Base Pay Structures

Page 224 – 228

FIGURE 11.1 Determine strategy before structure.

GENERAL AND SPECIFIC FACTORS AFFECTING PAY STRUCTURES

Pay structures are influenced by the following general factors:

· Corporate culture and values. An organization’s pay structure usually reflects the way employees’ work is valued. For example, does an organization always look for the best and brightest employees? If so, the pay line may be positioned to lead the market. If the organization encourages and values prudent risktaking, the total pay line may have an additional risk/reward component.

· Management philosophy. Narrow pay ranges and more grades allow for more frequent promotions—and a greater perception of “growth and advancement”— than wider ranges and fewer grades. However, if management believes in promoting employees only when duties and responsibilities change significantly, the distances between midpoints of ranges may be as substantial as 15 percent or more.

FIGURE 11.2 Pay structure example.

Source: WorldatWork Certification Seminar 4: “Base Pay Management,” 2007.

· External economic environment. Varied supply and demand for certain skills may necessitate a multistructured pay program. Technical professionals such as engineers may have special pay structures when there is a high demand for their skills. However, these special structures may be merged into the general structure when there is an increase in the supply of engineers in the market. Other external factors that may be reflected in pay structures include inflationary fluctuations and cost-of-living indices such as the Consumer Price Index (CPI).

· External sociopolitical and legal environments. The steps in the pay structure are likely to be more narrow and rigidly administered in a union environment than in a nonunion environment. Pay structures also are affected by regulations such as the FLSA, which mandates the minimum wage for most jobs and thereby determines the lowest possible pay scale.

Several other factors that influence pay structures relate directly to the operations and culture of a specific organization:

· Centralized compensation policy. A corporate compensation policy may call for the organization’s overall competitive posture to always be ahead of the market. This will be reflected in the pay policy line being higher than the market at every point on the salary range. On the other hand, the strategy could be to hire employees at a rate always higher than the market but over time to bring them in line with the market. This would mean steadily fine-tuning the pay ranges at different levels.

· Decentralized compensation policy. An organization’s goal may be to compete within the top quartile of its competitors in a particular functional segment (e.g., sales/marketing) or product segment (e.g., jet engines or disability income insurance). In this case, the pay structure may be different for those particular functional and product segments within the organization.

· Short-term vs. long-term orientation. A company with long-term orientation is most likely to have well-designed pay structures with career-path capabilities and smooth transitions from range to range. The ranges themselves will be developed after much thought and research. Short-term or temporary problems need to be taken care of with temporary solutions. Solving temporary problems with long-term solutions should be avoided. Employees generally have an entitlement mind-set with respect to compensation, and it may be difficult to “undo” prior actions, even though the original reasons for such actions no longer exist.

ANATOMY OF A PAY STRUCTURE

A pay structure has multiple pay or salary ranges. Every pay structure has key components that are critical to its overall design. The following section defines and describes these basic elements.

PAY RANGES AND RANGE SPREADS

A “pay range” has a minimum pay value, a maximum pay value, and a midpoint or central value. The difference between the maximum and the minimum is the “range spread,” or the “width” of the range. Range width usually is expressed as a percentage of the difference between the minimum and maximum divided by the minimum. For example, in Figure 11.3 , the range spread in dollars for Grade 10 (from Figure 11.2 ), where the maximum is $120,360 and the minimum is $80,160, is $120,360 – $80,160 = $40,200. The percentage is about 50 percent, or $40,200 divided by $80,160.

FIGURE 11.3 Illustration of a pay range and a range spread.

Note: Numbers have been rounded. Actual range spread is 50.15 percent.

To calculate the spread on either side of the midpoint, use the formulas shown in the Formula 11.1 box (where $100,260 is the Grade 10 midpoint in Figure 11.2 ).

A pay range with a 50-percent range spread will have a 20-percent spread on either side of the midpoint. (See Figure 11.3 .) That is, $80,160 is 80 percent of $100,260, and $120,360 is 120 percent of $100,260.

While all the ranges in Figure 11.2 have a range spread of 50 percent, the spread does not have to be uniform throughout the pay structure. Figure 11.4 lists common range spreads and their corresponding spreads on either side of the midpoint.

Example 11.1 shows how to calculate the spread on either side of the midpoint. To perform the calculation, one of the three points (minimum, midpoint, or maximum) on the pay range needs to be specified along with the range width.

Using a range spread of about 50 percent and a minimum of $66,800, the maximum and midpoint are calculated as in Example 11.1 .

Some Practical Considerations

Range spreads vary based on the level and sophistication of skills required for a given position. Entry-level positions that require skills that are quickly mastered usually have narrower pay ranges than supervisory, managerial, or higher-level technical positions. Individuals in lower-level positions not only master the requirements of the job sooner, they also have a greater number of opportunities over time to be promoted to higher-level positions. Senior-level positions require a longer learning curve and often have limited opportunities for advancement. The following are typical range spreads for different kinds of positions:

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FIGURE 11.4 Common range spreads.

Note: Under a broadbanding system, range spreads may reach 100 percent or more.

· 20–25 percent: lower-level service, production, and maintenance.

· 30–40 percent: clerical, technical, paraprofessional.

· 40–50 percent: higher-level professional, administrative, middle management.

· 50 percent and above: higher-level managerial, executive, technical.