Compensation for Business Leaders

Salary Structures

When designing a salary structure for top management compensation, a recurring challenge has been whether to use:

• one salary structure for the whole organization
• OR
• separate structures for different employee or functional groups

Many organizations segment their employee population and develop flexible salary structure(s) to effectively manage them.

Segmenting the executive structure from the professional/management structure typically will ensure both are paid appropriately relative to the competitive marketplace.

Pay strategies include establishing the desired competitive position relative to the corresponding desired marketplace such as the mean, 50th, 60th, or 75th percentile. When designing a salary structure, common pay strategy decisions include:

• Lead the market
• Lag the market
• Lead-lag the market

In a lead the market structure strategy, salary structures are set to be at the market rates by the end of the compensation planning year so at the beginning of the year the pay rates will be leading the market.

In a lag the market structure strategy, salary structures are set to be at the market rates by the beginning of the compensation planning year so at by the end of the year the pay rates will be lagging the market.

In a lead-lag the market structure strategy, salary structures are set to be at the market rates for the middle of the compensation planning year so at the beginning of the year the pay rates will be leading the market until the middle of the year, then lagging the market the second half of the year.

Pay Policy Line

A market trend line is developed based on the desired pay strategy of the company. Market pricing is the most prevalent practice to create a pay policy line. The first step is to identify the market rates for various benchmark jobs that cover the entire pay spectrum from the highest to lowest rates of pay. The most credible approach for identifying the trend line is by calculating the slope and y-intercept of a pay policy line from the plotted market rate points on a graph using regression statistical methods. The salary structure may be developed based on a straight line or a curved line.

Pay-policy lines are used in salary structures to chart a smooth progression between pay grades.

(To learn more about establishing wage structures and pay policy lines, see DLC Course 82: Creating a Market Competitive Salary Structure.)

Salary Ranges

Salary ranges typically describe acceptable levels of compensation for a group of similarly valued jobs. If an organization does use a separate salary structure for top management, one often finds wide salary ranges, sometimes known as "spreads."

Having a large spread in salary ranges is useful because of market practice, the length of time an incumbent will be in a top role, and the wide variation in the performance of managerial jobs. The use of broader ranges lets organizations recognize this variation by paying top performers significantly above average performers.

The use of pure market pricing is increasing where each job is paid at its specific market value rather than overpaying some jobs and underpaying others. Pure market pricing may use ranges within grades. Salary grades are optional for pure market pricing.

Broadbands

Broadband-type compensation structures evolved between 1990 and 2000 because businesses flattened their organizations and decentralized the decision-making to be more responsive to customers. In flatter organizations, "vertical" promotional opportunities continue to be available but lateral career growth based on skill acquisition, job enrichment, and job enlargement is increasingly more prevalent.

Although broadbands foster learning, employee development and flexibility, they require extensive use of market compensation data, have a lack of structure and control, and require greater Human Resource guidance. Salary ranges exist so that organizations do not overpay or underpay for the functions/tasks being performed and to provide cost control and this is lost to some extent when broadbands are used. More than any other factor, legal considerations drive management toward more generalized, broader, base salary applications. When used, large U.S. organizations today use as few as five or six broadbands with very large ranges of pay. Federal contractors using broadbands will likely have greater compliance requirements.