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SUMMARY
This course explained how to create a rational salary structure. The salary structure is a combination of an organization’s internal hierarchy and the market rates for those jobs.
Graph
Regression analysis is a very effective way to calculate the midpoints of a salary structure and usually starts with the internal hierarchy displayed on the horizontal axis (represented by job evaluation points or salary grades). The vertical axis represents the market value of jobs expressed in monetary terms. You can plot each job or use benchmark jobs on the graph.
Pay-policy line
A line of best fit can then be drawn that suggests the pay-policy line for the organization. The pay-policy line can be used to calculate the midpoints for a salary structure. The values of the two dimensions need to be grouped to make salary structure design more manageable:
- The horizontal axis is grouped into pay grades or job evaluation points.
- The vertical axis is grouped into a rate range for each pay grade.
Not all pay policy lines represent a best fit of the data. It is important to review the dataset influencing the line to determine if any corrections to the dataset will improve the line.
When a salary range is created, this provides the opportunity for the organization to recognize pay variances for employees in the same job or for jobs in the same pay grade to be recognized as having appropriate differences in skill, effort, responsibilities, and even working conditions.
Multiple Structures
Multiple structures can be used to reflect the different pay rates of geographic locations, job types, levels, and functions. A business will typically have separate salary structures for executives, commissioned sales, professional/management, and administrative/operative employees. Different compensation strategies, market rates, geographies, different incentive plans, unionization, and different job evaluation methodologies can also all influence the need for a separate salary structure.
Implementing the Salary Structure
Salary structures approved by top management will ensure organizational support.
Salary Structure Maintenance
All salary structures require ongoing maintenance to ensure they remain up-to-date and remain competitive with the external marketplace. But it is also important to ensure the structure is responsive to changes in the internal job structure and the hierarchy of the organization.
Also, a majority of companies will reprice their salary structures annually. Some companies will elect to reprice the structures every two years or on an as needed basis. A fixed percent increase is applied to the current salary structure to keep the structure up to date until it is repriced.
An effective salary structure influencing all parts of a business is an important management tool to ensure compensation fairness, equity, and market competitiveness. Factors such as the business strategy, compensation philosophy, current pay practices, the hierarchy of jobs, the defined external marketplace, and labor law all contribute to the development of a salary structure. An effective salary structure will thoughtfully integrate these factors in the overall design and contribute to equitable and competitive compensation throughout a business.