When managing pay most organizations worry about three things:
- Competitiveness – how jobs are paid relative to similar jobs in competitor companies
- Internal Equity – how individuals are paid relative to colleagues in the company; and
- Affordability – compensation budgets that align with profitability
These can be addressed by individual employee but as the company grows this becomes increasingly inefficient. Alternatively grouping jobs relative to “size” and importance to the organization’s mission to achieve these objectives can be accomplished typically in one of two ways:
- Direct market comparison – jobs are grouped by the level at which they are paid in the market. When the competitive market rate is critical and internal equity of little concern this is the approach most commonly used. Market data will need to be excellent and comprehensive; however, even the best market surveys may not cover every job. As businesses attempt to differentiate from the competition hybrid positions emerge that don’t have comparables in the market.
- Job Evaluation – compares and organizes positions weighted by the company’s critical criteria derived for example from its values, strategy, financial status, and client interaction etc. In other words a methodology for valuing the work conducted by its people. Many consulting companies offer standard proprietary methods but a customized in-house program will work as well. Once levels of work have been established pay bands can be developed comprising the market value of the roles in each band.
Line managers often regard job evaluation as a bureaucratic process but it plays a crucial role in reinforcing a company’s culture and the most important aspects of its work. This can be achieved and managed through a small group without lengthy formal committees and fairly quickly in companies where the culture and values are well understood.
Levels of work and pay bands are not static, as the company’s and its markets change the grading structure will evolve to face new demands for skills or the relative importance of existing ones. With this structure a company can integrate both market and internal equity into pay decisions. A pay structure will:
- Align pay decisions across the organization. Rules will determine how an individual’s pay progresses through a range, the size of increase relative to the level of performance etc. Managers will make fewer mistakes in pay allocation causing fewer legacy issues.
- Reinforce the values of the organization, what is important, and how it is to be managed. An effective pay structure will support the culture
- Simplify pay comparison to the market by benchmarking a sample of jobs by level instead of each individual role.
- Help to delineate incentives, perks, benefits and even titles by hierarchical level e.g. director, manager, professional etc. by distinguishing them by appropriate pay levels.
- Provide fair and defensible steps between levels of work that reflect increasing competence, encourage visible, equitable career progression, and address statutory pay equity.
- Become an effective cost and budgeting tool.
- Aid communication via a common language concerning pay without the need for specifics. Millennials will place greater value on a method that is transparent, fair and without subjectivity.
A pay structure need not be transparent although we would recommend that it is in order to drive engagement. Some organizations do not communicate pay scales and manage ranking covertly to capture the administrative efficiencies without using it to promote values.
Over time a well managed structure will reduce the cost of pay administration and improve employee engagement as equitable and consistent treatment begins to be recognized. Important skills will be more appropriately paid and performance and promotion consistently rewarded. In turn this will contribute to lower turnover and increased productivity.
A customized pay structure will do more than aid pay management, it will reinforce culture when the value of work is seen to be compatible.
Anna Abgaryan: a THW compensation consultant contributed to this blog