Compensation plays a significant role in an organization's success. A compensation strategy must be designed well to attract and retain talent. As the single largest expense for most companies, it's imperative to develop the right pay structure and appropriate recognition methods. This course is for HR Generalists who need to learn basic compensation principles and their application to the business. During this course, you'll learn about developing a compensation strategy, methods for conducting a job analysis, developing job descriptions, and setting up base and variable pay structures. Compensation is one of those topics you must understand to not only drive the success of your business but also build essential skills for a successful career in HR.
HR Jetpack is recognized by SHRM to offer Professional Development Credits (PDCs) for SHRM-CP or SHRM-SCP. This program is valid for 1.0 PDCs for the SHRM-CP or SHRM-SCP. For more information about certification or recertification, please visit shrmcertification.org.
This activity, has been approved for 1.25 HR (General) recertification credit hours toward aPHR™, PHR®, PHRca®, SPHR®, GPHR®, PHRi™ and SPHRi™ recertification through HR Certification Institute® (HRCI®). For more information about certification or recertification, please visit the HR Certification Institute website at www.hrci.org.
The use of the HRCI seal confirms that this activity has met HR Certification Institute's® (HRCI®) criteria for recertification credit pre-approval.
Title: Pay Structures
Module: Base Pay
Most organizations develop pay structures as a tool for managing their base pay programs and for ensuring employees are paid at a level that is competitive with the market and internally equitable. A pay structure consists of a series of pay ranges that represent the different levels of pay for jobs based on their market rate and/or their job worth as determined by the method selected for job evaluation. Pay structures serve as an important management tool in that they:
Number one, help managers make better decisions about what to pay individual employees. Two, help the organization better manage compensation costs and achieve compensation strategy and business objectives, and support alignment of work and pay
The process for building a pay structure is:
Step 1: Define your jobs using updated job descriptions
Step 2: Select a job evaluation method
Step 3: Assess the jobs using the job evaluation method selected
Step 4: Create a job worth hierarchy based on your assessment
And Step 5: Apply the job worth hierarchy and build the job structure
Let me define a couple of terms here to provide context for the pay structure process.
Job evaluation is a systematic process for assessing the relative worth of the various jobs in an organization, the purpose of which is to determine which jobs should get more pay than others. There are several methods for evaluating jobs. The two major approaches are:
Market pricing (which is external based): When using the market pricing approach, the relative worth of a job is based on what the market pays for the job.
Job content (which is internal based): When using the job content approach, the relative worth of a job is based on the value of the job to the organization.
The job evaluation method selected should be the method that aligns with an organization’s compensation strategy and philosophy. Most organizations use the market pricing approach with some consideration of job content, especially for jobs for which there is no market data available.
Now that we’ve discussed job evaluation methods, let’s define job worth hierarchy. A job worth hierarchy is the outcome of job evaluation. Jobs are listed in order of their value as determined by the job evaluation method selected by the organization.
A pay structure consists of several components or elements. They are:
Range Minimum: The minimum paid for any job assigned to the range
Range Midpoint: The halfway point between the minimum and the maximum of the pay range
Range Maximum: The maximum paid for any job in the grade assigned to the pay range
Quartiles: The pay range divided by four, with the first quartile starting at the range minimum
Range Spread: The width of the pay range expressed as a percentage
Midpoint Differential: The percentage difference between the pay rates at the midpoints of two adjacent pay ranges
This chart shows the elements of a pay structure.
Compensation strategy drives the design of the pay structure. For example, if the strategy is to pay at market median, the midpoint of each pay range would be close to the market median for all of the jobs mapped to the level.
Pay ranges can serve as a very useful tool for making pay decisions. For example, a manager could consider paying employees who are fully competent in their jobs at the midpoint of the range, those new in the job in the first or second quartile of the range, and those who are seasoned high performers in the third or fourth quartile of the pay range.
There are many approaches to designing pay structures. We’ll discuss the most common approaches, which are:
Regardless of approach, there are some guiding principles that should be followed when building a pay structure. These guiding principles include designing the structure in a way that:
Is consistent with an organization’s mission, culture, and core values and that aligns with the organization’s business strategy and objectives and compensation strategy
Enables the organization to attract and retain the talent required for its business to be successful
Supports talent development by rewarding performance, contribution, and acquisition of new skills and competencies
Provides the organization the ability to exercise control over pay policies and budgets
Is adaptable to changes in market rates and shortages of talent to fill certain positions
Starting with the market pay approach, this type of structure is comprised of progressive pay ranges and jobs with similar market rates are assigned to a range within the structure. Typically, a job is assigned to the pay range with the midpoint value that is closest to the market rate for the job, as shown in this table.
Market surveys are used to determine market rates, making the quality of job matches to survey data critical. Also, not all jobs can be matched to survey data, requiring some jobs to be slotted into the structure.
There are pros and cons to building a pay structure based on market pay. Pros are:
Pay rates are competitive with the market, supporting an organization’s ability to attract and retain talent.
The structure is responsive to market changes.
The structure is simple to administer compared to some other forms or types of structures.
It is also easy to communicate to managers and employees.
A job’s market value does not always reflect its value to an organization.
Errors can occur when matching jobs to survey data especially if job descriptions are not updated
In addition, there is not always sufficient survey data to draw on when matching a job
The next type of pay structure we’ll discuss is one that is based on point factor job evaluation. Features of this type of pay structure include the following:
First, the structure is comprised of progressive pay levels and jobs are assigned to a range within the structure based on their points value.
Points are established for each job as part of the job evaluation process. The points are determined based on a set of compensable factors (for example, managerial skills, problem-solving skills, physical effort, working conditions, and education requirements). The compensable factors are selected by an organization and vary from one organization to the next that uses point factor job evaluation.
Pay ranges may be developed based on market data for benchmark jobs but internal equity takes precedence over market.
Pros for this type of pay structure are that by design they are objective and reliable as the process for evaluating jobs is based on specific data and is quantitative. Thus, the structure is easier to defend in cases of pay equity issues compared to other types of structures. However, cons are that the structure is expensive, administratively burdensome, and time-consuming to build and maintain. In addition, when determining a job’s points value, it is critical that the job description be accurate. Finally, once established, the job worth hierarchy is not very flexible, which makes it difficult to adjust for changes in the organization or external market.
Moving on to structures using broadbanding, broadbanding collapses the typical number of pay levels to much fewer broad bands with wide range spreads of 100 percent or more.
Many organizations establish zones or reference points based on market within each broad band, and then map jobs to each zone in order to limit pay progression for jobs to the zone rather than to the entire broad band.
Some pros of broadbanding are that the structures are more flexible and they reward lateral development and growth in competence. This makes this type of structure a good fit for flatter organizations or organizations desiring to delayer.
That said, broadbanding can create unrealistic expectations for employees with respect to pay raises unless zones or reference points are set for each broad band and clearly communicated to employees and managers. Broadbanding also restricts promotions, is difficult to understand and communicate, and has the potential to be difficult to defend in cases of pay equity issues.
The final type of pay structure we’ll discuss is career progression. The process for creating this type of pay structure starts with building a career progression model. For each job function, job families are identified and then standard job levels based on skill, effort, and ability are created for the job families within the function. Once the career model is built, jobs are mapped to a market pay, broadband, or other type of pay structure as shown in the table.
Using this table as an example, we have eight levels for the Finance function and there are two job families within the function – Accounting and Finance. For the accounting family there are positions in all eight job levels. For the Finance function, there are seven.
This type of pay structures defines career paths with associated pay levels and thus is attractive to many applicants and employees. In addition, the structure can integrate dual career path opportunities, such as a management track and comparable knowledge expert track. This type of structure also integrates well with performance management systems and is a good fit for organizations that place a high value on expert knowledge workers.
Some cons of the career progression pay model is that it is not a good fit for small organizations or organizations with a high percentage of unique single incumbent jobs. In addition, it is difficult to map all jobs within a career progression model.
Other approaches to paying base pay are single rate and step increase programs. Organizations that use a single rate program pay all employees in a job the same pay rate regardless of performance, skills, knowledge, or experience. Typically, single rate programs may be used for paying entry level nonexempt employees in jobs with little performance variability.
Step increase programs are most commonly used for paying nonexempt unionized employees. A pay range consists of a defined number of steps (typically 5 to 10 steps) and employees advance from one step to the next based on tenure and/or acquisition of new specific skills and with each advancement the employee receives an increase in pay. This type of program typically does not recognize employee performance, knowledge, or experience. However, some step programs, referred to as variable step rate, factor in job performance.
You completed 0% of this lesson
You completed 0% of this course
Lessons Not Completed:
Pamela Sande, CCP, is the Managing Principal of Pamela Sande & Associates, LLC. Pamela has over 25 years of human resources experience in both consulting and corporate roles, including as an HR executive and as a specialist in designing total rewards programs that drive organizational performance.
In her current role as Managing Principal, Pamela and...