What is a Pay Structure!

August 06, 2014

There comes a point when the management of pay by individual employee becomes too onerous an exercise; too many moving parts begin to make it an extensive process. This may be on reaching a certain size (e.g. number of employees), it may be when engagement demands greater internal pay equity or it may be because of challenges around the comparative value of work in different parts of the business.

The successful organization worries about three components related to managing pay:

  • Competitiveness - how jobs in the organization are paid relative to similar jobs in competitor organizations
  • Internal Equity - how individuals are paid relative to colleagues with the same performance and similar responsibilities in different areas of the company
  • Affordability - how compensation levels are determined and budgeted versus the revenues and performance of the business

Organizations often consider these objectives by looking at pay on an individual employee basis but at some point a more efficient way to manage employee pay becomes necessary.

The solution is to deal with groups of employees rather than individuals, clustered into levels. This approach however, is not without some concerns from line management who fear losing touch with competitive pay levels who envisage bureaucratic job evaluation committees. This need not be the case and in fact while grades will undoubtedly improve the efficiency of pay management they can also enhance the organization's culture and engagement.

Job evaluation and a resulting pay structure will reinforce how you manage your business and make it more efficient:

  • Simplifying competitive comparison with surveys or other organizations by comparing key positions in each range rather than each individual
  • Improving internal equity by ensuring that employees who perform work perceived to be of the same value but in different parts of the organization e.g. HR and legal can be paid similarly for the same performance
  • Creating a robust structure for providing perceived consistent treatment of employee promotional or performance pay adjustments
  • Communicating fair and defensible pay steps between levels of work to support career advancement and recognition of progress to reflect increasing competence
  • Shortening the process of determining and budgeting annual payroll changes
  • Organizing work in hierarchical levels for delineating incentives, perquisites, titles and other benefits and programs

Line managers fear employee involvement in reviewing "job grades" as it may lead to expectations for pay improvement. These objections can be overcome too.

A pay structure need not be transparent; many organizations manage ranking covertly and do not involve employees and do not communicate pay scales or even levels. While this is not an approach that will drive employee engagement it will contribute to improving efficiency of pay management. Determination of an employee's value to the organization and establishing clear ties between pay scales, pay levels and an employee's individual performance and experience is top of mind for most employers.

Alternatively, a salary structure may be developed without job evaluation. There are methodologies that will allow positions to be satisfactorily evaluated and ranked without a complex (or expensive!) JE system. 

 A systematic approach to organizing work and related pay will improve engagement and talent management  if like any other arrangement that "touches" your employees, it is tailored to your culture and values. Yes there is a onetime investment to establish the initial structure but this can be as simplified as you need.

Results will not be instant but over time will reduce the cost of pay administration and raise engagement; employees will perceive equitable and consistent treatment which will in turn reward the organization with lower turnover and increased productivity.

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