Base Pay Structure - definition
The pay structure of an organization is a management tool that reflects the collection and organization of internal and external compensation data to support job values. A pay structure consists of a series of pay ranges that represent jobs of similar internal and/or external worth
Base pay structures are administrative tools designed to provide pay levels and pay opportunities that are internally fair, externally competitive and cost-effective – all in support of an organization’s compensation strategy. Pay structures typically group jobs of equal internal value or worth into grades. Pay ranges reflecting market value are then assigned to these job grades.
This module lays a foundation for the effective design of traditional pay structures and offers several approaches to assigning jobs to grades and developing competitive salary ranges for those grades. The concept of broadbanding is introduced and contrasted with a traditional pay structure. When designing any pay structure, compensation professionals need to consider how an organization’s compensation strategy will affect design elements and the competitiveness of midpoints or control points. Once designed, effective implementation, communication and maintenance of the pay structure are critical to its ongoing success.
Base Pay Structure - Ojectives
- create alignment between work and rewards
- help to achieve organizational objectives; effective compensation tools for supporting the organization
- reflect the company’s desired position with respect to competitive pay at a certain point in time (compensation philosophy)
Building a base Pay Structure
Job Analysis –> Job Documentation –> Job Evaluation –> Reconciliation of internal and external considerations –> job worth hierarchy –> Base Pay Structure –> either Market data emphasis (market based approach/external) or job content emphasis (point factor)
Market Based Approach to Pay Structure Development
The market-based approach uses external comparisons to create a pay structure. It involves completing a market pricing analysis of benchmark jobs, creating a market-based job hierarchy, and assigning benchmark and nonbenchmark jobs to the pay structure (slotting).
External market pricing or competitiveness takes priority – In the market-based approach, external market pricing or competitiveness takes priority over internal job equity.
Characteristics of market pricing and slotting:
- Simple to administer
- Easy to understand
- No job evaluation points
- Responsive to market changes
Point Factor Approach to Pay Structure Development
The point factor approach involves assigning a point value to specific jobs in the company. Total point value reflects the importance of the job to the company. Each specific job is assigned a point value and that point value determines the compensation for the position. Internal equity is a priority when using the point factor method.
After the point system is established, two approaches can be used to develop the pay structure.
Continuum approach:
- No job grades – Develop a base pay policy line by regressing job evaluation points with competitive market rates for each benchmark job (the trend line will help with the nonbenchmark jobs). This approach does not utilize job grades. Each point value (and the corresponding jobs) will have its own salary range.
- Internal equity is the priority.
Pay structure approach:
- Develop job grades – Develop job grades based upon the specific point factor results.
- Based on job evaluation or internal value
Integrating market data uses the current job evaluation system used within an organization and adds a market component.
Integrating market data into Point Factor uses the current job evaluation system used within an organization and adds a market component.
Integrating market data into point factor:
- Values both internal and external relationships
- Uses formal job evaluation system and market data allowing for an organization to place emphasis on formal job evaluation system while ensuring compensation is based on market data.
Pay Structure Design Considerations
Strategic issues
- Supports the organization’s business strategy
- Total rewards design strategy (desired competitiveness)
- Base
- Variable
- Work experience and/or other rewards
Competitive Practices
-external equity
The organizations job and workplace design approach
-internal equity
The organization’s administrative policies
The funds available for compensation plan
The value the program adds to the organization
Sample questions to ask
- Will this compensation structure enable our organization to achieve its goals?
- Can we attract, retain, engage and motivate the right employees?
- Is our organization’s compensation strategy to value internal job worth, external market data or both?
Pay Structure Design
Three interrelated components are important pay structure design considerations. Each of them is explored in greater detail on the following pages.
- Base Pay policy line
- number of pay structures
- number of pay grades or bands
Components of a Base Pay Structure
This graphic illustrates the components of a base pay structure as outlined on the previous page. a – range minimum b – range maximum e – midpoint a-b – range spread or depth d-c – range overlap e-f, f-g – midpoint differential e-f-g – base pay policy line
Developing a Base Pay Policy Line
One of the first steps in designing a pay structure is the development of a base pay policy line. This is done by combining internal and external values as follows:
- Plot internal value against current salaries
- Plot internal value against market data
- Compute the trend line(s) using regression analysis:
- Regress internal value with current salaries
- Regress internal value with market data
- Reconcile with compensation strategy: reconcile the base pay policy line with the compensation strategy.
Determining How Many Pay Structures
Once the pay structure design considerations have been addressed, determine how many different pay structures are necessary for the organization. This involves an examination of the following:
Diversity of jobs
- Vary by functional area (nursing, engineering, maintenance)
- Vary by job level (clerical, supervisory, executive)
Diversity in grading procedures
- Union negotiated production jobs may be in an automatic step-rate structure.
- Hourly office jobs may be evaluated using a point factor plan.
- Management jobs may be evaluated using a market-driven approach.
Internal equity versus external competitiveness
-In order to balance internal equity against external competitiveness, separate structures may be developed to address external competitiveness issues (e.g., nursing, IT, hot skills jobs).
Culture
-The culture of the organization may affect the number of pay structures that are required.
Determining the Number of Pay Grades
Jobs are assigned to grades in a traditional salary structure based on internal value and/or market value. The determination of the appropriate number of pay grades for the organization’s pay structure can be accomplished by evaluating the following:
Skill or responsibility distinctions
-How many skill and/or responsibility distinctions are evident in the organization (per job evaluation plan and internal value)?
Supervisor / subordinate relationships
- How many levels of supervision?
- How many grades between supervisor and subordinate at each level?
Career progression
-How does the organization view an employee’s career advancement?
Administrative considerations
-Generally more grades equal more administration.
Pay Ranges
Pay ranges are established to offer competitive ranges of pay for job groupings.
Pay range has a maximum pay value, a midpoint or central value, and a minimum pay value.
Generally each job has a maximum pay level, both in the external market and internally. This is why it is critical to observe market fluctuations and market pricing. For example, when an employee is at the maximum of a pay range, it typically means that the employee will no longer be eligible for pay increases unless the range is adjusted or the employee obtains new skills or gets promoted.
The midpoint or middle-pay value for the range usually represents the competitive market value for a job or group of jobs. It is established as an estimate of the going market rate, and typically is referred to as the pay policy line, the level at which the organization chooses to set its pay against the external market.
Generally each job has a minimum pay level. The minimum pay level is the wage that has been determined to be the lowest wage the market (internal structure) will bear for this position. It is important to stay cognizant of the minimum of the range and any employees that might be close.
Range Spread
A range spread is the width of a pay range from minimum to maximum. Care should be taken when deciding range spread. Assuming a constant midpoint, changing the range spread changes the minimum and maximum of the pay range. Below is an example of range spreads based upon organizational level:
Service, production and maintenance: 20% to 30%
Clerical, technical and administrative: 30% to 40%
Professional and supervisory: 40% to 50%
Managerial and executive: 50% or more under certain circumstances
Range Spread – Calculated Two Ways
In the first calculation, the range spread is calculated as the “spread from minimum to maximum.”
In the second calculation, the range spread is calculated as the “spread around the midpoints.”
-Use the following calculation to convert from a “spread around the midpoint” to a “spread from minimum to maximum”:
(1 + % desired) / ( 1 - % desired) - 1 = Range Spread
(1 + .20) / (1 - .20) -1 = .50 or 50%
Midpoint Differential Considerations
A midpoint-to-midpoint differential is the difference in wage rates paid in the midpoints of two adjacent grades.
Level of refinement of job evaluation method
-if the job evaluation approach doesn’t discriminate finely between levels, the result will be fewer grades.
Market competitiveness (market rates of lowest job in structure to highest) -Midpoints should align with established base pay policy line.
Cost of promotions
-The percent difference between midpoints should be aligned with the organization’s promotion policy; for example, a promotion policy that limits increases to 8%, but has a midpoint differential of 15%, may cause some employee salaries to fall below the new grade minimum when promoted.
Midpoint differential guidelines
5% to 12% between grades for clericals / production
8% to 15% between grades for paraprofessional, professional management
15% to 25% total midpoint differential between supervisor and subordinates
20% to 35% midpoint differential between grades for executive levels
Midpoint-to-Midpoint Differentials
Midpoint-to-midpoint differentials are calculated for adjacent grades. The formula is:
(midpoint of higher grade - Midpoint of lower grade) / (midpoint of lower grade)
Grade 1: min = 31000 , mid = 33500 , max = 36000
Grade 2: min = 31700 , mid = 35200 , max = 38700
(35200 - 33500) / (33500) = 0.05 or 5%
Range Overlap
Range overlap allows for movement throughout a pay structure (grades and ranges) due to performance, promotion, demotion, reclassification, market adjustments, etc.
What does it tell us?
Typically, range overlap will be very specific to both organizational philosophy and the job evaluation system. In a point factor system, large range overlaps are more common. For market-based approaches, the range overlap will not be as large; this will allow for fluid range movement. Usually, organizations have very small range overlaps for executive level ranges, due to uniqueness of jobs. However, an organization still might have some overlap due to succession planning.
Range overlap is also important for the issue of internal promotion. problems may occur if too much overlap is evident within the structure
Broadbands
Broadbanding results in a pay structure that consolidates a large number of pay grades and salary ranges into much fewer broadbands with relatively wide salary ranges, typically with 100 percent differences between minimum and maximum or more.
Broadbands provide bands rather than traditional salary grades and ranges. There are fewer bands than would be used in a traditional compensation program and the bands (or range spread) are considerably wider (100% to 300%).
The example above is one of many approaches to developing broadbands. This example demonstrates the expansive nature of broadbands: they include both broader pay ranges and broader groupings of jobs based on job value.
Reasons to Adopt Broadbands
Improve competitive advantage.
-By reducing the hierarchical nature of a traditional salary structure, broadbands can provide more flexibility to large organizations, allowing them to be quicker and more responsive to market needs.
Support a new culture/climate.
-With the broader definition of a band, employees focus less on the concept of their grade and level within the organization.
Support flatter organizational structure.
-Bands are often used to mirror the number of reporting levels within the organization.
Promote broader view of work.
-Less emphasis is placed on promotions in the traditional sense. More importance on growing by taking on more or different responsibilities, training for new skillls and improving competencies.
Increase flexibility of pay practices.
-Can be used to recognize and reward competencies.
Disadvantages of Broadbands
Lack of structure – The lack of structure inherent to broadbands can create confusion and chaos.
Just old salary ranges repositioned within new bands – Many organizations find that utilizing broadbands has created the need to further define market ranges within the bands, leading some to suggest that the market ranges are really just old salary ranges and grades repositioned within new bands.
Need for higher level of compensation expertise – For broadbands to be effective, market rates must be determined for jobs within the band, and those values interpreted by HR professionals using the bands.
Salary increases may be less structured – requires a higher level of expertise in managers allocating increases for competency, skill development and performance.
Summary of Base Pay Structures
Base pay structures are administrative tools designed to provide pay levels and pay opportunities that are internally fair and externally competitive – all in support of an organization’s compensation strategy.
- Considerations: strategic issues, competitive practices, value added.
- Design: base pay policy line, number of structures, number of grades, ranges, spreads, overlap, midpoint to midpoint differentials.
- Broadbands: larger than typical range spreads (100% to 300%); consolidates a large number of pay grades and salary ranges into much fewer broadbands.
? Identify the goals of a pay structure for an organization.
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? Describe methods involved in building a base pay structure.
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M1 - The Role of Base Pay in Total Rewards23
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M2 - Designing Base Pay Structures32
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M3 - Practical Applications of Base Pay Structure Design4
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M4 - Base Pay Implementation and Delivery31
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M5 - Pay for Performance and Salary Budgeting42
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M6 - Administering and Evaluating Base Pay Programs17
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M7 - Mergers, Acquisitions, and Base Compensation14
