Designing a Base Pay Structure
Jayendra Rimal
Introduction
Strategy: Develop a link between work required,
performance demonstrated and pay provided to each
employee.
Guidelines for developing pay structures:
• Minimum and maximum levels of pay (considering
ability and willingness to pay, concern for
profitability, government regulations, union
influence and market pressure)
• The general relationships among levels of pay
• Whether the pay structure should lead, lag or leadlag the market
• The division of the total compensation (what portion
goes into base pay, into benefits, merit pay or payfor performance)
Some Pertinent Questions
1. What is the lowest rate of pay offered that will entice
people?
2. What is the rate of pay to ensure incumbents will stay?
3. Does the organization want to recognize seniority and
meritorious performance through base pay?
4. Does the organization want to give different rate of pay for
identical jobs?
5. What is considered the sufficient difference in pay rates?
6. Does the organization wish to recognize dangerous jobs?
7. Should there be a difference in changes in base pay
progression opportunities among jobs of varying worth?
8. What should be the relationship between promotion and
changes in base pay?
9. Do policies permit incumbents to earn rates of pay higher
than established compensations?
10. Will the pay structure accommodate adjustments?
Pay Structure Architecture
Determining a Pay Policy Line:
• This is a line of best fit that best represents the
middle pay value of jobs that have been evaluated to
have a particular worth.
• A line of best fit produces a trend line by minimizing the
sum of the squares of the vertical deviations around
that line.
• This best represents the middle pay value (the central
tendency) of all jobs used to establish a pay policy line.
• Using the pay policy line, organizations set minimum and
maximum pay levels, range and relationship among pay
rates.
More Than One Pay Structure
• It is quite usual for large organizations to have multiple pay
structures that focus on the forces that influences the actual
pay.
• Blue collar workers, white collar salaried staff, managerial or
professional employees and senior executives may be some of
the structures.
• Sometime legal considerations must be taken into account too.
• What are the prescribed minimum standards?
• The influence a geographical area or industry labor market has
on wage rates. When employment rates are high, minimum rates
must be high to attract job seekers. But if it is too high, it
could limit competitiveness and profitability. If it is too low,
the number of suitable candidates may be inadequate to meet
standards. Salary survey could, thus help in this regard.
• Usually the CEO earns the highest pay but it is relatively
harder to relate the contribution at this level as compared to
the lower levels. At this level job is designed to fit the
knowledge, skill and even the style of the CEO.
Developing Pay Grades
Pay grades are convenient groupings of a wide variety of
jobs or classes similar in work difficulty and complexity
requirement but possibly with nothing else in common.
The maximum pay of a pay grade states that this is the
most that work produced by someone holding a job in this
grade is to the organization.
The bottom pay places a minimal value on the contributions
of the assigned jobs. Some types:
• Single rate pay grade
• Two tier wage plan
• Range or spread dimension
• Pay grade width
• Determining pay grade minimum and maximum rates of pay
• Internal design consideration
• Broadbanding
Pay Sectors, Education, Experience and Training
It may be useful to review the education, experience and
training requirements for jobs within each pay grade:
Pay sector
Education, experience, training
I
Less than high school education, no experience
to a max of 2 years, no formal training
III
Completion of bachelor’s program, 3 years
related work experience, formal training
V
Completion of Masters program or extensive
related work experience (10 years), formal
training with valid registration
VII
Knowledge gained through formal education
and job experience that establishes
jobholders as masters of a professional field
of work
Any questions?