Ten Steps For Building A Salary Structure

Author:
Warren Heaps – Birches Group LLC

A salary structure is commonly used by employers to set out the range of pay, from minimum to maximum, associated with each salary grade or band. By associating each position with a grade or band, employers can use a salary structure to help manage compensation in an optimal way.

Here are ten steps to develop a salary structure for your organization, with some special considerations for international developing markets:

  1. Establish your compensation philosophy. Each employer needs a policy which outlines their desired market position. What percentile of the market is your target?   Which comparators are appropriate?  Is the target the same for all grades?   A well-articulated compensation policy provides valuable guidance for the development of a salary structure.  In large organizations, there is often a corporate policy which forms the basis for local policies.
  2. Gather market data. Identify surveys with your desired comparators (as specified in your comp policy). Most employers prefer at least two survey sources. In international markets this can be challenging, especially in developing countries and smaller markets. Consider sector-specific surveys as well as multi-sector options – certain jobs are found across many employers, not just your sector.In smaller international markets, leading employers often provide a better proxy for the most competitive market than do sector surveys with many less sophisticated employers.  Don’t overlook international organizations like the World Bank and the UN; they pay very competitively and are often well-established in the smallest of countries.
  3. Identify benchmark jobs.  Benchmark jobs are those that are representative of roles found across many organizations – standard roles such as Manager, Accountant, Payroll Administrator, Secretary, Clerk and Driver.   Benchmark jobs are easy to understand and match to, and will appear in multiple surveys, enabling the use of multiple sources.For professional roles specific to your sector, sector surveys could be a good source.  In other cases, and with multi-sector survey sources, look for those that utilize well-developed career ladders, enabling easy cross-occupational job matching.  As an example, such an approach would examine Analyst positions across different functional areas (e.g., finance, HR, procurement, marketing, etc.).
  4. Measure your market position. There are several ways to do this. If you have a lot of benchmark jobs, tabulate the average of all of the roles in the same internal level or grade. Weighted averages incorporating number of incumbents associated with each survey data point is a common approach. Select the market reference from the survey most appropriate under your policy.In developing countries market data is more volatile.  A good approach is to use minimum and maximum values to “bookend” the data in these markets.  This helps eliminate outliers and capture more realistic market survey values.
  5. Calculate the compa-ratio. This is the ratio of your data to the market — 100 means fully comparable, while a ratio under 100 indicates a below market position, and over 100, above market. There are different approaches to summarizing the data — by position, by grade, etc.Whatever approach you use, the compa-ratio analysis will illustrate which parts of the organization are competitive against the market and which ones require some attention!
  6. Check your budget.  This is a critical step.  In Step 5 you can calculate the average difference between your current scale and the market.  This indicates about how much of an increase would be required to make your scales fully comparable to the market.  Your internal budget constraints, though, will dictate how close to this ideal you can achieve.  In addition to internal budgets, consider the average market movement in your surveys, and the general inflation rates (never use inflation to determine how much more to pay staff – this is determined by cost of labor, not cost of living).
  7. Start allocating.  This is the start of an exercise which will repeat many times, until you get the desired result.  Build a model of your organization, ideally with the number of incumbents in each grade.  Using your overall percentage of market (Step 5) and budget number (Step 6), start increasing your scale (use midpoints, or the mins and maxs).  See how close you can get to fully comparable to the market, and how much it will cost.  Does it jive?  If not, tweak the data a bit.  You can adjust the percentage each grade is increased, as well as examine the spans (range from min to max) and inter-grade differentials, in order to gain better market alignment.  Obviously, the incumbent count of each grade will impact the overall costing model.
  8. Final adjustments.   Once you have built your new scale and matched it to the market as closely as possible, and within your budget, give it a once over.  Does it make sense?  Are the increase amounts distributed in a pattern which will cause unrest amongst your staff? Strive to achieve a scale which will reflect your comp policy and enhance internal cohesion in the organization.  This step is the art of compensation, not the science.
  9. Management approval.  Review your proposed scale with management, presenting your rationale, budget and overall market comparisons.  Discuss concerns you may have uncovered about specific positions or grades, and educate your management about the process used.  Outline your implementation plans.
  10. Communicate.  Develop appropriate communications for managers and staff.  Let them know all of the work that went in to the exercise, and how the organization compares to the market.  Be careful here — you need to obviously put on a positive spin — that’s why statistics are so flexible!

You’re done!  That wasn’t so hard, was it?  Now you need to figure out how to allocate individual increases, taking into account performance and other factors.  But that’s a story for another post.

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19 Responses to Ten Steps For Building A Salary Structure

  1. Any extra tips for establishing a global structure that can overlay individual region/country salary structures?

    • Anne – Excellent question. I think we need to be careful to differentiate between global banding structures (i.e. bands or grades which differentiate jobs by contribution levels), and salary structures, which are a handy way to measure market position and manage internal pay issues.

      Global banding structures (a.k.a. global grades) are a useful tool in many organizations. For example, if a company has bands A through G, under a global structure, you can be reasonably assured that the contribution value of a position graded F in one country versus another are equivalent. Such structures should be created using standards that are clear and straightforward, and that resonate with staff and managers alike, in all of your global locations.

      As I know you realize, each country market is different and requires it’s own salary structure. You may be able to develop a core approach regarding spans and inter-grade differentials, but if you actually measure the market, you will find that in many countries, especially developing ones, the traditional patterns that prevail in the US and Western Europe are not so useful. I wrote another post on this very topic – http://wp.me/pupHI-u2.

      The point is, having global grades with consistent definitions enables many global HR processes (e.g., succession planning, executive compensation, mobility, etc.). But there is no substitute, and not too many shortcuts, to creating tailored salary structures that are in line with both corporate comp policy and the realities of each individual country market.

      Warren

  2. The pay in emerging markets can be much more complex than in many western style countries. Be sure what you are picking up in the surveys as just looking at basic salary will not be enough. Do you want your position to be, for example, median at Basic or basic plus allowances or total cash or even total cost to employer.

    There may be a very different approach to bonus payments in some countries as some cultures are more used to an even profit share than individual bonus payments so look out for the inclusion of variable pay.

    • John –

      Thank you for your comment. You are absolutely right.

      Each country’s practice is different with respect to cash allowances, in-kind benefits and incentives. Our survey data provides our clients with all of these components at the position level. We have also developed a tool to automate scale creation, which allows users to measure comparability of total compensation, and then back out incentives and other components to match the individual company philosophy for scale components. For example, if an employer defined their scale with base plus cash allowances (guaranteed cash), we would back out incentives and in-kind benefit values.

      Warren

  3. may i ask where can i find out more about step 5. Calculate the compa-ratio. ? thanks.

    • Sure. Simply put, compa-ratio is your data divided by the market comparison, usually (but not always) the market median value. For example, if your data (scale midpoint or average of actual incumbents) were 50,000 and the market median were 55,000, then the compa-ratio would be 90.9 (50,000/55,000 * 100). Similarly, were the market 40,000, the compa-ratio would be 125 (50,000/40,000 * 100).

      The challenge is how to manage the data for all of your positions or grades. Some common techniques would be to calculate the compa-ratio for each position within an internal grade, and then calculate an average of the compa-ratios, usually weighted by number of incumbents in each position.

      An alternative approach which works well in developing markets is to calculate the compa-ratio of the minimum (versus the low in the market) and the maximum (versus the high). Then average those values to determine the average market position. There are other approaches as well — it really depends on how much market data you have, how detailed the results are and how large your organization is. If you have few positions in a grade with few incumbents, for example, weighting may not make much difference.

      Hope this answers your query.

  4. Warren i give your rating 10 for this article. I feel i should implement this 10 steps in my newly started business..I have also shared this on to face book..thanks a lot!!

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  8. Hi Warren, could you please advise more in regard with step 5 and 6? are we only considering “green circled” employees in this practice and remove “red circled one”, and if so, is not it effected while starting allocating (step7) ? We used this practice during annaul salary review and not while building salary structure. For builidng salary structure we were relying on market movement of data along the desired span and pay differential mode. Could you please provide me with more information on this? many thanks

    • Simin,

      You raise an excellent concern. There will be outliers in your data — usually people with very long service or perhaps someone hired more recently with special skills that required a very high salary to attract. Similarly, you could have people very low in range for a variety of reasons.

      When calculating your market position, you could elect to exclude outliers and other exceptional cases. This will result in a more realistic picture of your market position. Just remember to include these individuals in your budget process if you intend to provide them with increases!

  9. Simin
    You may also wish to check if your outliers are all in a particular job function. If they are it could mean that you should actually consider a separate salary structure for those disciplines which have a different market anchor from the main group.
    Perhaps also you can check if their place of work is different from the main group where a local market sets the trend.

  10. I found this really helpful. Thanks Warren for posting this and answering questions.

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  13. Excellent article and all the comments are very useful. We have just implemented a year ago the new frame with salary structures, salary bands, and employees being classified (through thorough job evaluation method) to the given grade on the bases of the job they hold. We than have the technology behind that support the salary review on annual bases.. The managers are now very educated, but employees understand also more and more..We have explained the overall concept to Managers and employees and now the questions is more how transparent we want to be as the organization. How transparent would you recommend to be with employees, when it comes to the communication on their pay in relation to the internal salary structure (employee compa-ratio) ? Most of them would like to know, how well they are paid (below the market point/at reference or above the market)…

  14. Grazyna – Thanks for your comments. Regarding employee communication, it depends on both internal company culture and national culture. What are your employees used to knowing, how comfortable is management in sharing such details, and most importantly, if you disclose the pay ranges, do your managers know how to handle the onslaught of questions from employees about why they are paid below the midpoint.

    In the US many years ago, “full disclosure” became the norm. Yet even today, in certain countries in Western Europe, for example, companies are still cautious due to Works Councils and other labor issues. In Latin America and Asia, full disclosure is less likely but not unheard of.

    What is your experience in your country?

    Warren