We regularly work with clients who want to simplify their reward mechanisms and make career development and salary progression, as simple to manage and transparent as possible. Key to this is developing a fair and robust pay structure.

While each pay structure is unique to an organisation and their specific design needs, there are three components to creating a pay structure:

1. Internal job levels

Your job levels create the steps in the pay structure, ensuring roles at each level have comparable skills and responsibilities. This means employees can see how their reward compares to other roles at that level.

2. Internal market

Combining your incumbent salary data by job level, creates an internal rate for a job by level. This will tell you the typical salary for a job at a given level within your organisation.

3. External market

By using pay benchmarking data for roles, an external rate for a job can be calculated by level, allowing you to account for skills that pay premiums.

These three elements are the science behind developing a pay structure. The way these elements are combined is the art. As well as creating a clear and easy to manage pay and career framework, the art of combination needs to reflect your reward values, your business strategy and be commercially viable. Let’s take a look at what needs to be considered:

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.

Job families

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 are able to progress their salaries without moving roles.

Implementation

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’.

Getting your pay structure right will help you motivate, retain and attract your key talent within the business. Get it wrong and it will probably undermine every other great HR initiative you try to put in. If you would like to chat to us about how we could help you get your pay structure working better, please get in touch with me at ian.glendinning@innecto.com

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