09 Jul Key Considerations for Selecting the Right Pay Structure
One question compensation teams often find themselves asking is how accurately their pay policies should reflect market rates. In most cases, employers believe their pay policy should align with market rates as closely as possible. Yet, there are many cases in which market factors may not reflect your company’s current needs. In the following scenarios, for example, market data may not be the most appropriate guiding force for establishing pay structures:
- Your company is the industry leader. Other companies follow your pay practices.
- The market data doesn’t exist or is of poor quality.
- Your workforce value proposition (including total rewards and perks specific to your company) far exceeds your competitors’.
- Your cost of turnover is low, and it’s more important to focus pay on internal fairness.
Of course, in many other cases, market data is a useful tool for determining pay structures. With that said, it’s also important to consider how fast your market is moving. Ranges may need to be wider due to an underdeveloped workforce or in hyperinflationary environments. In such circumstances, you may need to visit pay structures more frequently, such as on a quarterly basis. Hot jobs, too, may demand a different strategy, and you may have to track pay very accurately to navigate talent wars successfully.
Another question to ask is: How much pay variation is tolerable for jobs of the same level? The answer is different for every company. Roles that are easier to fill may have a narrower range, while the range may be wider in roles that have larger differences in performance, knowledge, skills, and abilities.
How much variation is then tolerable for jobs within the same family? This, too, can vary from company to company, and may be based on organizational culture. If you have many levels within a job family, the midpoint differential will naturally be smaller.
Should the pay structure support career paths? Modern career paths are no longer linear, so be sure to factor in the lateral movements employees may consider in addition to hierarchical advancements. Many employees also take on project management roles, and the contingent workforce is also becoming more prevalent. Make sure you’re managing costs with external sources, such as consultants and gig workers, too.
An additional consideration is how your company will recognize performance and competency growth. You may be able to use your pay structure to encourage growth and development, moving employees across the pay range as they gain experience.
A final but important question to ask is how you’ll manage the cost and administration of the pay structures. Many smaller enterprises prefer structures that won’t take a great deal of time and effort to administer, so keep resources in mind as you make your decisions.
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