Creating a Market Competitive Salary Structure

DEVELOPING A SALARY STRUCTURE

The job structure presents the compensation professional with a hierarchy of the jobs in the organization. An external market value now needs to be established for this hierarchy of jobs. This value is typically available from the external marketplace through salary surveys.

Current Pay Rates

The current salary rates in an organization will clearly influence any changes made in its current salary structure.

In most organizations, there is a well-defined group of jobs that represent strategic functions and an important segment of the total labor costs of the company. Prices assigned to this group of jobs may greatly affect an organization's competitive position, and salary structure relationships are built around them. These are the organizations benchmark jobs.

Benchmark Jobs

Benchmark jobs are important to establishing the framework of a salary structure. They are commonly found in salary surveys and are used to make pay comparisons, either internally or externally, for an organization. When selecting benchmark jobs, they should:

• be important to your organization’s internal hierarchy
• represent all major job families, departments, and levels
• serve as an internal anchor for non-benchmark jobs

An organization's salary structure should be both internally equitable and externally competitive. It is internally equitable if the salary structure appropriately manages the hierarchy of the business and provides appropriate career ladders and organizational growth within the business. Pay differentials between levels will then typically reflect differences in skills, effort, responsibilities, and working conditions.

All organizations need to understand how their pay relates to competitive levels. Market data does not exist for all jobs. Rather than examine every job in the organization relative to market rates, the focus is typically on jobs that provide a competitive advantage reflecting strategic core competencies or on benchmark jobs that have a high number of incumbents.

Benchmark Jobs are representative samples of standard jobs that exist across multiple organizations and industry sectors.

Benchmark jobs are:

• well-defined
• stable across organizations
• jobs for which market data is readily available

The pay ranges for benchmark jobs are pegged to the market, establishing the framework for the salary structure. Then, the pay ranges for the rest of the organization's jobs can be slotted into the appropriate location in the hierarchy based on their relative value compared to the benchmarks or based on their job evaluation points.

Examples of benchmark jobs in the marketplace include Accountant, District Sales Manager, Recruiter, Administrative Assistant, Engineer, Research & Development Director, etc. Ideally, they should represent each department, functional discipline, and level throughout an organization. They are very common jobs in the external marketplace and are important anchors when developing a salary structure.

Market Rates

Most often, the job structure is priced through the use of salary survey market rates. (See DLC Course 73: Analyzing Salary Surveys, for information on salary surveys.) One such source of salary survey data is ERI's Salary Assessor, which provides base salary, annual incentive compensation, and total cash compensation for over 19,000 positions in the United States, Canada, and Europe.

When salary survey data is used, the market data should be adjusted based on:

• compensation philosophy
• market position
• industry
• desired competitive position to the market
• competitive marketplace
• level of jobs
• size of business for management jobs

Market value of jobs

A single market value must be determined for each job. Salary surveys summarize collected data typically by mean, median, and desired percentiles (e.g., 50th percentile). A compensation professional must decide which value, such as the mean or median, to use for their market analysis. (The framework for this set of decisions is covered in DLC Course 19: Quantitative Methods Used in Salary Administration.)