When organizations are thinking about developing salary structures within their workplace the first thing that they need to determine is their overall compensation philosophy. Does the organization want to pay at market, do they want to lead the market, or do they want to lag the market when it comes to base pay rates? Technically, there is no right or wrong answer. It all depends upon what the organization is able to afford and consistently administer over time. In addition, it depends upon how the organization looks at recruitment and retention of employees. Those organizations who want to recruit and retain the best talent generally want to lead the market and/or pay at market, and those who have small total compensation budgets generally lag the market.
Salary structures generally provide a framework to manage base pay that traditionally serves as the foundation of the economic contract between employers and employees. They are known to bridge the gap between external market equity of a job and internal hierarchy with regards to pay among jobs. Salary structures also provide governance and transparency around who is paid and how much. If salary structures are designed correctly, they may also help an organization to reward values and control compensation costs while also creating pay equity among employees.
There are typically five different types of salary structures. Deciding upon which one that your organization utilizes depends upon an organization’s needs. They include the following:
- Market-based – tend to be aligned and balanced with the competitiveness within the market.
- Traditional – are consistent and easily controlled.
- Pure Market Pricing – are based upon market data obtained for each individual job and may also be referred to as “job-based pay ranges”.
- Step Structures – are step-oriented, generally for employees who complete different related tasks within a job classification.
- Broadband – offer flexibility and differentiation, as they have range spreads from 80% to 200%.
So, which type of salary structure is right for your organization? Again, that depends upon your organization’s compensation philosophy. Although there may be differences in prevalence by industry and organization size, the vast majority of organizations are using market-based or pure market pricing structures, or a combination of both. These organizations generally want to determine what their competitors are paying for jobs in their market and then base their salary structures around those market rates. However, keep in mind that some organizations utilize a variety of types of salary structures depending upon the job. A job that is in high demand with few applicants may require the use of a pure market pricing structure, while a job that is not in high demand and has many applicants may require the use of a traditional structure. Whether employers use a pure market pricing structure or a traditional structure it is important to make sure that jobs are grouped by exempt and nonexempt within each salary structure. Separating them helps to make sure that base salaries are separate from hourly rates within the structures themselves.
Once the salary structures are developed it is also very important to make sure that they are updated annually so that they don’t become static. In most organizations, they are typically not updated so become a one-time tool to aid in the creation of pay programs, which ultimately means that over time they lose their relevance. Technically, salary structures, i.e. minimum, midpoint, and maximum amounts, should be increased annually in order for all employee pay rates to stay within the structures. If they are not, employees who receive pay increases, whether merit-based or cost-of-living based, will soon fall above the maximum of a pay structure creating a “red lined” situation. To find the percentage increase for salary structures each year, consult with an HR professional who should be able to research and provide the percentage increase amount by industry for any organization.
Good salary administration plans include not only salary structures, but also policies on what employers should do when an employee is paid below the minimum of the structure, i.e. “green lined”, above the maximum of the salary structure, i.e. “red lined”, what to do in the case of an employee with no experience in the job, i.e. learner’s rate, what to do with pay in case of a demotion or promotion of an employee, and how to handle new hire compression when a newly-hired employee is equal to or exceeds those of existing employees, to name a few. Employers who have a plan on how to handle each of these situations will not only promote a fair pay workplace, but will also be able to show consistency across the board with all employees when it comes to determining pay. Pay equity is critical when helping to prevent future employee complaints and potential litigation. Thus, employers who have salary structures and a written salary administration plan are one step closer to making sure that employees are paid fairly across the board.
Finally, employers should complete and distribute total compensation statements to employees annually. Individual total compensation statements should not only include the amount of base pay, i.e. salary, or hourly rate that employees receive, but they should also include additional pay such as variable pay to include a bonus, commissions, incentives, and longevity, if appropriate. Total compensation statements also include the inclusion of both employee and employer contributions to additional benefits provided to an employee by an organization to include the costs or fees for medical, dental, vision, and life insurance, short-term disability, long-term disability, long-term care, retirement savings plan contributions, pension opportunities, employee assistance plans (EAPs), clothing or fitness center allowances, training, licensure and certifications, to name a few. Total compensation statements give the employee a great overview of the cost of their total compensation, opening their eyes to what the employer offers on an annual basis with regards to pay and benefits. While all of this information should be included in each employee’s total compensation statement, it should also be included in a municipality’s salary ordinance. For government entities, their total compensation statements should be their annual salary ordinance.
For additional information on salary structures, salary administration plans, total compensation statements, or municipal salary ordinances, please contact us at www.newfocushr.com.
Written by: Kristen Deutsch, M.B.A., CCP