Third
Edition
How-to Series
for the HR Professional
Building
Pay
Structures
Daniel P. Purushotham, Ph.D., CCP, CBP
Stephanie Y. Wilson, CCP
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Building Pay Structures
With the world becoming a smaller place every day, the labor market for
many organizations is now a global labor market. In this latest edition of a
WorldatWork classic How-To book, authors Dan Purushotham and Stephanie
Wilson have updated their content to reflect the global implications and
considerations when building pay structures. The authors also discuss
designing effective pay structures, the distinction between pure marketpriced pay structures and market-based pay structures. Readers will learn to
design and implement pay structures that support their companies’ business
strategies while balancing internal equity against external competitiveness.
Business/Human Resources
www.worldatwork.org
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$26.95
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Building Pay Structures
Purushotham, Wilson
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How-to Series
for the HR Professional
Building
Pay
Structures
Daniel P. Purushotham, Ph.D., CCP, CBP
Stephanie Y. Wilson, CCP
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About WorldatWork®
WorldatWork (www.worldatwork.org) is a global human resources association focused
on compensation, benefits, work-life and integrated total rewards to attract, motivate
and retain a talented workforce. Founded in 1955, WorldatWork provides a network
of more than 30,000 members and professionals in 75 countries with training,
certification, research, conferences and community. It has offices in Scottsdale,
Arizona, and Washington, D.C.
Any laws, regulations or other legal requirements noted in this publication are, to the
best of the publisher’s knowledge, accurate and current as of this book’s publishing date.
WorldatWork is providing this information with the understanding that WorldatWork is
not engaged, directly or by implication, in rendering legal, accounting or other related
professional services. You are urged to consult with an attorney, accountant or other
qualified professional concerning your own specific situation and any questions that you
may have related to that.
This book is published by WorldatWork Press. The interpretations, conclusions and
recommendations in this book are those of the author and do not necessarily represent
those of WorldatWork.
No portion of this publication may be reproduced in any form without express written
permission from WorldatWork.
©2009, 2004, 1993 WorldatWork Press
ISBN 978-157963-197-0
Project Lead: Wendy Anderson, WLCP
Editor: Andrea Ozias
Design: Melissa Neubauer
Production: Deb Shenenberg
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Table of Contents
Introduction
5
1 An Ideal Compensation Program
7
2 Anatomy of a Pay Structure
13
3 Developing a Pay Structure
25
4 Pitfalls, Precautions and Trends
43
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5
Introduction
Compensation deals with establishing a meaningful and acceptable
relationship between work and rewards with both employer and
employee in mind. Work performed by employees should help
organizations achieve their objectives. These objectives are derived
from the organization’s overall business strategy, which supports
the organization’s mission statement.
When designed and administered appropriately, an organization’s compensation program is an effective management tool for
supporting the organization’s overall business strategy. A series
of steps is used in the process of designing sound compensation
programs. (See Figure 1 on page 8.) This process is not a onetime event. It involves constant review and refinement in light of
changing business needs and the business environment.
There are two broad categories of compensation: cash and noncash.
The focus of this book is on cash compensation. Cash-compensation
management has two distinct but interrelated aspects: content and
process.
Content is managed through job analysis, evaluation and research
to keep abreast of the changes in compensation levels in the
external market.
Process includes tools and methods for collecting, calculating,
organizing, storing and customizing internal and external information
pertaining to compensation. The pay structure of an organization
is one such tool. Within the context of cash-compensation management, process should support and not conflict with content.
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6
Building Pay Structures
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An Ideal Compensation Program
7
1
An Ideal
Compensation Program
Most compensation professionals agree that the following “ideal” characteristics are necessary for every compensation program in order to attract,
retain and motivate qualified employees. (Note: These characteristics
are primarily for all positions except single-incumbent seniormanagement positions.) These characteristics are the foundation for
an ideal pay structure:
• Internal equity. A measure of how an organization values each
of its jobs in relation to one another.
• External competitiveness. A measure of an organization’s pay
structure and the actual pay delivered compared to that of its
competitors.
• Affordability. A measure of how costly a compensation program is
to an organization. If pay structures are not developed responsibly,
an organization could incur labor costs that exceed what it can
afford to pay.
• Legally defensible. Compensation programs must adhere to specific
laws designed to provide fairness in how employees are paid.
These laws include the Fair Labor Standards Act (FLSA), the Equal
Pay Act, Title VII of the Civil Rights Act, the Age Discrimination
in Employment Act and the Americans with Disabilities Act
(ADA).
• Understandable/saleable. To be accepted and understood,
compensation programs must be communicated effectively.
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FIGURE 1
8
Building Pay Structures
Determine Strategy Before Structure
Mission Statement
Business Strategy
STRATEGIC
Human Resources Strategy
Total Rewards Strategy
Compensation Strategy
Compensation Objectives
Design
Program Evaluation
TACTICAL
Ongoing Communication
Business Plan
Compensation
Program
Communication
Administration
Implementation
• Efficient to administer. With increased pressure to improve
productivity and reduce costs, it is important that an organization’s compensation program be as simple and straightforward
as possible to maintain and administer. A balance needs to be
struck between what appears to be the “best” program and what
is efficient, effective and easiest to administer.
• Safeguard the organization’s resources. The compensation
program should reward performance fairly without conflicting with
the interests of the organization’s stakeholders. Rewards should
reflect both individual employee and organizational performance.
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An Ideal Compensation Program
9
Human resources should be seen as an investment that should
be protected and optimized.
• Flexible. Pay programs are tools necessary to compete for labor in the
marketplace. As such, they must be flexible and capable of changing as
needed, without having to be revamped completely every time a new
need arises.
• Meets the organization’s unique needs. To some degree, each
organization is unique within its own industry or geographic
area. Unique characteristics need to be recognized and addressed
when designing compensation programs and, particularly, pay
structures.
Most compensation programs, however, will not include all these
characteristics. In fact, some of these characteristics may be in
conflict with each other. For example, it may not always be possible
to maintain internal equity when an organization is trying to be
externally competitive. Therefore, it is important to recognize the
possibility of such conflict and to review the business strategy to
determine the appropriate balance of all features of the compensation program.
Pay Structures
A pay structure consists of a series of pay ranges, or “grades,” each
with a minimum and maximum pay rate. Jobs are grouped together
in ranges that represent similar internal and external worth. (See
Figure 2 on page 10.)
The midpoint or middle-pay value for the range usually represents the competitive market value for a job or group of jobs. The
organization’s base-pay policy line connects the midpoints of the
various pay ranges in the pay structure.
In recent years, pay policy lines have been developed to reflect base
salary midpoints and to take into consideration variable compensation. For the purpose of this discussion, the design and development
of pay structures will be confined to base salary, representing all
positions except single-incumbent senior-management positions.
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Building Pay Structures
FIGURE 2
10
Pay
Pay Structure Example
Grade
General and Specific Factors Affecting Pay Structures
Pay structures are influenced by the following general factors:
• Corporate culture and values. An organization’s pay structure
usually reflects the way employees’ work is valued. For example,
does an organization always look for the best and brightest
employees? If so, the pay line may be positioned to lead the
market. If the organization encourages and values prudent risktaking, the total pay line may have an additional risk/reward
component.
• Management philosophy. Narrow pay ranges and more grades
allow for more frequent promotions — and a greater perception
of “growth and advancement” — than wider ranges and fewer
grades. However, if management believes in promoting employees
only when duties and responsibilities change significantly, the
distances between midpoints of ranges may be as substantial as
15 percent or more.
• External economic environment. Varied supply and demand
for certain skills may necessitate a multistructured pay program.
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An Ideal Compensation Program
11
Technical professionals such as engineers may have special pay
structures when there is a high demand for their skills. Special
structures may be merged later into the standard base pay structure
once there is no longer a supply/demand issue for engineers
that necessitates a more aggressive pay policy. Other external
factors that may be reflected in pay structures include inflationary
fluctuations and cost-of-living indices such as the Consumer Price
Index (CPI).
• External socio-political and legal environments. The “steps”
in the pay structure are likely to be more narrow and rigidly
administered in a union environment than in a nonunion environment. Pay structures also are affected by regulations such
as the FLSA, which mandates the minimum wage for most jobs
and thereby determines the lowest possible pay scale.
Several other factors that influence pay structures relate directly
to the operations and culture of a specific organization:
• Centralized compensation policy. A corporate compensation
policy may call for the organization’s overall competitive posture
to always be ahead of the market. This will be reflected in the
pay policy line being higher than the market at every point on
the salary range. On the other hand, the strategy could be to
hire employees at a rate always higher than the market but over
time to bring them in line with the market. This would mean
steadily fine-tuning the pay ranges at different levels.
• Decentralized compensation policy. An organization’s goal may be
to compete within the top quartile of its competitors in a particular
functional segment (e.g., sales/marketing) or product segment
(e.g., jet engines or disability income insurance). In this case, the
pay structure may be different for those particular functional
and product segments within the organization.
• Short-term vs. long-term orientation. A company with long-term
orientation is most likely to have well-designed pay structures
with career-path capabilities and smooth transitions from range
to range. The ranges themselves will be developed after much
thought and research. Short-term or temporary problems need
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12
Building Pay Structures
to be taken care of with temporary solutions. Solving temporary
problems with long-term solutions should be avoided. This caution
is necessary because employees generally have an entitlement
mind-set with respect to compensation, and it may be difficult
to “undo” prior actions, even though the original reasons for
such actions no longer exist.
All the above mentioned factors become even more relevant and
complex considering the effect of globalization of organizations.
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13
2
Anatomy of a Pay Structure
A pay structure, as indicated earlier, has multiple pay or salary
ranges. Every pay structure has key components that are critical to its
overall design. The following section defines and describes these
basic elements.
Pay Ranges and Range Spreads
A “pay range” has a minimum pay value, a maximum pay value
and a “midpoint” or central value. The difference between the
maximum and the minimum is the “range spread,” or the “width”
of the range. Range width usually is expressed as a percentage of
the difference between the minimum and maximum divided by the
minimum. For example, in Figure 3 on page 14, the range spread
in dollars, where the maximum is $120,310 and the minimum is
$80,210, is $120,310 – $80,210 = $40,100. The percentage is about
50 percent, or $40,100 divided by $80,210.
To calculate the spread on either side of the midpoint, use the formulas
shown in the box below (where $100,260 is the Grade 10 midpoint in
Figure 3).
Calculation of Spread on Either Side of Midpoint
Midpoint - Minimum
Midpoint
=
$100,260 - $80,210
$100,260
= – 20% of Midpoint
Maximum - Midpoint
Midpoint
=
$120,310 - $100,260
$100,260
= + 20% of Midpoint
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FIGURE 3
14
Building Pay Structures
Illustration of a Pay Range and a Range Spread
– 20%
+ 20%
Minimum
Midpoint
Maximum
$80,210
$100,260
$120,310
Range Spread (Width) = 50%
(Numbers have been rounded. Actual range spread is 49.99%.)
FIGURE 4
A pay range with a 50-percent range spread will have a 20-percent spread
on either side of the midpoint. (See Figure 3.) That is, $80,210 is about
80 percent of $100,260, and $120,310 is about 120 percent of
$100,260.
While all the ranges in Figure 2 have a range spread of approximately
50 percent, the spread does not have to be uniform throughout
the pay structure. Figure 4 lists common range spreads and their
cor responding spreads on either side of the midpoint.
Common Range Spreads
Range Spread
Spread on Either Side of Midpoint
20%
9.1%
25%
11.1%
30%
13%
35%
14.9%
40%
16.7%
45%
18.4%
50%
20%
Note: Under a broadbanding system, range spreads may reach 100 percent or more.
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Anatomy of a Pay Structure
15
Example 1 shows how to calculate the spread on either side of
the midpoint. To perform the calculation, one of the three points
(minimum, midpoint or maximum) on the pay range needs to be
specified along with the range width.
Using a range spread of about 50 percent and a minimum of
$80,210, the maximum and midpoint are calculated as in Example 1.
Example 1A shows the calculation of maximums and minimums.
EXAMPLE 1
Some Practical Considerations
Range spreads vary based on the level and sophistication of skills
required for a given position. Entry-level positions that require
skills that are quickly mastered usually have narrower pay ranges
Calculating the Range Spread on Either Side of the Midpoint
Maximum = Minimum x (1 + Range Spread) = $80,210 x 1.5 = $120,310*
Midpoint =
(Maximum + Minimum)
($120,310 + $80,210)
=
= $100,260
2
2
Spread on either side of the midpoint =
(Midpoint - Minimum)
Midpoint
=
($100,260 - $80,210)
= – 20% of midpoint
$100,260
or
($120,310 - $100,260)
(Maximum - Midpoint)
= + 20% of midpoint
=
$100,260
Midpoint
EXAMPLE 1A
* Numbers in this equation have been rounded. Actual range spread is 49.99%
Calculating Maximums and Minimums
Maximum = Minimum × (1 + range spread) = 80,210 × 1.5 = $120,310*
Minimum =
Midpoint
1 + ½ range spread
* Numbers in this equation have been rounded. Actual range spread is 49.99%
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16
Building Pay Structures
EXAMPLE 2
than supervisory, managerial or higher-level technical positions.
Individuals in lower-level positions not only master the requirements
of the job sooner, they also have a greater number of opportunities
over time to be promoted to higher-level positions.
Senior-level positions require a longer learning curve and often
have limited opportunities for advancement. The following are
typical range spreads for different kinds of positions:
• 20 percent to 25 percent: lower-level service, production and
maintenance
• 30 percent to 40 percent: clerical, technical, paraprofessional
• 40 percent to 50 percent: higher-level professional, administrative,
middle management
• 50 percent and above: higher-level managerial, executive,
technical
Care should be taken when deciding pay-range width. Assuming
a constant midpoint, changing range spreads also changes the
minimum and maximum. Notice in Example 2 that as the ranges
get wider, the maximums increase, the minimums decrease and
the midpoints are constant.
Ranges should be designed to provide midpoints that reflect the
“going rate” and are reasonably close to what the market establishes
as the minimum and maximum for the job. Minimums that are too
low will result in a company needing to pay an employee higher
in the range in order to pay competitively. This narrows the position’s long-term earning potential. In turn, a high maximum may
provide long-term earnings opportunities that are higher and more
costly than what are needed to be competitive.
Range Spread
Minimum
Midpoint
Maximum
30%
$27,826
$32,000
$36,174
40%
$26,667
$32,000
$37,333
50%
$25,600
$32,000
$38,400
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Anatomy of a Pay Structure
17
Midpoints
The midpoint is a key element in pay administration. It often is
used as a reference point in salary administration decisions as
a point or “target.” The midpoint usually is the reference used
because it typically is set to equal the market average or median.
It should not be an organization’s only market reference point
for salary administration. Other factors such as performance and
affordability also must be considered in salary decisions.
FIGURE 5
Compa-ratio
Related to the midpoint is the compa-ratio, a statistic that expresses the
relationship between base salary and the midpoint. Figure 5 illustrates
the calculation of compa-ratio for the same job as well as for the
market average. Compa-ratios can be calculated for individuals, groups
of individuals, by organizational units or functions and the organization
as a whole.
Most organizations strive to have the overall workforce paid at
or around a compa-ratio of 100 percent. Individual compa-ratios
vary according to how long the individual has been in the job,
previous work experience and job performance. A mature, long-
Illustration of Compa-Ratios
Within Company
Base Salary
Person 1
Person 2
Person 3
Average
$22,500
$25,000
$27,500
$25,000
Outside
Company
$24,500
Market Average
Midpoint
$25,000
$25,000
$25,000
$25,000
$25,000
Market Average
Compa-Ratio
(
Base Salary
Midpoint
90%
110%
100%*
98%
(
* Company Average
Market Average
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100%
= Market Ratio
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18
Building Pay Structures
service workforce will tend to have a higher compa-ratio (often
above 100 percent) than a younger group of employees with a
shorter service record.
It is important for an organization to be able to explain the
reasons for its current compa-ratio. Businesses monitor comparatios because they recognize them as an important tool for
managing compensation costs. In some cases, organizations cap
pay at the midpoint for the purpose of paying “at market” for
base salaries. The remainder of the range is available only to high
performers and often is paid on a lump-sum basis from year to
year. These companies increase base salaries only when range
midpoints move and their compa-ratios drop below 100 percent.
Range Penetration
EXAMPLE 3
Another way of tracking an organization’s compensation is to view
employee pay in relation to the total pay range. This is known as
range penetration. Unlike compa-ratios, which are calculated using
a salary range’s midpoint, range penetration is calculated using
the minimum and maximum of a salary range. Range penetration
is shown in Example 3 below.
Often range penetration is a preferred tool because it does not
focus on a single number alone, the midpoint. Instead, it refers to
how far into the range a particular individual’s salary has penetrated.
Range profiles often are used in conjunction with either the comparatio or range penetration to describe where employees should
expect their pay to fall relative to their pay range over time. (See
Figure 6 on page 19.)
Given a minimum of $80,210, a maximum of $120,310 and an incumbent
salary of $102,000, what is the range penetration?
Range penetration =
(Incumbent Salary - Range Minimum)
=
(Range Maximum - Range Minimum)
($102,000 - $80,210)
= 54.3%
($120,310 - $80,210)
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FIGURE 6
Anatomy of a Pay Structure
19
Illustration of Range Penetration
Year
Minimum
Midpoint
Maximum
Salary
Range
Penetration
1
$15,360
$19,200
$23,040
$15,360
0.00%
2
$15,744
$19,680
$23,616
$15,974
2.93%
3
$16,138
$20,172
$24,206
$16,613
5.89%
4
$16,541
$20,676
$24,811
$17,278
8.91%
5
$16,954
$21,193
$25,432
$17,969
11.96%
6
$17,379
$21,724
$26,068
$18,688
15.06%
7
$17,813
$22,266
$26,719
$19,435
18.22%
8
$18,258
$22,823
$27,388
$20,213
21.41%
9
$18,714
$23,393
$28,072
$21,021
24.65%
10
$19,182
$23,978
$28,774
$21,862
27.94%
11
$19,662
$24,577
$29,492
$22,737
31.28%
12
$20,154
$25,192
$30,230
$23,646
34.65%
13
$20,658
$25,822
$30,986
$24,592
38.09%
Range penetration =
(Salary = Range Minimum)
(Range Maximum – Range Minimum)
Constant Range Width: 50%
Constant Annual Range Movement (Structure Change): 2.5%
Constant Salary Increase: 4%
Given the above constants and a starting salary of $12,800,
it would take:
• 8 years to exceed the midpoint ($22,823) of the range
• 13 years to reach close to the maximum ($30,986) of the range
By changing any one of the
three constants, the extent of
range penetration could be
increased or decreased. The
actual progression in the range
is determined by the difference
between range movement and
the amount of salary increase.
Midpoint Progression
Midpoint progression refers to the percentage difference between
pay-grade midpoints. The larger the midpoint progression, the
fewer the number of grades within a pay structure. Conversely,
the smaller the midpoint progression, the larger the number of
pay grades within the pay structure.
Three Approaches to Developing Midpoints
One approach to developing midpoints is the present value/future
value formula, which may be used to determine the percentage
between midpoints, assuming the highest and lowest midpoints and
the number of grades are known. The formula shown in Figure 7
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Building Pay Structures
FIGURE 7
may be used, or the calculations may be performed on a business
calculator or computer.
Suppose a company wishes to develop a pay structure with six
grades that has a highest midpoint of $84,000 and a lowest midpoint
of $46,620. What is the midpoint progression?
Using the formula in Figure 7, the midpoint progression is calculated to be 12.5 percent. The resulting pay structure looks like
Figure 8.
There are two other approaches to developing midpoints and the
resulting midpoint progression. The first is to use the average of the
market pay rate for different jobs within benchmark-job groupings.
The resulting midpoint progression would have varying percentage
differences between midpoints, which reflect the market more
closely than constant differences. An organization’s pay structure
Present Value/Future Value Formula
FV
PV =
(1 + i)
n
Definition
Value
PV
Present value (midpoint of lowest pay grade)
$46,620
FV
Future value (midpoint of the highest pay grade)
$84,000
n
Number of desired grade intervals (one less than
the total number of grades in the structure)
i
Percentage difference between midpoints
5
To be determined
FIGURE 8
Using these values, i = 12.5%
Example of Midpoint Progression
Grade
Midpoint
Midpoint Progression
3
$46,620
4
$52,440
12.5%
5
$59,000
12.5%
6
$66,370
12.5%
7
$74,660
12.5%
8
$84,000
12.5%
(Numbers have been rounded)
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Anatomy of a Pay Structure
21
need not have a constant percentage progression — it may remain
uneven without being smoothed. In such instances, it should be
recognized that promotional increases may be uneven and sometimes difficult to administer because of the following reasons:
• If the percentage difference between midpoints is too high, the
result could be costly promotional increases.
• If the percentage difference is relatively low, the result could be
salary compression problems between supervisory and subordinate
positions and difficulty in matching promotions with appropriate
compensatory rewards.
The other approach to develop midpoints in a pay structure is
the use of regression analysis. The advantage of this approach
is it helps align market rates more closely with company policy.
Regression analysis works well when job-evaluation points are used
to develop pay structures. With the advent of more sophisticated
technology, much of the statistical work can be done with the use
of computers or powerful calculators.
Exercising salary judgments within a segment often is easier and
more practical than focusing rigidly on a single point within the
salary range, such as the midpoint.
Pay Grades
The purpose of grades is to be able to refer to a compensation
range that groups together multiple jobs with similar value based
on internal comparisons and external market data. Grades need
not always be numerical; alpha grades can serve the purpose just
as well. Pay grades can be established by a number of methods.
There are many grades or levels within a pay structure. The number
of grades used by a particular organization will vary based on findings from market research as well as the company’s compensation
strategy. Does the policy call for frequent “promotions,” or does
it allow for real promotions when the major functions in the new
job are of a higher value to the employees? Does the company
want a “flat” organization, or does it prefer multiple levels within
the organization?
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Building Pay Structures
Segmentation of Pay Grades
A pay grade may be segmented or subdivided in many ways —
thirds, quartiles, quintiles and so on. These segments may or may
not overlap. They serve as reference points for cost control and
pay administration. The number of segments within a pay grade
varies by company, and it often reflects the company’s merit pay
process and pay administration philosophy.
Using segments within a pay grade instead of only midpoints
provides more flexibility to managers in pay-related decisions. These
segments serve as mini-ranges within the main range. Exercising
salary judgments within a segment often is easier and more practical than focusing rigidly on a single point within the salary range,
such as the midpoint.
FIGURE 9A
Pay-Grade Overlap
Pay grades usually overlap. Except for the minimum of the lowest grade
and the maximum of the highest grade, minimums and maximums
usually fall within adjoining ranges. The width of the pay grade
and the midpoint differentials determine the amount of overlap
between adjoining grades. Grade overlap is minimal when midpoint
differentials are large and range widths are small. (See Figure 9A.)
Illustration of No Grade Overlap
Dollars
$26,000
$24,626
$24,000
Width = 10%
$21,414
$22,000
$20,000
Width = 10%
$18,621
$18,000
$16,000
$16,192
$16,928
$14,080
$14,000
$12,000
$22,387
$12,800
$10,000
HT BldgPayStructures UPDATE book.indd 22
$19,467
Width = 10%
Width = 10%
$14,720
Midpoint Differential = 15%
Number of Overlapping Grades = 0
Midpoint Differential = 15%
Width = 10%
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Anatomy of a Pay Structure
23
FIGURE 9B
Figures 9B and 9C are illustrations of moderate grade overlap.
Grade overlap is significant when midpoint differentials are small
and range spread is large. (See Figure 9D on page 24.)
In a pay-for-performance or merit system, grade overlap allows
high performers in lower pay ranges with longer time-in-grade to
Illustration of a Moderate Grade Overlap
Dollars
$18,000
$17,114
$16,299
$16,000
$14,784
$15,523
$14,080
$14,000
$14,112
$14,818
$15,558
$13,440
$12,000
$12,800
Number of Overlapping Grades = 2
Midpoint Differntial = 5%
Width = 10%
FIGURE 9C
$10,000
Illustration of a Moderate Grade Overlap
Dollars
$35,820
$36,000
$34,000
$32,000
$31,148
$30,000
$28,000
$27,085
$26,000
$24,000
$23,552
$22,000
$22,387
$20,480
$20,000
$19,467
$18,000
$16,928
$16,000
$14,720
$14,000
$12,000
$10,000
HT BldgPayStructures UPDATE book.indd 23
$12,800
Number of Overlapping Grades = 4
Midpoint Differntial = 15%
Width = 60%
4/21/2009 1:06:18 PM
FIGURE 9D
24
Building Pay Structures
Illustration of a Significant Grade Overlap
Dollars
$26,000
$24,894
$23,708
$24,000
$22,579
$22,000
$21,504
$20,480
$20,000
$18,000
$16,000
$14,000
$14,112
$14,818
$15,558
$13,440
$12,000
$10,000
$12,800
Number of Overlapping Grades = 5
Midpoint Differntial = 5%
Width = 60%
be paid more than a relatively new (and/or lower) performer in a
higher pay range. However, overlapping more than three or four pay
grades generally should be avoided. Too much overlap limits the
difference between midpoints, which in turn places limits on potential
earning ability and can cause differentiation problems between supervisor and subordinate pay.
Multiple Pay Structures
An organization may have many pay structures within its overall
structure. The number of structures is primarily a function of the
market and the company’s compensation philosophy. For instance,
the ranges for certain professionals such as information systems
and technology and investment management may call for a separate
structure that cannot be force-fit into a typical “corporate” structure.
Different labor markets with different levels of supply and demand
may necessitate multiple pay structures. Such pay structures allow
greater flexibility in pay administration. Different groupings of
positions, such as clerical, blue collar jobs versus technical and
professional jobs, usually reflect different labor markets depending
on supply and demand. Therefore, the slope of the pay lines could
be different for different job families.
HT BldgPayStructures UPDATE book.indd 24
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25
3
Developing a Pay Structure
There are two basic considerations to factor into the design and
development of pay structures: internal equity and external
competitiveness.
Internal Equity
FIGURE 10
Internal equity refers to the relative values assigned to different
jobs within an organization and how reasonable those values are,
both within job families and among comparable jobs throughout
the organization. Internal equity can be examined horizontally and
vertically, as shown in Figure 10. In this example, Departments A and
B demonstrate horizontal internal equity in all three jobs because
the salaries are fairly close. These departments also demonstrate
vertical internal equity because there is a similar progression within
the job hierarchy. Department C, however, demonstrates neither
horizontal nor vertical internal equity.
Internal Equity Example
Horizontal
organizational units)
Vertical
(Within departments or
(Across departments or organizational units)
HT BldgPayStructures UPDATE book.indd 25
Department A
Department B
Department C
Position
Salary
Salary
Salary
Secretary Level I
$25,000
$26,000
$29,000
Secretary Level II
$30,000
$31,000
$25,000
Secretary Level III
$35,000
$36,000
$50,000
4/15/2009 9:32:07 AM
26
Building Pay Structures
Although horizontal and vertical internal equity are presented as two
separate concepts, in reality they are interrelated. While it is appropriate
to pay the Secretary Level III more than Levels I and II, how much more
is determined by what is being done in the other two departments.
(There are other factors that also must be factored in, such as
performance and time in grade.)
The purpose of this illustration is to emphasize the importance
of equity in salary administration and to point out the different
perspectives from which equity needs to be viewed. Internal equity
is a key consideration in developing pay structures not only within
a job family, as shown in the illustration of secretarial positions,
but also among various job families that have common job grades.
The first step in establishing internal equity is job evaluation.
External Competitiveness
The other basic consideration in the design and development of
pay structures is external competitiveness, or external equity.
Busi nesses compete in a free market for products and services.
The costs of these products and services include labor, which is
never constant. Companies need to closely monitor labor costs
to make sure that they neither overpay (leading to a higher cost
than necessary in providing a product or service) nor underpay
(possibly leading to higher turnover, which could hurt organizational
productivity).
The labor market is subject to the same external pressures as the
product and services market. Organizations have to respond quickly,
appropriately and consistently to survive constant changes in the
labor market. It is important that the company’s pay structure be
capable of accommodating such changes.
Defining Competition
In researching a company’s competitive posture, the first step is
defining “competition.” During times of low turnover, it may be
more difficult to identify organizations that compete for labor. Low
turnover should not lead to the false conclusion that there are no
HT BldgPayStructures UPDATE book.indd 26
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Developing a Pay Structure
27
competitors for labor or that the compensation program is working
perfectly for a given organization.
Turnover statistics may show which skills are in demand — and, in
turn, which special pay structures may be necessary. However, turnover
statistics by themselves may not reveal much about competitiveness.
Terminations may be taking place for many reasons, both personal
and professional. If employees are leaving particular companies
for reasons other than increased pay — for example, to start their
own businesses — these companies should be excluded from the
defined list of competitors.
Once it is established that employees are moving to other organizations, it is time to gather data on these organizations. In the
final analysis, an organization’s human resources strategic plan
must tie directly to the data gathered on any defined competition.
In general, organizations tend to survey other businesses similar
to themselves in all or some of the following characteristics: size
(usually reflected by total assets), industry type (products, services),
geographic location, revenue/income size and required job skills.
Here are three ways to obtain data:
• Refer to published surveys. Before using published surveys, carefully review their usefulness and applicability to the organization.
It may be possible to examine the survey input documents as
well as an extract of survey output.
• Participate in customized surveys. When possible, participate
in customized surveys conducted by other companies of similar
size or industry type.
• Conduct a survey. If data are required in a hurry, a telephone survey
(by a third party) may be conducted. However, telephone surveys
are not recommended for multiple jobs because the amount of
phone time required may not be convenient for all participants.
Before an organization decides to conduct its own survey, there
are obvious considerations such as time, costs, usefulness of data
and survey purpose. There also are some hidden concerns, such
as the difficulty of convincing potential peer organizations to
participate.
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28
Building Pay Structures
Key Steps in Designing an Effective Pay Structure
The following set of steps describes the specific ways in which
internal equity and external competitiveness both play a role in
establishing pay structures and job hierarchy. (See Figure 11.) These
steps are based on the assumption that the organization is using
a point-factor job-evaluation plan, one of the many methods of
establishing the value of a job internally.
After the description of each step, key issues pertaining to that
step are highlighted and questions to be asked regarding each issue
are indicated. Specific answers to these questions are not given
because they would differ from organization to organization.
Note that the first five steps relate to the establishment of internal
equity. The last five steps relate to external competitiveness. In
general, as the job level increases, the reliance on external market
data — as opposed to internal considerations — also increases.
(See Figure 12.)
FIGURE 11
Step 1: Review Overall Point Differentials
This step often is referred to as “sore thumbing” because it involves
reviewing all of the job-evaluation points to see if any evaluations
stand out from the group. If necessary, points are changed to better
reflect the relative internal value of the job before proceeding to
the second step.
Steps in Establishing Internal Equity
and External Competitiveness
Internal Equity
External Competitiveness
• Review overall point differentials
• Incorporate market data
• Rank order jobs by total
evaluation points
• Review market inconsistencies
• Develop job groupings
• Smooth out grade averages
• Develop preliminary point bands
• Review differences between
midpoints and market averages
• Check intrafamily and
supervisory relationships
• Resolve inconsistencies between
internal and external equity
HT BldgPayStructures UPDATE book.indd 28
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FIGURE 12
Developing a Pay Structure
29
Internal vs. External Equity as Applied to the Hierarchy of Jobs
Job Level
High
Middle
Low
Internal
Evaluation
External Evaluation (Market-Based)
EXAMPLE 4
In the process of establishing job levels, the proportion of internal evaluation and external evaluation used usually varies with the level
of the jobs within the hierarchy of jobs in the company. As the level of the job increases, the reliance on external market data increases.
Key issue: Do any job evaluations appear to be “out of place,”
either with their peers across functions or with their superiors or
subordinates?
Key questions to ask: Do the evaluators fully understand the jobs?
Is the job description or questionnaire complete? Is the job being
compared to the correct peer
group?
Is the rater evaluating
Rank Order
Points
Job Title
the job or the person?
13
Claims Officer
565
12
Accounting Systems
Control Officer
550
11
Employee Relations Officer
545
10
Team Leader
470
9
Senior Accounting
Consultant
425
8
Project Coordinator
405
7
Accounting Consultant
355
6
Accounting Technician
350
5
Records Management
Specialist
345
4
Reconciliation Technician
335
3
Service Center Coordinator
260
2
Copy Center Worker
210
1
Mail Clerk
140
HT BldgPayStructures UPDATE book.indd 29
Step 2: Rank Order Jobs
by Total Evaluation Points
Rank all jobs in ascending or
descending order as shown
in Example 4.
Key issue: Does the hierarchy of positions make
intuitive sense?
Key questions to ask:
Does the hierarchy reflect
the differences in the functions of the various positions?
Has any position been overrated or underrated? Do the
4/15/2009 9:32:07 AM
EXAMPLE 5
30
Building Pay Structures
Job Groupings
Points
Claims Officer
565
Accounting Systems
Control Officer
550
Employee Relations Officer
545
differences in points reflect
the degree of differences
between positions?
Step 3: Develop Job
Groupings
Team Leader
470
While developing groupings,
Senior Accounting
425
look for point breaks. Make
Consultant
sure that the number of
Project Coordinator
405
levels identified is compatAccounting Consultant
355
ible with the number of
Accounting Technician
350
levels
within the organizaRecords Management
345
Specialist
tion. Possible job groupings
Reconciliation Technician
335
using natural point breaks
Service Center Coordinator
260
are shown in Example 5.
Copy Center Worker
210
Ke y i s s u e : H o w t o
Mail Clerk
140
develop job groupings that
are meaningful rather than
contrived.
Key questions to ask: Where are the natural point breaks? How
many levels should there be to accommodate levels within the
organization?
Step 4: Develop Preliminary Point Bands
Salary-grade point bands, or ranges, can be developed as either “absolute” point spreads or as percentage-based point spreads between
point-band maximums. Table 1 is an example of an absolute point
spread between maximums based on some of the jobs in the preceding
examples. Notice that 39 points is the absolute value between pointband maximums. However, the percentage spread varies.
A variation on the “absolute” point spread is to increase the point
spread when moving up the salary-grade structure. Organizations
may choose to do this in recognition of the broader range of skills
represented within higher salary grades. Table 2 is an example.
HT BldgPayStructures UPDATE book.indd 30
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TABLE 2
TABLE 1
Developing a Pay Structure
Point Bands
Grade
Minimum
Maximum
1
137
178
2
176
217
3
215
256
4
254
295
5
293
334
6
332
373
Point Bands
Grade
Minimum
Maximum
1
140
165
2
166
180
3
181
215
4
216
250
5
251
290
6
291
330
Constant
Absolute
Points
Varying
Percentage
Spread (rounded)
39
22%
39
18%
39
15%
39
13%
39
12%
Varying
Absolute
Points
Varying
Percentage
Spread (rounded)
15
9%
35
19%
35
16%
40
16%
40
14%
31
An alternate approach is to develop point bands with percentage-based
point spreads between point-band maximums. The percentage spread
can remain constant or vary. (See Tables 3 and 4 on page 32.)
Key issue: Determining the width of each point band.
Key questions to ask: Wider point bands will require fewer grades,
and they will group a larger number of jobs together. Is this in line
with organization’s corporate policy? Are jobs with similar skill,
effort and responsibility being grouped together?
For the purposes of this example, a salary structure will be
constructed with 11 grades. It is important to remember that this
decision is not purely objective. It takes into account an organization’s internal values and other practical considerations, such as the
desired number of grades or a set policy regarding the number of
grades between supervisor and employee. Most importantly, the
structure should work for the organization.
HT BldgPayStructures UPDATE book.indd 31
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TABLE 4
TABLE 3
32
Building Pay Structures
Point Bands
Grade
Minimum
Maximum
1
126
145
2
146
167
3
168
192
4
193
221
5
222
254
6
255
292
Point Bands
Grade
Minimum
Maximum
1
126
145
2
146
167
3
169
192
4
199
225
5
230
263
6
275
313
Varying
Absolute
Points
Constant
Percentage
Spread (rounded)
22
15%
25
15%
29
15%
33
15%
38
15%
Varying
Absolute
Points
Varying
Percentage
Spread (rounded)
22
15%
25
15%
33
17%
38
17%
50
19%
The point bands in Example 6 were developed using job evaluations and the natural breaks between jobs. A minimum of 137
points was set for the lowest grade, which is occupied by the
Mail Clerk job (evaluated at 140 points). Each grade’s point-band
width is a constant 39 points between point-band maximums. The
11 grades, shown in Example 6, are designed to accommodate the
lowest-level job — Mail Clerk — to the highest-level job — Claims
Officer.
Step 5: Check Intrafamily and Supervisory Relationships
The last step in the internal equity process is to check the evaluations
to ensure they represent all the levels and reporting relationships
within the organization. It is important to determine whether jobs
of similar skill, effort, responsibility and working conditions are
within the same salary level. The structure should be reviewed to
HT BldgPayStructures UPDATE book.indd 32
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TABLE 5
EXAMPLE 6
Developing a Pay Structure
Grade
Point Bands
11
527 +
10
488-526
9
449-487
8
410-448
7
371-409
6
332-370
5
293-331
4
254-292
3
215-253
2
176-214
1
137-175
33
ensure that dissimilar jobs are not
placed within the same level, and
that subordinate and supervisor positions are not placed within the same
grade.
Key issue: Peer and subordinate/
superior relationships.
Key questions to ask: Are there
enough levels between supervisor
and subordinate positions? Do the
set levels accurately reflect relative
levels within job families?
Step 6: Incorporate Market Data
Based on the preliminary ranking
performed in Steps 4 and 5, market data are added to identify differences in how your company and the market value a particular set of
jobs. Table 5 is an example.
Key issue: How to obtain the best fit between internal evaluation
and market value.
Key questions to ask: Are the market numbers reliable? Are the job
matches appropriate? How many open grades are needed to meet
future needs? Is it possible to keep the market comparisons current?
At this point in the
process, di fferences
MARKET AVERAGE
GRADE
POSITION
between a com pany’s
11
Claims Officer
$57,000
Accounting Systems Control Officer
$53,000
Employee Relations Officer
$49,000
internal values for a
10
Open
job and the market’s
9
Team Leader
$36,000
values become apparent.
8
Senior Accounting Consultant
$31,600
7
Project Coordinator
$29,200
In Example 7 on page 34,
6
Accounting Technician
$25,600
note that there is only
Accounting Consultant
$24,300
Records Management Specialist
$23,000
a 20-point difference
5
Reconciliation Technician
$23,000
4
Service Center Coordinator
$20,300
between the evalua3
Open
tions for the Employee
2
Copy Center Worker
$18,000
Relations
Officer and
1
Mail Clerk
$15,300
HT BldgPayStructures UPDATE book.indd 33
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TABLE 6
EXAMPLE 7
34
Building Pay Structures
Job Title
(Grade)
Points
Market
Average
Claims Officer (11)
565
$57,000
the Claims Officer but an $8,000
difference in pay.
Step 7: Review Market
Inconsistencies
$49,000
Employee Relations
545
At this point, the organization
Officer (11)
must decide the importance of
Open (10)
the internal values that have
$36,000
Team Leader (9)
470
been placed on its positions. It
Senior Accounting
$31,600
425
Consultant (8)
also must decide whether it can
$29,200
Project Coordinator (7)
405
afford to pay differently than
$25,600
Accounting Consultant (6)
355
the
market. Can the organizaAccounting Technician (6)
$24,300
350
tion risk the internal integrity
$23,000
Records Management
345
Specialist (6)
of the compensation program
Reconciliation Technician (5)
$23,000
335
by relying more heavily on the
$20,300
Service Center Coordinator (4)
260
market value of these positions?
Open (3)
Are there enough positions within
Copy Center Worker (2)
$18,000
210
a job family to justify establishing
$15,300
Mail Clerk (1)
140
a separate salary structure to
address these problems?
Once any inconsistencies between the internal and external markets
have been resolved, “raw” averages for jobs in each of the salary
grades are calculated. These averages are simple means calculated
from the market data. (See Table 6.)
Key issue: The company must decide whether it can accept a
salary structure with
va r y i ng p ercent% DIFFERENCE
GRADE
RAW MARKET AVERAGE
ages between its
11
$53,000
midpoints.
10
Open
9
$36,000
Key questions to
13.9%
8
$31,600
8.2%
ask:
Is the number
7
$29,200
20.2%
6
$24,300
of grades selected
5.7%
5
$23,000
13.3%
(11) still acceptable?
4
$20,300
3
Open
Can the differences
2
$18,000
17.6%
between midpoints
1
$15,300
be smoothed out
Accounting Systems
Control Officer (11)
HT BldgPayStructures UPDATE book.indd 34
550
$53,000
4/15/2009 9:32:09 AM
EXAMPLE 8
Developing a Pay Structure
Grade
Proposed
Midpoints
11
$53,000
10
$46,807
35
without affecting the integrity of the market
competitiveness? How important is it to be
close to the market?
Step 8: Smooth Out Grade Averages
8
$36,509
While smoothing out grade averages, a deci7
$32,243
sion has to be made on where it is most
6
$28,476
important to be competitive and where the
5
$25,149
most payroll dollars are at stake. Then test to
see which midpoint-to-midpoint percentage
4
$22,211
increment is the most logical to use.
3
$19,616
Example 8 has made use of 13.229-percent
2
$17,324
increments, which allow for use of the 11
1
$15,300
grades proposed earlier. (These increments
may be derived using the “present value” formula discussed on
page 20.)
Key issue: The company must decide whether there is an “ideal”
midpoint-to-midpoint percentage spread.
Key questions to ask: Is smoothing out always necessary or desirable? Because the smoothing-out process is one of trial and error, at
what point is it advisable to stop so that the salaries generated by
the structure are competitive and at the same time payroll dollars
are not used ineffectively or irresponsibly?
9
$41,338
Step 9: Review Differences Between
Midpoints and Market Averages
The key to this step is to identify any large differences between pro posed midpoints and individual job-market averages. (See Table 7
on page 36.)
Key issue: The company must determine the percentage factor
that should be used to smooth out the midpoints.
Key questions to ask: Which jobs have the greater need to be competitively paid? Can any jobs be underpaid without affecting the company’s
ability to attract and retain employees? Can the company afford
to overpay some jobs?
HT BldgPayStructures UPDATE book.indd 35
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POINT
SPREAD
527 +
488-526
449-487
410-448
371-409
332-370
293-331
254-292
215-253
176-214
137-175
GRADE
11
10
9
HT BldgPayStructures UPDATE book.indd 36
8
7
6
5
4
3
2
1
Mail Clerk
Copy Center Worker
Open
Service Center Coordinator
Open
Reconciliation Technician
Records Management Specialist
Accounting Consultant
Accounting Technician
Project Coordinator
Senior Accounting Consultant
Team Leader
Open
Accounting Systems Control Officer
Claims Officer
Employee Relations Officer
POSITION
140
210
260
335
345
355
355
405
425
470
550
565
545
POINTS
$15,300
$18,000
$20,300
$23,000
$23,000
$24,300
$25,600
$29,200
$31,600
$36,000
$53,000
$57,000
$49,000
MARKET
AVERAGE
$15,300
$17,324
$19,616
$22,211
$25,149
$28,476
$32,243
$36,509
$41,338
$46,807
$53,000
PROPOSED
MIDPOINT
COMPA-RATIO
100%
96%
109%
124%
124%
117%
111%
110%
116%
115%
100%
93%
108%
MIDPOINT
( PROPOSED
MARKET AVERAGE )
36
Building Pay Structures
TABLE 7
4/15/2009 9:32:09 AM
Developing a Pay Structure
37
Step 10: Resolve Inconsistencies
Between Internal and External Equity
The proposed salary structure shows how each of the evaluated
positions relates to one another internally as well as how each
job relates to the market. Most companies are comfortable if the
proposed midpoints are within 10 percent of the competitive market.
Using this as a rule of thumb, the following positions are most out
of line with the market:
• Reconciliation Technician:
24 percent
• Records Management Specialist: 24 percent
• Accounting Consultant:
17 percent.
With these proposed midpoints, the company will pay above the
going rate in the market. If internal equity is a greater concern,
then the additional money spent may not be a significant issue.
However, another possibility to consider is pulling these jobs out of
the proposed pay structure and paying them separately. The grade
level would stay the same to provide internal job-level equity, but
the pay midpoints would represent the market more closely.
Decisions of this nature must be made after reviewing the inconsistencies. Each company must take into account its corporate culture
and ability to pay when deciding what adjustments to make in
the balance between internal values and external competitiveness.
The key goal, as always, is to develop an acceptable pay structure
that will aid the company in attracting, retaining and motivating
qualified employees.
Key issue: Determining what is more important — internal or
external equity.
Key questions to ask: What is the company culture? What is
its stance on the consistent treatment of its employees? Is there
high turnover in the company? Is it in a low-level or high-level
job family?
The previous example explored creating a structure using both
internal equity and external competitiveness. But, in today’s global
economy, competition for talent may be defined as a competitor
across the street or all the way across the globe. A need for
HT BldgPayStructures UPDATE book.indd 37
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TABLE 8
38
Building Pay Structures
Job Title
Market Rate
Minimum
Midpoint
Maximum
Range
Spread
Corporate
Accountant
$79,000
$63,200
$79,000
$94,800
50%
Customer
Service
Supervisor
$60,000
$48,000
$60,000
$72,000
50%
Computer
Operator
$48,000
$38,400
$48,000
$57,600
50%
Groundskeeper
$30,000
$24,000
$30,000
$36,000
50%
knowledge about what an organization’s competition pays for talent
is more critical than ever before. WorldatWork research has found
that 80 percent of organizations use market pricing as their No. 1
means of determining employee pay rates. Therefore, it is also
important to be familiar with the methodology needed to build a
pay structure that relies heavily on market data.
When creating a structure solely using market pricing, there are two
approaches to using market data. One is what is referred to as pure
market pricing and the other is market-priced salary structure.
The pure market pricing approach refers to the method in which
each job in the organization can be market priced. Rather than
build a pay structure with grades and ranges, each job has its own
independent salary range. An example is shown in Table 8. Note
that the midpoint is always equal to the market rate because each
position has a unique salary range based on its market value. The
advantages to this approach includes the use of pure market points
(25th percentile, 50th percentile for the market rate and midpoint),
fluctuates along with the market movement, is simple to understand,
and correlates with market rates at any given time. However, an
organization with numerous jobs or that cannot market price all
jobs may choose to use market data to build a base-pay structure.
In this case, follow the following steps to develop a market-based
pay structure:
• Step 1: Analyze and document job content. Identify key duties
and responsibilities for each job to be market priced
HT BldgPayStructures UPDATE book.indd 38
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Developing a Pay Structure
39
• Step 2: Select Benchmark Jobs. Choose at least 50 percent
of your jobs to serve as benchmarks for market pricing. Note:
Benchmark jobs are defined as jobs that are easily found in
the marketplace, such as a receptionist, accountant, computer
operator and benefits analyst. Select jobs that represent all levels
and functions that will be covered in the new pay structure.
• Step 3: Select relevant labor markets that will provide the competitive market data. Markets should be determined keeping in mind
where employees come from (geographically and industry type)
as well as where they go when they leave.
• Step 4: Identify and select data collection options. Are there
published surveys that will meet the organization’s needs, or will
a survey need to be conducted (either internally or by a third
party)?
• Step 5: Collect and analyze data for benchmark jobs. Jobs will
be matched to survey sources based on job content, not title.
Job titles often are customized within a company and while they
sound generic they may differ widely from the customary definition found in the survey sources. At this point the competitive
information collected is used to assess an organization’s current
pay levels for benchmark jobs.
Note: Steps 1-5 are the same whether using the pure market
pricing approach or developing a market pay structure, with one
exception: In the pure market pricing method, all jobs are market
priced rather than a sample of jobs being selected.
• Step 6: Develop a structure of midpoints. Using the lowest market
priced job, build a pay structure to include all jobs that have
market data.
• Step 7: Assign market priced jobs to a salary grade. Individual
jobs are assigned to a grade with a midpoint that most closely
matches the market rate for the job
• Step 8: Slot non-benchmark jobs into the structure. It is not
uncommon for some jobs to not have good matches to available
market data. In those cases, the job is slotted into the grade level
that is the best fit based on internal equity comparisons. This
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40
Building Pay Structures
step takes into consideration where the appropriate grade level
will place the job within the job family as well as with peer jobs
within the organization. Consideration also should be given to
supervisor/subordinate relationships (how many grade levels
should the position be below the supervisor for the job).
A pay structure is built after these steps are in practice.
When building a pay structure it is important to remember the
culture of the organization as well as the need to provide ranges
that are market competitive. To that end a decision needs to be
made about:
• Number of pay grades. Is your organization set on a specific
number or is there flexibility?
• Midpoint differentials. Is the percent difference between midpoints
to be constant or increase as you move up the structure?
• Future growth. Should there be a number of empty grades to
accommodate positions to be added later?
Build a pay structure using the market priced jobs below. Keep in
mind that this is one of many possibilities. It is not uncommon to
try several variations until you get the one you are most comfortable
with. If, however, the desired number of grades or the midpointto-midpoint differential have already been determined, the present
value/future value formula can be used.
Market Priced Job Values
Corporate Accountant
Compensation Manager
Customer Service Supervisor
Computer Operator
Drafter
Secretary
Groundskeeper
HT BldgPayStructures UPDATE book.indd 40
$79,000
$72,000
$60,000
$48,000
$39,000
$34,000
$30,000
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TABLE 9
Developing a Pay Structure
41
Proposed Salary Structure*
Job Title
Minimum**
Midpoint**
Maximum**
Midpoint to
Midpoint
Differential
11
Corporate
Accountant
$63,200
$79,100
$94,500
12%
10
Compensation
Manager
$56,600
$70,700
$84,900
12%
9
Customer Service Supervisor
$50,500
$63,100
$75,800
12%
8
Open
$45,000
$56,300
$67,500
12%
7
Computer
Operator
$40,200
$50,300
$60,300
10%
6
Open
$36,700
$45,800
$55,100
10%
5
Open
$33,300
$41,600
$50,000
10%
4
Drafter
$30,200
$37,800
$45,300
8%
3
Secretary
$28,000
$35,000
$42,000
8%
2
Open
$26,000
$32,400
$39,000
8%
1
Groundskeeper
$24,000
$30,000
$36,000
NA
Grade
Level
* Market jobs are slotted into the closest midpoint that represents the market value for the job.
** Numbers rounded to the nearest hundred.
To determine the minimum and maximum of each salary grade, the
organization will adopt what it deems the correct range width and then
use the following formulas. For this exercise we have used a range
width of 50 percent (the difference between the range minimum
and maximum):
Range minimum:
Midpoint
1 + ½ range spread
Range maximum: Minimum × (1 + range spread)
Frequently you will have one or more open grades, and that is
fine. This allows for the addition of future jobs. As mentioned,
more grades may be added to the top of the structure to accommodate a time when higher-level jobs will be added to the structure.
Cautionary note: if there are numerous open grades consider
re-thinking the midpoint-to-midpoint differential used to develop
the pay structure. A larger midpoint differential percentage will
create fewer grades.
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42
Building Pay Structures
The final step is to place all nonbenchmark jobs into the
existing structure. Because there is no market data to guide
the decision it is necessary to slot jobs based on internal equity
comparing other jobs in the same job family and across all of
the functional areas for a peer comparison. One final note:
Occasionally the market value for a job places it in the middle
of two midpoints in the range; the dollar difference between the
market value and midpoint are the same. In this instance, internal
equity guides the selection of which grade is the better choice,
the same as slotting a nonbenchmarked job.
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43
4
Pitfalls, Precautions
and Trends
A pay structure is not an end in itself. In fact, it is possible for an
organization to pay its employees without having a formal pay structure.
While pay structures help create a systematic and equitable system of
cash-compensation management, it is important to keep in mind that
they are only tools. Pay structures actually will burden a company unless
the following issues are considered:
• Competitive posture. What is the competitive posture of the
organization? How much above or below the market should the
company pay or can it afford to pay?
• Decision-making. Who will make the critical decisions underlying the
pay structure? (For most companies, senior management tends
to make these decisions.)
• Monitoring. How frequently will the pay structure be monitored
and assessed for currency and appropriateness?
• Flexibility. Is the pay structure flexible enough to handle dynamic
situations? This is critical in this age of constant change in
corporations and in the economic environment, particularly the
labor market.
• Resources. Can the organization afford to allocate sufficient resources
(including technology) to build and maintain current and relevant
pay structures related to data?
• Communication. Is the organization willing to allocate the required
effort and resources to communicate the pay structures to employees
and educate management in the proper use of pay structures?
Many organizations have used the “broadbanding” concept of
salary ranges where applicable and appropriate. Broadbanding is
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44
Building Pay Structures
the combination of existing ranges by expanding salary range width
and reducing the number of grades. This usually is done for many
reasons to benefit the organization and its employees, including:
• Paying for performance and allowing managers greater flexibility in
salary administration
• Ease of moving people within the company
• Reduction of the demands of job evaluation as well as the time
and effort required to make organizational changes.
Broadbanding is only one approach to pay administration in general
and pay structures in particular.
Pay structures should be developed from the organization’s mission and
business strategy. Strategy should always precede structure development.
Many internal and external environmental factors determine a company’s
pay structure. The pay structure has to adopt the same positive
characteristics of a company’s overall compensation program.
While designing a pay structure, a balance between internal and
external equity must be maintained. Constant fine-tuning should
take place. Developing pay structures is more an art than a science,
although many mathematical techniques and processes may be used.
While it is important to be specific about structural features such as
the salary range spread, midpoint progression and so on, the key
element of an effective pay structure is its value in functioning
as a tool for managing pay.
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Pitfalls, Precautions and Trends
45
Quick Reference to Building Pay Structures
Midpoint =
(Maximum + Minimum)
2
Compa-ratio =
Individual Base Salary
Midpoint
(Compa-ratio can be calculated for individual employees, for each salary range,
for organizational units/departments or for functions)
Spread on Either Side of the Midpoint =
Midpoint – Minimum
Midpoint
Midpoint – Minimum
Midpoint
Range Spread =
HT BldgPayStructures UPDATE book.indd 45
[expressed as a
positive percentage]
(Maximum – Minimum)
Minimum
Maximum = Minimum × (1 + Range Spread)
Minimum =
[expressed as a
negative percentage]
Minimum =
Maximum
(1 + Range Spread)
Midpoint
(1 + ½ Range Spread)
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46
Building Pay Structures
Quick Reference to Building Pay Structures
Midpoint Progression Matrix
In the case where midpoint progressions
are to be calculated repeatedly over
the long run, it is possible to develop
a matrix for ready reference purposes.
One such matrix is shown below. This
matrix was developed using the “present
value/future value formula.” The vertical
axis represents present value (PV), the
horizontal axis represents future values
(FV) and the number of grades used is
eight (the number of intervals between
grades, “n,” is 7). The percentages listed
are “i” values, where “i” is the percentage
difference between midpoints.
The matrix shows that the constant
difference between midpoints would
be 25.85 percent. Remembering that
$10,000 represents the midpoint of the
lowest pay grade and $50,000 represents
the midpoint of the highest pay grade,
midpoints for all eight grades can be
assigned by spacing them apart by
25.85 percent.
If the number of grades changes, a
new matrix can be constructed using
a different value or “n.” Matrices can
be developed quickly using a business
calculator or computer.
For example, consider a present value of
$10,000 and a future value of $50,000.
Lowest Midpoint (PV)
PV =
FV
Highest Midpoint (FV)
(1 + i)n
$50,000
$55,000
$60,000
$65,000
$70,000
$75,000
$80,000
$85,000
$90,000
$95,000
$100,000
$10,000
25.85%
27.58%
29.17%
30.66%
32.05%
33.35%
34.59%
35.76%
36.87%
37.94%
38.95%
$10,500
24.98%
26.69%
28.27%
29.75%
31.13%
32.43%
33.66%
34.82%
35.92%
36.98%
37.98%
$11,000
24.15%
25.85%
27.42%
28.89%
30.26%
31.55%
32.77%
33.92%
35.02%
36.07%
37.07%
$11,500
23.36%
25.05%
26.62%
28.07%
29.44%
30.72%
31.93%
33.08%
34.17%
35.21%
36.20%
$12,000
22.61%
24.30%
25.85%
27.30%
28.65%
29.93%
31.13%
32.27%
33.35%
34.39%
35.38%
$12,500
21.90%
23.57%
25.12%
26.56%
27.90%
29.17%
30.37%
31.50%
32.58%
33.61%
34.59%
$13,000
21.22%
22.88%
24.42%
25.85%
27.19%
28.45%
29.64%
30.77%
31.84%
32.86%
33.84%
$13,500
20.57%
22.22%
23.75%
25.17%
26.51%
27.76%
28.94%
30.06%
31.13%
32.15%
33.12%
$14,000
19.94%
21.59%
23.11%
24.52%
25.85%
27.10%
28.27%
29.39%
30.45%
31.46%
32.43%
$14,500
19.34%
20.98%
22.49%
23.90%
25.22%
26.46%
27.63%
28.74%
29.80%
30.80%
31.77%
$15,000
18.77%
20.40%
21.90%
23.30%
24.62%
25.85%
27.02%
28.12%
29.17%
30.17%
31.13%
$15,500
18.21%
19.83%
21.33%
22.73%
24.03%
25.26%
26.42%
27.52%
28.57%
29.56%
30.52%
$16,000
17.68%
19.29%
20.78%
22.17%
23.47%
24.69%
25.85%
26.94%
27.99%
28.98%
29.93%
$16,500
17.16%
18.77%
20.25%
21.64%
22.93%
24.15%
25.30%
26.39%
27.42%
28.41%
29.36%
$17,000
16.66%
18.26%
19.74%
21.12%
22.41%
23.62%
24.76%
25.85%
26.88%
27.87%
28.81%
$17,500
16.18%
17.77%
19.25%
20.62%
21.90%
23.11%
24.25%
25.33%
26.36%
27.34%
28.27%
$18,000
15.71%
17.30%
18.77%
20.13%
21.41%
22.61%
23.75%
24.83%
25.85%
26.83%
27.76%
$18,500
15.26%
16.84%
18.30%
19.66%
20.94%
22.14%
23.27%
24.34%
25.36%
26.33%
27.26%
$19,000
14.82%
16.40%
17.85%
19.21%
20.48%
21.67%
22.80%
23.87%
24.88%
25.85%
26.78%
$19,500
14.40%
15.97%
17.42%
18.77%
20.03%
21.22%
22.34%
23.41%
24.42%
25.38%
26.31%
$20,000
13.99%
15.55%
16.99%
18.34%
19.60%
20.78%
21.90%
22.96%
23.97%
24.93%
25.85%
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47
About the authors
Daniel P. Purushotham, Ph.D., CCP, CBP, is a faculty member at
the schools of business at the University of Connecticut and Central
Connecticut State University and former Vice President of Corporate
Compensation and Performance Management at The Hartford Financial
Services Group Inc. in Hartford, Conn. A WorldatWork faculty member,
he holds a master’s degree in industrial psychology from Springfield
College, an M.B.A. from the University of Hartford, a master’s degree in
psychology from Madras University in India, and a Ph.D. in adult and
vocational education from the University of Connecticut. Purushotham has
served in many leadership positions, including Chair of the Compensation
Committee of the Life Office Management Association, President of
the WorldatWork Eastern Region and President of the Human Resource
Association of Central Connecticut. He also served on the WorldatWork
Board of Directors and various association task forces and committees. Most recently, he was Chair of the Conference Board’s Executive
Compensation Management Council. Purushotham has led workshops
nationally and internationally on human resources topics, in addition
to developing WorldatWork certification course materials.
Stephanie Y. Wilson, CCP, is President of Human Capital Solutions, LLC,
a consulting firm specializing in innovative human resource practices and
cash and non-cash recognition and reward programs. As a WorldatWork
faculty member she has taught numerous courses within the United States
and abroad. She has served as a practice leader and advisor for several
WorldatWork core courses. Ms. Wilson has a Bachelors degree in Behavorial
Psychology from the Honors College of the University of Utah and her
MBA from the University of Connecticut. Her career includes corporate
experience as a HR Director for JC Penney’s and as a Compensation
Director for Pepsi-Cola. She has extensive consulting experience with
William M. Mercer, Arthur Anderson, KPMG and Towers Perrin.
She is the author of a Malcom Baldrige National Quality Award Winner’s
Book on HR Practices – a pioneer look at leading human resource practices of the award winning companies. She has served as an Adjunct
Professor for the graduate HR program at the New School University in
New York City and is currently serving as an advisor to the Graduate
School of Business at the Citadel in Charleston, South Carolina.
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Building Pay Structures
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