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Understanding the Complexities of Pay Structures

Written by Christine Whelan on February 21st, 2019.      0 comments


Written by Christine Whelan on February 21, 2019.

This article was published in the March Issue of NZ Management Magazine

An important part of the conversation around pay structures is how to make them transparent within the organisation and to what extent that should be facilitated. people coins-301

Why might you need a pay structure, and if you do have one what might it look like?  When you have a pay structure in place it makes it clear how remuneration works across the company and enables salary levels for individual roles to be fairly decided. 

P
ay structures will be different from one organisation to another for many reasons, including such elements as the size of the company and the number of roles within the structure. 

Pay structures can vary from the simplest single job match against the external market to one where each job is evaluated, or sized, and has its salary set based on the job evaluation points it earns.

However, there are some middle grounds, which is where most organisational remuneration structures fit.

In very small businesses, there may be no official salary structure at all. With few roles to manage, it’s likely that each position will be considered individually and the known market for similar positions will be used to decide the remuneration level. 

An appropriate salary could be determined by looking at other jobs being advertised, or by taking a more scientific approach, looking at surveys and benchmarking the role within the industry. These are the organisations at the single job match end of the spectrum.

With a bigger organisation it becomes administratively difficult to follow that process for all positions. So the next option is to evaluate and group jobs of a particular level into narrow grades, with a remuneration range for each grade.

These grades are usually underpinned by a job evaluation process, ensuring that there is internal relativity across the organisation. 

Grades work well in organisations where there is a clear hierarchy and movement from one step to another is easy to recognise. They also work well for organisations that need to keep a tight handle on their budget, because the difference in salary between grades is relatively small. 

As a result, grading is common with not-for-profit organisations and in some public sector organisations.

Where organisations have flatter structures and need more flexibility in how employees are used it’s common to move from a grade structure to a broader, band structure.

This tends to be more common amongst medium-sized to large companies and in organisations where there is considerable range and diversity of roles within the organisation. 

Again, as with the grades, jobs are grouped into bands containing roles of similar size, and remuneration ranges set for each of the bands.

Usually reserved for much larger organisations in New Zealand, broad branding uses significantly wider salary bands, meaning that there is more flexibility in setting pay levels for roles where there may be similar accountabilities, but a wide range of expertise needed. It's often used alongside a very flat structure.

All these structures need to be underpinned by robust remuneration data obtained through reputable sources, such as surveys using consistent methodologies and with solid databases.

HOW TO APPROACH PAY STRUCTURES

Creating a formal salary structure starts with finding common criteria to establish the relative size of each individual role, in order to establish their internal relativities. 

This will be critical in ensuring that jobs are going to be rewarded at a level that is appropriate to their place in the organisation.

There are number of methodologies available to enable job sizing, however, most apply similar criteria, which will generally include such elements as education or experience, the level of authority and decision-making involved, the use of interpersonal skills needed and the degree of responsibility for managing people. However, what's crucial is that the same criteria is applied to roles across the organisation from entry level to executive leadership remuneration, to ensure fairness and equity.

Whichever type of pay structure an organisation uses, it may choose to break down the roles into career pathways, or job families, to make it clear how employees can expect to progress within their field of expertise.

In this case, the same structure of grades or bands should be used, but the salaries associated with each point of the scale may be different according to industry market rate.

More recently, an important part of the conversation around pay structures is how to make them transparent within the organisation and to what extent that should be facilitated. 

Some organisations will just tell individual employees their own band or grade and possibly their salary range, while some are highly transparent about which jobs fall into each band so that employees can see how they might progress.

In order to be open about their pay structure, organisations need to be confident that what they have in place is fair.

WARDING THE RIGHT SALARY

Part of creating a pay structure is deciding how employees are able to move through the grades or bands appropriate to their role and increase compensation. 

How this is organised is very much down to company philosophy and available budget.

W
hether your organisation uses bands or grades, there will usually be a range applied to each of these, based on market data. 

In general, the midpoint, or thereabouts, of each band or grade is where fully competent and well performing employees would expect to be paid. 

Those with less experience may be remunerated below the midpoint and will be expected to move towards the midpoint over time.

Exceptional performers should be paid towards the upper end of the range. Should an employee reach the maximum salary available within the band, but still perform at an exceptional level, a single one-off recognition payment could be made, with the salary held where it is until the market catches up.

Some organisations use performance-based increases, while others prefer to apply annual increases based on market movement. 

While annual percentage increases on the surface appear to be fair, they do in fact reinforce existing relative pay levels while failing to reward good performance.

Performance-based reviews may be a more equitable method of managing pay for those who work hard, especially within the private sector. 

However, where organisations have limited budget, it can be difficult to decide just how to share a low salary increase budget in a way that provides meaningful reward for excellent performance while still recognising those who are simply performing at a competent and satisfactory level.

In either case, an organisation’s band or grade pay ranges should be reviewed each year and if necessary moved to keep pace with what’s happening in the external market. 

This will ensure that organisations remain competitive in the recruitment and retention areas.

A good approach to take is that bands or grades move with the market, while individual pay moves based on performance. This ensures both that external relativity is maintained and individual performance is recognised.

HOW INCENTIVES, REWARDS AND BENEFITS FIT

On top of base pay, an organisation may choose to offer benefits, rewards or incentives as part of its pay structure.

These can take many forms, from the provision of company cars or medical insurance, to sales commissions, regular company bonuses, or long or short term formal incentives.

When considering how your organisation measures up against the external market it is important to take all these things into account in order to ensure that it remains competitive within its own market. 

If your pay structure needs an overhaul, or if your organisation has grown enough that you need to move from individual job pricing it’s probably time to get some expert advice on the best way to approach the project. 

Such advice should cover the spectrum of pay structure management, from job sizing through to the inclusion (or not) of benefits and incentives.

The ultimate aim of such a project should be to provide you with a customised structure, fully owned by your organisation and easy to manage in the future. 
 
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