We’re working on a compensation project now with a company to redesign their exempt salary structure. When thinking about how to best design a system, it’s important to realize there are two key factors:
Internal Equity– Are you paying people fairly compared to what other people within the organization are making based on the knowledge, skills and abilities required for each role?
External Competitiveness– Are you paying what the market demands for certain knowledge, skills and abilities required for each role in order to recruit and retain people?
Basic steps to consider when designing a compensation structure:
You gotta do a job description. In considering the factors of internal equity and external competitiveness, both of these hinge on knowing the knowledge, skills and abilities needed for the jobs in which we you trying to define a compensation structure. Read more about performing job analysis and what a job description needs here (link back to previous post).
Get market data. For external equity, you need to know what the market pays for the jobs you have.
Some sources for market data:
Define compensable factors. Compensable factors are based on what the organization places a value on (internal equity) in order to differentiate the value of roles. For example, education is a compensable factor. In general, positions that require a bachelors degree have a higher value placed on them than those that only require a high school diploma.
Create the structure. Creating the structure takes the information defined in the previous steps to create salary grades and ranges. Grades are the hierarchy of the salary structure (grouped by jobs with relative worth) and ranges are the minimum and maximum established within grades. Using compensable factors for each job, you will then place each job into the appropriate salary grade.
Create a Salary Administration Manual. In order to make sure that the structure you created is implemented appropriately, a salary administration manual needs to be created. The manual should include a description of the newly created structure, administrative procedures governing the structure and guidelines for annual salary increases. In addition, it should contain ways to keep the program up-to-date through a periodic systematic review of the structure.
Designing and creating a compensation system seems like a daunting task. But if you take things step-by-step, you’ll see that it can be manageable. More importantly, if done correctly it can add tremendous value to your organization by helping you recruit, retain and reward talent appropriately.
