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By: Paul Davis on May 26th, 2017

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The Impact of Having an Effective Salary Structure

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What an Effective Salary Structure Can Do For Your Business

It is common for organizational leaders to dwell on what percentage salary increases to give to employees, how much they should offer to a candidate that they’re looking to hire, or even what compensation should be provided to an employee who has changed jobs internally and/or been promoted. Due to these universally recurring questions regarding pay, many organizations find the up-front effort required to create a salary structure to be a major payoff in the long-run since a salary structure can help inform all of these compensation-related decisions in a market-based, internally equitable, intuitive, and efficient manner.

Salary Structure Benefits

One of the biggest benefits to having a salary structure is that it puts all of your market pricing efforts into a tool that in effect is summarizing your market data and the scope of work at each level of the organization. This is important when you’re frequently needing to review the degree of compensation that you offer to candidates, current staff, and also to inform your pricing when responding to proposals. 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. Having a tool with this flexibility can save organizations tens or hundreds of thousands of dollars (depending on the size of the organization) based on a reduction in errors regarding how staff are paid, and via reducing the opportunity cost realized through increased administrative efficiencies when salary administration guidelines are in place.

In addition, having a salary structure with defined levels can help create a foundation through which your organization can lay the groundwork for what’s called career pathing, the importance of which is described in the linked article written by a colleague of mine.

Designing a Salary Structure

When I discuss associated HR compensation-related best practices with my clients, the conversation starts with a single question; what is your philosophy towards paying your staff (i.e. what is your compensation philosophy?). This philosophy, which varies by organization based on their unique circumstances, is the lens through which you can then analyze current pay practices, and ultimately can lead to designing salary structure(s) for the organization.

Also critical to the success of the implementation of a salary structure involves having clarity regarding the roles at your organization to help determine role scope and level. At the end of an exercise which yields a salary structure for your organization, you’ll be slotting jobs into your that structure, so it is very important to have solid documentation regarding what those jobs actually are relative to the other jobs within a given job family and across the organization regardless of job function. A colleague of mine has already written an article about job descriptions which is worth a read as having quality job descriptions is one of the prerequisite to informed decisions on pay.

Another prerequisite to making informed decisions on pay involves market pricing your jobs. Market pricing jobs is an HR best practice that should be conducted regardless of whether it will be used to either create or refresh a salary structure.

What Are you Aiming For?

This should come as no surprise, but in order to accurately slot jobs into a structure, you need to define the levels of the compensation structure in such a way that both ties back to the market from which you’ll be drawing talent from, and is also in-line with your organization’s structure and vocabulary regarding how work is described. Your ultimate goal, or end product that you should be striving for, is to be able to review a new job that’s been created at your organization, and quickly and accurately slot it in to the correct level of your salary structure.
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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 most sense for your organization 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 organization either has work or expects/hopes to have work;
  • whether there are any unique characteristics that may impact your organization in a way that’s different than the general market (for example, if your organization employed a lot of ‘cleared’ personnel with clearances that command a premium on the market);
    • For example, some organizations will ‘bake’ 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 Create a Salary Structure for Your Business

There are so many different ways to approach this sort of project that it’s difficult to provide any sort of specific guidance towards creating a structure without knowing what an organization already has in place, and where it wants to go with its structure. With that said, there is some general guidance which 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 such factors as:

  • the range spread of your salary
  • 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 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 structure, and intentionally approach this project for your organization, you are on a path towards created an effective salary structure which can help save your company a ton of money in the future!

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