By: Paul Davis on May 26th, 2017

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Why Your Business Needs a Salary Structure

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I'm certain that, in your business, you have probably given a fair amount of thought to what percentage of salary increase to give employees. You've probably also had conversations with managers on how much to offer a candidate they want to hire, or what a new salary should be for someone who moved to a new role internally. These are all common compensation conversations that happen throughout the year in business. 

Due to these universally recurring pay questions, many business leaders that I work with find that putting in the time and effort to develop a formal salary structure provides a major payoff in the long run. A salary structure can help inform all compensation-related decisions that occur in a business in a market-based, internally equitable, intuitive, and efficient, timely manner. Sounds pretty good, right? Let's dive even deeper.

The Business Benefits of Having a Formalized Salary Structure 

One of the biggest benefits to having a salary structure in your business is that it puts all of your compensation benchmarking into a tool that in effect,  summarizes your market data and the scope of work at each job level of the organization. Why does this matter?

Well, when you are frequently having conversations about what salary to offer a prospective candidate, what compensation looks like for your current employees who bring you printouts of what they found on, or even pricing strategies for RFPs, this tool becomes incredibly helpful in saving your precious time and energy. 

In addition, once you create a base salary structure, you can then apply that structure to whatever geographic areas your organization does business in to properly account for the cost of labor. With remote work now the norm and the increasing popularity of employees moving across the nation, this tool gives you quick access to the data you need to make informed decisions. 

Having a business tool with this flexibility can save your organization tens or even hundreds of thousands of dollars (depending on the size of the organization). Ok, that's a big statement and range, I know. Here's how a salary structure can save you money:

  • Reduction in errors regarding how employees are paid. In otherwise, you've done the homework to know you are paying your team fairly and competitively, but not overly compensating well beyond the market.
  • Reduction in opportunity costs through increased efficiencies now that salary administration guidelines are in place.

In addition, having a salary structure with defined levels can help your organization create a foundation for career pathing. Career paths are another important retention tool to have in place so that your employees understand their growth potential and understand how they can advance their careers within your organization. It's widely known that some of the top reasons why employees leave an organization is because 1) they feel they aren't compensated fairly or 2) they don't see future growth opportunities.

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Ok, so hopefully I've done a good job describing why salary structures can make a difference in your business. Now, I'll go into more detail on how to design a salary structure.

What is Needed to Develop a Salary Structure?

As a consultant, when I start a new compensation project such as developing a salary structure like this, I always first ask my client, "what is your philosophy towards paying your staff?"

I'm essentially trying to understand if there is a compensation or total rewards philosophy for how the business approaches pay decisions in general. Every organization is going to have a different philosophy based on its unique position and circumstances. When I understand the philosophy of if you try to pay at the high end, average, or a little lower with generous benefits, then it can help inform how the salary structure is approached. 

The other important piece of information that is critical to developing and implementing a salary structure is having clarity of job roles within your organization. This will help us understand the full scope of the job role and level.  It's important to have solid documentation regarding what each job does relative to the other jobs within a job family across the organization, regardless of job function. Quality job descriptions are a prerequisite to informed decisions on pay, and they will be used when we're slotting jobs into the salary structure. 

Another prerequisite to making informed decisions on pay involves market pricing your jobs. Compensation benchmarking is an HR best practice that should be conducted regardless of whether you are implementing a salary structure.

What Are We Aiming For?

In order to accurately slot jobs into a salary structure, we will need to define the levels of the compensation structure to tie in the talent market and ensure it is also in line with your organization’s structure, and vocabulary of how the work is described. We want to have an end product where we are able to review a new job that's been created at your organization, and quickly and accurately slot it into the correct level of your salary structure.

Can I Just Copy a Structure That Already Exists?

In short, no. There are numerous types of salary structures that exist in the market, and there are an accompanying multitude of ways to approach this sort of project. Ultimately, the approach that makes the most sense for your business takes into account:

  • the specific types of work that your company needs and expects to have
  • the industry(s) that your organization is situated in
  • whether there are multiple labor markets/geographies in which your business either has worked, expects/hopes to have work, or talent in
  • whether there are any unique characteristics that may impact your business in a way that’s different than the general market (i.e., a government contractor who employs people with clearances, they are at a premium on the market).
Some organizations will bake in premiums into their structure levels, and some will include those premiums on top of the compensation associated with the levels. When this occurs, there are typically multiple structures in place to account for the fact that it’s unlikely that the premiums apply to all employees.

How to Design a Salary Structure for Your Business

It’s difficult to provide specific guidance towards creating a structure without knowing what an organization already has in place, and what the objectives and goals are for the business. With that said, there is some general guidance that should be applicable regardless of the route that you decide to take. When building a salary structure based on the approach that best fits your organization’s level of expertise and needs, I recommend that you consider two primary factors including 1) the range spread of your salary and 2) geographic differentials. 

As you have probably pieced together from this article, making sure that your organization has a solid foundation in place before you build a salary structure is critical to your salary structure being successful.

If you already have in-house expertise that has experience in creating a salary structure, you should be leveraging their knowledge throughout the lifecycle of the entire project. If you do not have the in-house expertise to create a salary structure, it is recommended that you reach out to an external resource and begin engaging with them as early as the planning phase of the project. A lot of the steps listed above are common sense, but just because they’re common sense doesn’t mean that they’re always executed effectively.

If you take the time to slow down, consider all of the relevant factors that would influence your salary structure, and intentionally approach this project for your organization, you will be on a path towards saving your company a ton of money in the future!

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