4 steps to creating the perfect pay structure
A great pay structure is like a snowflake: each one is unique.
Pay structures need to reflect your organisation’s reward values, business strategy and commercial needs, whilst managing your pay and career framework as simply and clearly as possible.
Here’s 4 design elements to consider:
Internal vs. External
A fundamental design decision is the balance between the internal and external market. If your benchmarking shows you are consistently behind the market, you might want a pay structure that is geared towards the external market, helping you address your position. Market driven pay ranges are initially more expensive to introduce – in this case, it’s likely a number of employees would fall out the bottom of the pay structure and would need to have their salaries uplifted.
Alternatively, you might be in a position where the external market is less relevant to you and your main priority is maintaining internal salary levels. This might be where you are already seen as an employer of choice, with a strong total reward proposition which means base salary is not so market driven. In this instance, the pay structure would be geared towards the internal market data.
Choosing the right job families will help make career development opportunities clearer within your organisation, while ensuring that the pay structure differentiates pay premiums for certain skill sets or business critical areas. For example, you may wish to have a Sales job family due to the critical impact these roles have on the business whereas HR, Finance and Marketing could be grouped together in Central Functions.
It’s also possible to tailor the design of individual job families depending on your reward strategy. While most functions in your organisation might look at the median of the market, you might decide the Sales job family is so critical that it should look at the upper quartile so you can attract and retain the best talent.
Pay grade width
Another consideration when designing your pay structure is how wide to make the pay bands at each grade level. Wider grades will decrease the cost of implementation as fewer incumbents will fall out of the ranges, and will give you more flexibility in managing pay. Ultimately, you are giving yourself a wider goal to aim at, allowing yourself greater differentiation of salaries at each level. However, the wider the bands and therefore the greater the overlap between salaries at each level, the less clear career development becomes, as employees can progress their salaries without moving roles.
Prior to implementation it is important to have modelled the financial impact of applying the pay structure. The direct costs will be incurred where incumbents are below the start of the pay range for their grade and therefore need to have their base salary moved up to the start of their grade. As we saw above, the implementation costs can be controlled by widening the width of the pay grades or phasing the introduction.
While there is not a direct cost associated with people sticking out of the top of a pay structure, a decision needs to be made on how pay for these individuals is to be managed. This can range from red-circling employees so they do not receive a pay increase until their pay is back within the pay range, to a more extreme and very uncommon pay reduction, or simply accepting that for some key talent in the business they will be managed ‘off-scale’.
If you’d like to get your existing pay structure working better, or design a new scheme, please get in touch with me at email@example.com