Your salary structure (or salary range structure) is a foundational piece of your compensation plan. Salary structures help ensure that the pay levels for your jobs are competitive externally and equitably internally, and they provide a way to manage employee pay effectively.
types of pay structures
There are two distinct types of salary structures that are quite common today. The first is a grade-based structure (or pay grades), where groups of jobs with similar relative internal worth are bundled into the same level and associated with a pay range. Typically, each position is slotted into a certain level based on the scope of the role, the level of authority, skills needed to perform the role and tenure. The second common structure is a job-based salary structure, where you determine a pay range for each position. Creating a range for a job involves gaining a really good understanding of your talent market (including where you are located, the size of your company, industry, etc.), making critical distinctions between job types and more importantly, identifying necessary skills for each role.
While grade-based structures have been common in the past, especially for large companies, we’ve seen organizations — even quite large ones — shift to a job-based pay structure for a variety of reasons.
HOW TO CREATE A PAY STRUCTURE
In order to create a pay structure, it is critical to research the current market data pertaining to related jobs and their salaries. A good pay structure should help companies gain long-term employees and should take into account the education, skillsets, conditions, and responsibilities that the job entails.
Step 1: Job Analysis
Conducting a job analysis includes gathering the information needed in order to outline the requirements and daily responsibilities of all of the jobs within an organization. Additionally, this analysis should contain the job title, the skills and experience level needed to work in this position, and any other pertinent details.
Step 2: Job Evaluation
This step involves determining how a position fits in relative to the company’s organizational hierarchy. Job evaluation requires you to compare a job to others within the company in order to ensure fair pay.
Step 3: Determine Pay Strategy
Next, you need to determine how you want your pay to compare to other companies’ compensation; do you want to lead, lag behind, or have an average compensation plan relative to other companies in the market. This step is important because it influences employee motivation and retention rates.
Step 4: Gather Additional Data
In this step, you will analyze data from other companies in your same industry, gathering information related to base pay, bonuses, incentives, and any other benefits offered.
Step 5: Construct Pay Structure
Creating the pay structure is the final step; this includes combining the information gathered from step 2 and from step 4 and making a simple regression to show the range of pay. Refer back to your answers in step 3 regarding if your company wants an average, leading, or lagging compensation structure, and adjust your spot on the regression line accordingly.
Why does your choice of Salary Structure Matter?
The type of structure you choose will affect how quickly you can make pay changes for employees. The speed with which you can make changes to your comp plan is crucial for retaining and hiring talent in a tight labor market. Research has shown that a worker’s satisfaction with their pay remains a large factor in their desire to stay or leave a company. For mission-critical roles, the cost of losing a talented employee can be extraordinarily high, with overall costs ranging anywhere between six to nine months of the employee’s salary to replace him (SHRM). In short, your salary structure has a serious impact on your business.
Recently, we hosted a webinar to explore how one’s choice of salary structure can impact one’s ability to retain, motivate and hire key talent. We invited Susan Hollingshead — an experienced HR leader and PayScale customer — to give organizations some guidance on how to determine the right salary structure for their business. She talked about why she made decisions in her previous companies to shift from pay grades to job-based ranges. She also gave listeners insights on what it means to design an agile and flexible comp strategy that enables an organization to thrive in today’s highly competitive talent market.
Susan is someone who’s achieved a great deal in her career. As the Chief People Officer for Vendini, Susan is responsible for managing human resources including compensation and benefits, talent acquisition, organizational development, corporate training, safety, security and payroll. Susan helped grow her previous company — Sungevity — from 50 to 1100 people in the eight years she worked there. She’s also founded two companies of her own and held a variety of C-level positions over the course of the last 20 years.
Below, you’ll find the highlights, insights and tips from our conversation with Susan. The conversation has been edited for clarity.
Topics of conversation:
- When should companies consider adding structure to their compensation plans?
- Why would you always consider job-based ranges first?
- Key point to consider when deciding what type of salary structure to use
- Using job-based ranges to facilitate career development conversations
- How often should you evaluate your mission-critical jobs?
- Common misconceptions about job-based ranges
- Sharing compensation with employees under a grade-based structure vs. a job-based ranges
- Moving from one salary structure to another
1. When companies are growing and they are thinking about the need to add structure, do you have a rule of thumb for when companies should consider adding structure to their compensation plans and where should they start?
Susan: By the time a company reaches about 50 employees, it’s time to add structure. When you reach 50 employees, you’ve outgrown or you’re about to outgrow what I call groundhog hill. And groundhog hill is that time when the company is still very small. Everyone kind of knows everything that’s going on in the company, what jobs are available and how they should be being paid (whether that’s market based or not). And there’s a much more intimate level of communication.
When you get about 50, that understanding begins to fade away and it becomes critical at that point for the company, for many, many reasons, not the least of which is budgetary, to understand why they’re going to pay, what they’re going to pay, and how they’re going to pay it to their employees. So, you know, if you hit 50 employees and you haven’t started to think about a compensation structure, do it soon because the bigger you get, the harder it is to back into that.
Also, given that once you have more employees, the budgetary impact of payroll is huge. So why would you not want to understand very critically what you’re paying, and why you’re paying that?
2. Looking at the two options (grade based ranges vs. job-based ranges), would you always consider job-based ranges first? And when would you recommend that a company consider a grade-based structure or a mix of the two?
Susan: I really strongly believe that all compensation structures should be based initially on job-based ranges. This allows you to really understand your marketplace and make critical distinctions between job types and more importantly, necessary skill types.
When would I say that you might need to migrate from job-based ranges to grade-based structure? First of all, I’d say never entirely. There are certain jobs that you should always be looking at job-based ranges. And I can talk in a minute about what I think those are. So, you know, at worst, you have a blended structure of job-based and grade-based.
Certainly, once companies get to a certain size, it’s just not efficient to individually value each and every job. You know, when you’re in the thousands of employees, it’s neither practical nor possible in many cases to do that. But there’s always going to be a class of jobs that are so mission-critical to your company that if you allow them to get away from you, if you don’t understand what their value and the value of individual skills within those jobs are in the marketplace, you’re really putting yourself at very grave risk.
In an employee-driven market as we see today where unemployment is so very low, no company can afford to have a sudden and unexpected migration of its most critical employees because they failed to properly adjust their salary ranges.
So I would say never, ever only have grade-based structure. For those jobs that are either in very fast-moving sectors or just simply mission-critical to you, you want your eye on those all the time because they can and will move out from under you at times.
Susan: First of all, there’s nothing to say that you cannot have job-based ranges that you use to place jobs within grades. They’re not mutually exclusive and certainly don’t have to be.
The key is to identify which jobs are moving the fastest in the marketplace. Notice ones you absolutely need to have job-based ranges for. And actually, one of the very cool things about PayScale is that they have this great tool that helps you identify which of your jobs are in very fast-moving sectors. I keep an eye on that every month. I’m looking at which of my jobs are experiencing significant adjustment up or down, but my jobs are seldom down anymore in their ranges in the marketplace.
Secondly is those jobs that are mission-critical. Whether they’re moving a lot in the marketplace or not, I think it’s absolutely imperative that you never lose track of those and that you critically understand what’s happening to them from a compensation standpoint.
And third, is a little bit harder to put your finger on. It’s jobs, particularly new ones, that are very difficult to explain what grade they should be in. A lot of new job types have been created over the last 10 years. When I started in the residential solar business eight years ago, we were creating whole piles of jobs that had never existed before. Trying to value those jobs from the traditional grade-based structure was almost impossible and certainly not fruitful.
What we needed to understand was, “Where were those skills coming from and what were people in the kinds of roles where those skills were present being paid?” Since those jobs had never existed before,there was no competitive information. So to the extent that you’re creating new jobs, job-based structures become even more important because you’ve really got to parse out the individual skills and the value of those skills to create realistic salary ranges.
4. In your last comment, you made a point that going through the process to create job-based ranges yields benefits beyond just being able to track those jobs. There’s this whole step of defining what’s mission-critical for your company. And by creating a structure that asks you to identify that, it kind of forces you to have some critical conversations about what you value in your organization and what jobs are most important to your success.
Susan: You know, what’s really interesting is that all of these things are beginning to link together. So job-based ranges link to career development, which link to succession planning, they’re so inextricably entwined with one another so you can’t do one well without the other. And I think that one of the most fun things that’s come out of job-based ranges is the ability to have candid conversations with employees about their skill development.
If you want certain kinds of salary advancement versus other things that may be important to you about your job or your life, we can now have very deep conversations about the marketplace and how skills are being valued relatively. And we can tie that to the kinds of career development opportunities that we offer people based on which jobs are the most mission-critical to us, which are moving faster in the marketplace, which are the hardest to retain, and to succession planning. I mean, every one of those informs the other. And so, you now have a really dynamic system where one aspect supports another. You can have much more exciting conversations with employees about career development than we were potentially able to have in the past.
Susan: I keep an eye on them all of the time, but at the very least quarterly. And, you know, that’s again, another advantage of getting real-time data through PayScale versus the kind of traditional market surveys that we used to rely on that typically were updated annually. And even when we were using traditional market surveys, that data was somewhat stale because it relied on surveys that had been done several months before. Real-time data is a more and more critical need for tracking those kinds of jobs.
Susan: I’ve heard is there’s just not enough data to build job-based ranges. You know, very simply, that’s not true. It’s not true whether you’re looking at conventional consulting surveys, or you’re looking at PayScale data. The data definitely is there to support job-based ranges, it’s really a misconception to say that it’s not. And I think increasingly, any kind of organization that delivers compensation data is focused at a much more granular level than perhaps historically is true.
You know, one of the things that I like to facetiously say is, “I don’t really care how many years’ experience you have.” But in reality, what I care about are the skills that you have and how well-developed they are or they aren’t. And certainly, a lot of the kind of data that we used to look at was a lot based on years of experience. I would say that there’s more data available today on depth of skill set.
At one point, I actually forbid our organization, not this one but the past one from putting years’ of experience on job requisitions, not because I didn’t think it had a certain validity, but because I was trying to force the issue within the organization to focus on skills and to focus on how we were going to interview and select for competency and skill sets. It was met with some interesting reactions.
Susan: This is my favorite question. Because in my experience it is so much easier to have job-based ranges conversations with them than grade-based.
Grade-based conversations just become so contentious. It’s like, “Well, why am I at 20 instead of a 21? You know, why do you like that job better than this job? How do I get to a 21?” Sometimes those answers are clear, but often they’re not. Whereas when you’re talking about job-based ranges, you’re talking about marketplace, and people understand this. I mean, people increasingly get that they have a set of skills to sell in the marketplace and that it has a market value and they understand those kinds of questions or those kinds of discussions.
I’ve found where we’d implemented job-based ranges, it has made those conversations so much more direct and so much easier to have. And it’s enabled us to create a level of transparency that was somewhat difficult to do before that.
8. If anyone is currently using pay grades and considering moving to or incorporating job-based ranges, what sorts of things should they be aware of and what are the opportunities they should expect to get out of that?
Susan: First of all, they have to select their data sources and consider where they’re getting the data and validate the quality of that data. That’s always critical. No matter what you’re doing with compensation, that’s critical to the whole way in which you engage around that effort. So that’s the first thing.
Secondly, they have to allow themselves enough time to move through the organization, decide if they’re going to do one part of the organization at a time or the whole organization. In that case, it’s going to be some months or quarters of effort before they get that whole system set up and put it in place. But with tools that PayScale has developed for job-based ranges, it’s surprisingly easy how many of them you can generate and how quickly. You know, software-as-a-service (SaaS) is a wonderful thing and the data that’s incorporated in the cloud on platforms allows you to move into that kind of effort much more quickly, much more efficiently than you could in the past.
I think the opportunity is for the whole organization to engage around a real discussion in integration and appreciation of skill sets and what they mean to the organization and how they develop employees. This includes career development, succession planning, across the breadth of the employee-focused activities in the organization.
The conversations should also include things other than cash comp, by the way. We’ve been talking strictly about cash comp, but there is nothing to say that variable pay or equity, or other forms of incentive compensation can’t also be job-based because that data will be increasingly available.
Blog post with video: Learn how PayScale Insight Lab supports job-based ranges