4 Steps to Building Smart Compensation Structure
Jennifer Ferris, CCP Compensation Professional
Ian Englund, CCP
Compensation Professional
www.payscale.com
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14,000 Positions 3000 Customers 11 Countries
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Agenda Why have pay structure
Requirements for building structure
Building Structure • Step 1: Identify pay schedules
• Step 2: Determine pay grades
• Step 3: Develop ranges
• Step 4: Assign grades to positions & adjust for internal equity
Using Pay Ranges
Immediate Actions
Why have pay structure
4
• Clarifies the market and internal value for each job, and provides a way to manage employee pay effectively
• Quantifies compensation costs & enables budget decisions
• Validates compensation strategy & aligns to business goals
• Provides a tool to talk with employees about development
• Ensures pay equity
• Determines pay for non-benchmark jobs
• Allows ease of administration
REQUIREMENTS FOR BUILDING
PAY STRUCTURE Develop a compensation
philosophy & strategy
Know your jobs
Conduct a market analysis
Pay Schedules
Pay Grades
Pay Ranges
Pay Structure Elements
Building Structure Step 1: Identify Pay Schedules
Identify Pay Schedules
o Groups like geographies together with the same set of pay grades
o Streamlines pay structure
o Consider how complex your organization is
o Industries and/or lines of business
o Retail & Social Services
o Sales
o Engineers vs Admin
o Locations
6 Different Pay Schedules:
o Home Schedule– 3 labor markets, within 2.5% of HQ
o Schedule A, Minus 15% Schedule – 4 labor markets
o Schedule B, Minus 10% Schedule – 7 labor markets
o Schedule C, Minus 5% Schedule – 4 labor markets
o Schedule D, Plus 5% Schedule – open
o Schedule E, Plus 10% Schedule – 1 labor market
For example…
Building Structure Step 2: Determine Pay Grades
Determine Pay Grades
oNumber of pay grades varies in response to:
o Size of the organization
o Distance between the highest and lowest level job
o How differentiated are the jobs (i.e. levels)
o The pay increase and promotion policy of the organization
oDetermine the definition or label for each grade
Building Structure Step 3: Develop Ranges
o Midpoint Differential.
o =(MidB-MidA)/MidA
o Range Spread.
o =(Max-Min)/Min
o Min relative to Mid.
o =Mid/(1+(Range Spread/2))
o Max relative to Min.
o =Min*(1+Range Spread)
Develop Ranges
Considerations
o Range Spread at base vs top of structure
o Overlap between pay ranges
Building Structure Step 4: Assign grades to positions and adjust for internal alignment
• Align positions to structure by matching market value with closest range midpoint
Assign Grades to Positions
Adjust for Internal Alignment
• Adjust for internal alignment.
• Positions with similar level of responsibility and value to the organization
• Where market is between two grades, use internal equity to tip
Example
Internal Title Grade Billing & Collections Specialist I 1 Member Services Specialist I 1
Accounts Payable Specialist I 2 Billing & Collections Specialist II 2 Branch Inside Sales I 2 Member Services Specialist II 2 Quality Assurance Analyst I 2
Accounts Payable Specialist II 3 Billing & Collections III or TL 3 Branch Inside Sales II 3 Marketing Coordinator 3 Office Manager 3 Project Coordinator 3 TAC Engineer I 3
Branch Inside Sales III 4 Corporate Accountant I 4 NOC Technician I 4 TAC Engineer II 4
Corporate Accountant II 5 NOC Technician II 5 Project Manager I 5 Software Development QA I 5
How do you use
pay ranges?
• Determine employee
placement in range
• Develop guidelines or
policies
Understanding Range Penetration (RP)
RP = (EE Pay – Range Min) / (Range Max - Range Min)
• Indicator of how employee is positioned in the range
• Use RP in policies to get specific
Employee Placement in Range
Range Midpoint Minimum Maximum
$20,000 $32,000 $26,000
Range Midpoint:
Range Minimum:
Range Maximum:
Lower limit of a pay range/band. Pay for new or less experienced employees should be closer to minimum.
The midpoint identifies the proficiency point. Market
based ranges have a midpoint that aligns with the
target percentile in the market.
The upper limit of a pay range/band. Pay for more tenured employees or star
performers should be approaching this number.
Employee Placement in Range
Range Midpoint Minimum Maximum
$20,000 $32,000 $26,000
Green-Circled Employees Red-Circled Employees
Employees that are paid below the minimum of the pay range.
Employees that are paid above the maximum of the pay range.
Comparing Employee Pay to Ranges
Range Midpoint Minimum Maximum
$20,000 $32,000 $26,000
50% Penetration
33% 66% 100% 0%
Range Penetration: A percentage that shows an employee’s position in the range. The percentage shows a relative comparison to the minimum of the range. = (Employee Pay – Min) / (Max – Min)
Range Penetration = 0% Employee’s pay is at the minimum Range Penetration = 50% Employee’s pay is at the midpoint Range Penetration =100% Employee’s pay is at the maximum
Immediate Actions Gather information about your jobs
o What are the key skills, experience, and education required?
o What are the top 3 responsibilities?
Talk with managers and executives
o Where are you recruiting (or losing) your talent?
o Begin to explain the usefulness of pay ranges
Obtain accurate market data for your positions
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Jennifer Ferris, CCP Compensation Professional Ian Englund, CCP Compensation Professional
www.payscale.com