How to Set Competitive Compensation Structures

8/15/2019 How to Set Competitive Compensation Structures

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How to Set Competitive

Compensation Structures

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How to Create a Compeve Salary Structure

This learning aid serves as a resource for creang a compeve salary structure

Well-designed salary structures have compensaon levels that are internally equi-

table, externally compeve, and cost-eecve and deliver a posive business im-

pact on the organizaon in several ways, as highlighted in the infographic belowAlthough the technical steps are the focus, the underlying process requires a cross-func-

onal team of stakeholders working collaboravely to create a compeve salary structure

Process for Designing a Salary Structure

There are several steps to creang a compeve salary structure. The nal structure will

have a series of salary ranges and grades that represent the hierarchy of jobs and job fami-lies in the organizaon.

Once introduced, it is necessary to keep the structure current and aligned to support busi-

ness objecves. Salary structures require maintenance to funcon properly.

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Step 1: To be eecve, tools and programs that directly impact the enre organiza-on (such as a compeve compensaon structure), require a needs assessment which

analyzes the following:

• Business strategy

• Corporate culture

• External factors

• Key-performance-indicators (KPIs)

An organizaon’s compensaon strategy should align with the company’s mission, vision,

and culture, as well as support the overall business strategy. In regards to external fac-

tors, the compeve market posion is dened in terms of how the company wants to

compete in the labor markets by paying below market, market, or above market rates.

For example, an organizaon may pay below market rates for low skilled, high turnover

posions. Above market rates may be paid for posions that are crical to the organiza-

on’s mission.

Step 2: Establish a job structure by conducng job evaluaons and market pricing.

A job evaluaon is preceded by a job analysis to collect job content. Aer the job analysis,

the jobs are evaluated based on company-specic criteria like compensable factors (see

“How to Conduct Job Evaluaons” -hp://downloads.erieri.com.s3.amazonaws.com/pdf/

Job_Evaluaton.pdf ). Job evaluaons create an internally focused nomenclature to com-

municate similaries and dierences across jobs.


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Job structure example of Step 1 results:

For market pricing, internal jobs are matched with benchmark jobs in compensaon sur-

veys. To result in a valid structure, at least 50% of the workforce in the organizaon need

to be represented in the benchmark jobs. It is essenal to use appropriate salary surveys

based on the relevant labor market where an organizaon recruits employees. Consider

the four factors that drive the selecon of a relevant survey as summarized in the info-

graphic below:




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Step 3: Next, develop grades where jobs are assigned grades based on the job evalua-on results and job structure.

Organizaons with uid, organic structures have fewer grades, whereas highly structured

organizaons have more grades. In pracce, the number of grades varies from as few as 4

to as many as 60. Here’s an example of a “vanilla” grade structure for an organizaon with

$100 million in revenue:

Step 4: Next, plot job evaluaon points and market rates to idenfy a trend line fromthe lowest market rate to the highest market rate. This can be accomplished using simple

regression in MS Excel with the scaerplot funcon. The resultant equaon is referred to asa “pay policy line” and is expressed as follows:




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Step 5: Finally, determine salary ranges as well as their respecve range spread andmidpoint progressions to complete the compeve base salary structure.

A salary range consists of these rates:

• Minimum pay rate (also may be the beginning hire rate)

• Midpoint (the market or compeve market rate)

• Reminder: the compeve market rate is dened in the business needs assess-

ment process and could be below, at, or above the market average.

• Maximum (the highest rate the organizaon is willing to pay)

The data set and graph are shown below. Based on this equaon, each job evaluaon point

increases the salary by $692.77. Also note the R2 stasc of 0.9657. This is the percentage

of the response variable variaon that is explained by the equaon. As an organizaon, an

acceptable R2 result should be dened to determine if the results will be used. An accept-

able range could be from 0.60 to 0.80.




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Midpoint progression is the percent dierence between the successive salary grade mid-

points. Below, some guidelines are presented which build on the same example used earlier

showing a structure with 10 grades.

Employees in the same job grade may dier signicantly in performance or work characteris-

cs. A “fully performing” employee is likely paid the compeve market rate: the midpoint.

New hires start near the minimum, and salaries above the midpoint are for high performance

employees and/or those who have mastery or domain experse in the job. A salary range

spread allows exibility to account for these dierences. It is calculated using the following

formula:

(Maximum – Minimum)

Minimum

Consider these general guidelines for salary range spreads:

• Service, producon, and manufacturing jobs have range spreads of 10-20%.

• Clerical, technical, and paraprofessional jobs have ranges of 20-40%.

• Professional and supervisory jobs that wider ranges of 40-50%.

• Managerial jobs have ranges of 50% or more.

Example: Receponist Salary Range




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Summary

As part of an organizaon’s strategy, salary is the foundaon of compensaon packages and

an HR nancial lever for the organizaon’s ability to aract, movate, and retain talent cri-

cal for business success. Eecve salary structures are equitable, compeve, and supporve

of organizaonal objecves. A well designed and managed salary structure requires keeping

a pulse on changing internal workforce requirements and relevant external labor markets.

Having the appropriate tools and processes in place to ensure that compeve base salary

structures support the business strategy is crical to the long term health of the organizaon.

For more informaon regarding base salaries structures, contact ERI at 800-627-3697 or info.

[email protected].

Pulling It All Together… The Inverted Pyramid Concept

Salary grades for early career professionals or lesser skilled jobs will generally be narrow,

and salary progression can be relavely quick depending on the job and individual perfor-

mance. As the grade increases, ranges get wider and allow for larger increases for jobs in

these grades. From a promoon perspecve, vercal progression slows down since knowl-

edge, skills, and abilies are more complex, and a longer me period is required to acquireor learn the associated competencies.




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ABOUT ERI ECONOMIC RESEARCH INSTITUTEERI Economic Research Institute has been trusted for decades to provide

compensation survey data. We compile the most robust salary survey, cost-

of-living, executive compensation, and job competency data available.

Thousands of corporate subscribers, including the majority of the Fortune

500®, rely on ERI analytics to streamline the compensation planning process,

develop compensation packages that attract and retain top performers, and

provide defensible data that holds up during litigation and audit.


How to Set Competitive Compensation Structures

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