Why every organization needs a salary structure: A simple step in the right direction
Friday, February 08, 2019
While the causes of fair pay issues vary, implementing a salary structure is a simple step that can help any organization prevent and address a number of problems. In part two of this article series, we will review what a salary structure is and how it can be a simple step in the right direction for any size organization.
In its simplest form, a salary structure is a written plan that reflects all the positions within an organization with their corresponding salary range. The range reflects the differences in pay warranted within each position based on education, experience, or other factors the company deems relevant.
Normally the data reflects market rates while accounting for organization-specific differences. But, as pointed out by Reina Castro, Certified Compensation Professional (CCP), setting up a pay structure can do so much more than just validate salary competitiveness. Instead, Castro explains how salary structures can help establish fair pay practices for new hires, promotions and incentive pay.
Let’s start at the beginning
While it can be particularly tempting in an employee market to ignore any internal pay guidelines and even market rates to secure hiring the best talent, doing so can lead to problems like newer employees being paid more than more senior employees with more experience and institutional knowledge. It can also lead to problems with the new employee if the employer cannot continue to maintain the high pay rate with promotions and incentives.
Instead, Castro suggests establishing a hiring range within a position’s salary range which ensures external pay competitiveness and internal pay equity. For example, Castro notes: "If the organizations strategy is to pay at market for new talent, the targeted pay for a new employee could be at the 50th percentile of the position pay range." Posting this range also helps set and reinforce standards internally and externally.
Similarly, minimizing a compounding difference in salaries can be achieved by reconsidering incentive pay. Castro suggests calculating increases using a percentage of the position mid-point or other targeted pay point instead of the employee’s current pay. "This would mean two employees in the same position with different pay rates might receive the same pay increase amount, slowing down one employee’s progression through the salary grade, while the second employee may progress quickly."
Finally, when considering promotions, a salary structure can establish pay when role responsibilities have increased, or the employee is moving from one level and title, up to a higher level and title. For example, similar to incentive pay, Castro notes, "a promotional increase could be calculated using a philosophically based percentage of the targeted pay for the position. This allows for control over the progression through the pay range for the position. Alternatively, if the employee is below the targeted pay for the position, moving directly to the target would be reasonable."
For employees promoted to a higher level and title, the organization should set a target within the higher positions range. According to Castro, "setting the target at the 25th percentile, for example, gives the employee room to progress in the salary range and she isn’t promoted to a pay rate greater than other employees who have seniority in the same position."
The bottom line is, when an organization has pay structures in place, budgeting for new hires, incentive pay, and promotions is easier. Career paths are clear and incentive pay is understood and can better drive performance. Using this type of structured, transparent system is not only a step in the right direction to better pay practices, it can have a positive impact on hiring, retention, morale and overall organizational culture.
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