Tuesday, February 19, 2013

Compensation 103: Salary Structures

An important part of compensation administration is the salary structure. According to Compensation Programs and Practices 2012, 85 percent of organizations have a formal salary structure in place. What are the pros and the cons of using a formal salary structure? What type of salary structures can be used to attract and retain talent?  How often should an organization update its salary structures?  How does HR know when it is time to create a brand new salary structure? These are essential questions we will answer in this issue of Astronology: Compensation 103: Salary Structures.

At its most basic, a salary structure is the manner in which an organization carries out its pay philosophy. As mentioned in our Compensation 101 and Compensation 102 articles, formal salary structures are used to create fairness among employees and protect an organization from possible federal law violations. Having a salary structure, however, is a commitment.  Organizations must keep the pay ranges up to date, or run the risk of paying non-competitive wages or being unable to attract new talent.

There are two leading types of salary structures that an organization can use: the Internal Equity Structure or the Market Pricing Structure.

Internal Equity Structure

The Internal Equity Structure is described as a salary structure that “examines positions and creates levels of pay, with large jumps in salary rates for the higher positions in the company and smaller jumps for lower-level jobs where promotions may not have so much effect.” In the Internal Equity Structure approach, the primary focus is on the value each job brings to the organization.  Organizations typically increase each grade’s midpoint salary range by 15% of the midpoint for the range below. Such ranges provide room for developing employee skills and an employee’s value within the organization. In addition, by using range maximums, the employer sets a limit for what the organization will pay for all jobs and levels.  Without an eye towards the external market, however, the Internal Equity Structure may not reflect current market pay rates.


The Market Pricing Structure

The Market Pricing Structure is quite simple.  The pay range for each job is tied to the market pay rate.  “Market” is defined by the region and industry of interest to the organization.  For some positions, the local market is relevant, while for others, a regional focus on industry specific competitors is pertinent.  Many organizations use this approach for developing salary ranges, as it is easy to understand and gives consideration to competitive pay.  

As a result of the external focus, the pay range structure determines which positions should be paid more than others, while reflecting yearly rate increase trends. For organizations with strong competition, this structure is ideal as it incorporates the compensation activities of targeted counterparts and what they may be paying employees in the same position.  The Market Pricing Structure is often used when organizations have employee retention concerns.

The Market Pricing Structure, however, does not place a primary emphasis on each position’s value to the organization.  Rather, the value and range placement reflects that of the external market.  As such, positions with a shortage of talent, or “hot” skills, may command a higher pay range than an organization would otherwise want to pay.


One or the Other?

While it seems that organizations will use either the Internal Equity Structure or the Market Pricing Structure, in reality most employers use a blend of the two.  “The majority of our clients use the Market Pricing Structure, while keeping an eye towards internal equity,” explains National Director Jennifer Loftus.  “An employer cannot focus strictly on the external or the internal, to the detriment of the other.  Employers who successfully attract and retain employees keep their eye on both distinct balls, and achieve balanced compromises in situations where the external and internal dictate widely differing grades and ranges.”

As mentioned in the previous Compensation 101 and 102 articles, an organization’s salary data, ranges, and structures should be reviewed at least once a year to ensure on-going effectiveness.  However, it is sometimes necessary to conduct interim reviews to ensure market competitiveness and internal equity.  What are some signs that your organization may need to change its salary structure?  Employee dissatisfaction can be an indicator. Astron Solutions offers a variety of options in employee satisfaction surveys that allow organizations to obtain employees’ feelings in regards to their employment. Designing a survey to address organizational compensation issues can be used to determine whether your organization may be in need of adjustment.  In addition, an inability to hire and / or retain employees can also indicate the need to review an organization’s salary structures.  While other factors such as work conditions, location, and managerial style may be driving recruitment and retention issues, it is important to first review the compensation structure to ensure it is not creating these employee challenges.

When was the last time your organization reviewed its salary structures?  With spring right around the corner, now is a great time for a compensation tune up!  Contact Astron Solutions today for a free consultation to learn more, and enjoy a more effective 2013.

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