Ten Steps For Building A Salary Structure

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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