How to Develop Effective Pay Structure: Allocating the right pay to an employee

The quest to compensate employees fairly is an ongoing challenge. If your organization pays employees too little, you my risk alienating and losing valuable employees. If you pays too much, you may be unwisely spending company resources. If you pays too much, you may be unwisely spending company resources. If you earn a reputation as a poorly paying employer, you may fail to attract the desirable candidates.


How much your organization can afford for employee salaries determine the caliber of talent you attract to your organization. Salary discussion starts only in the recruiting process, sometimes as early as the initial phone screening. Why spend time on a candidate you cannot afford?

The purpose of pay structure is to organize and demonstrate your organization's compensation philosophy and to reflect and support the advancement of your company culture.

An effective pay structure also allows you to attract and retain the people who can help achieve your business goal. Your organizations pay structure is a visible demonstration of your compensation philosophy and strategy. Developed logically and communicated effectively, your organizations pay structure is a tool that employees can view and understand. This is important because a recent study shows that understanding a company's compensation strategy influences employee’s satisfaction with their Compensation.

These are three challenges in developing a pay structure.
You should determine:

• The appropriate data for establishing the relative value of a particular job to your organization
• The appropriate pay range for a job with the rated value to your organization
• The value of each job position within the allotted pay range.

Once you have developed a pay structure, another ongoing challenge is determining your organization's annual compensation budgets.

The following are the different types of data used to determine pay structures:

Ranking Data.

Traditionally organizational pay structures were developed with an internal focus on creating equitable pay ranges dependent on job evaluations. This is known as the internal equity method. A different and currently favoured ranking method for job evaluation is the point factor method. In the point factor method, certain aspects of jobs such as skills required, work, environment, or level of authority, are assigned points.

The assigned points determine the ranking of a job in the organization job hierarchy. Higher ranking jobs are more highly compensated. The downside to job evaluation ranking system is that they depend largely on subjective decision-making and can be time consuming.

Market pay data.

In the past decade, pay structure development has been more externally focused and driven by market considerations. This is known as the market - pricing method. This method relies on market pay data usually obtained through commercial or professional association salary surveys.

When certain job positions, such as a software developer position, are highly valued in the market, the use of market data is critical to retaining and attracting talented candidates. However, jobs with less value in the market place are often overvalued when compared with data from market pay studies.

Combination approach to using data.

Recently, organizations pay structures have been developed by combining both types of ranking methods. Informally, many organizations assess ranking data and also evaluate the potential degree of difficulty in refilling the position.

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Strategic work valuation data.

Strategic work valuation data is the current buzz in structuring pay. Strategic work valuation emphasizes both the market pay rate for the job and value of the organization. The chief different in strategic work evaluation from earlier ranking and market pricing strategies, is that the valuation factors are specific to your organization.

These valuation factors measures the impact of each job on your organization's success. For example, your company might decide that revenue growth, external customer satisfaction, operational effectiveness, financial impact, and span of control are the most important business success drivers. In the simplest form of strategic work valuation, jobs are then strategically valued in relation to each of these drivers.

Jobs are either high impact - D, divers’ company results; or moderate impact - S, sustain company results; or limited impact - P, preserves company results.

Applied to the business success factors above, human resources generations job might receive a "P" rating for preserving company results, while a pant manager’s job might receive "D" rating for driving results in each category.

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Culled from Susan M. Heathfield take on what it takes to have an effective pay structure.