analyst I; focuses employees on the changing needs of the organization and
E $30,000 $37,500 $45,000 $15,000 50% 9.5%
HRIS Clerk III
helps them experience an internal culture.
HRIS Clerk II;
D $27,400 $34,250 $41,100 $13,700 50% 9.5%
Payroll Clerk II
Payroll Clerk I; Figure 5 illustrates changes in design characteristics when moving
C Human $25,000 $31,310 $37,500 $12,500 50% 9.4% from a traditional to a broadband salary structure.
Resources Asst.

Figure 5: Salary Structure Alternatives


Broadband Structures Traditional Broadband
By definition, broadbanding is creating a salary structure that
Range 13
consolidates the relatively large number of ranges found in a
traditional structure into fewer ranges. Because there are fewer Range 12
Band 3
ranges, a broadband salary structure has characteristics that Range 11
distinguish it from a traditional structure. Broadband structures
Range 10
are characterized by fewer salary ranges that have wider range
spreads, larger midpoint differentials and a lesser degree of overlap. Range 9
Broadband structures tend to place greater emphasis on career Range 8
development opportunities than employees otherwise would seek Range 7 Band 2
in the company’s recruiting markets.
Range 6

Broadbanding has been a recognized practice of corporate Range 5


compensation professionals since roughly 1990. Organizations Range 4
that implemented broadband structures sought to improve the
Range 3
administration of the salary program subsequent to downsizing Band 1
initiatives that created flatter organizations. In flat hierarchies, Range 2
greater emphasis tends to be placed on career development as Range 1
opposed to job promotion. Today, broadbanding still refers to
collapsing a company’s job-worth hierarchy into fewer, wider
salary ranges. This is done to manage pay delivery in a manner Administrative Issues
that recognizes career growth in light of fewer promotional Occasionally, employee salaries might fall outside the company’s
opportunities and company pay practices that are closely tied to defined salary range for the job. The employee salary will be either
competitive levels. above the maximum value or below the minimum value. Salaries
that fall above the maximum are referred to as red-circle rates.
Broadbanding usually appeals to organizations that want to Red-circle rates might be caused by demotion, an exceptional
be more nimble in response to persistent changes in business salary paid to retain a high-potential employee, reorganization or
conditions or recruiting markets. Such organizations would likely acquisition, or a structure that has fallen behind competitive rates.

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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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• Reevaluation of the job’s value causing reassignment to a higher 866.391.9557

range in the structure, reorganization or acquisition

Compensation professionals recommend employees not be


paid salaries below the company’s prescribed minimum value.
The employee’s salary should be raised to the range minimum
value immediately, or at some scheduled event in the salary
administration process, such as annual salary review.

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