Designing Pay Levels, Mix, and Pay Structures

Designing a pay structure involves major decisions such as defining the employer's competitive pay policy, surveying relevant market competitors, interpreting survey results using a pay policy line, and balancing external competitiveness with internal alignment.

Surveys provide crucial data for translating external pay policies into actual pay levels, mix, and structures. They are systematic processes for collecting and judging compensation paid by other employers. Companies use surveys to adjust pay levels, establish pay structure prices, analyze pay-related problems, and estimate competitor labor costs. Surveys also help validate job evaluation results and provide insights into specialized pay issues.

To make informed decisions about pay, mix, and structure, organizations must identify a relevant labor market. This can include jobs with similar occupations or skills, employees in the same geographic area, or organizations offering similar products and services. Defining the market based on industry specific skills is also common. International comparisons, while improving, still require significant judgment due to emerging labor markets and unique organizational structures, making comparable data challenging to find.

Several questions guide survey design: who should be involved, how many employers to include, which jobs to include, and what information to collect. Compensation managers typically lead survey efforts, often involving other managers and employees. The number of employers varies, with some large firms exchanging data with a few top competitors. The U.S. Bureau of Labor Statistics (BLS) is a major public source, though many combine multiple surveys for comprehensive data.

Surveys typically request three types of data: information about the organization (often financial data for grouping by size), details on the total compensation system, and specific pay data for incumbents in the jobs being studied. The challenge lies in evaluating and understanding this information to assess total pay packages and competitor practices effectively.

After data collection, results are analyzed using statistics to construct a market payline. This involves checking job matches for accuracy, identifying anomalies, aging data to account for changing pay rates, and considering organizational specifics. Variation in data helps understand market spread, with percentiles indicating where an organization's pay stands relative to competitors.

A market line connects a company's internal benchmark job structure with external market rates. Organizations choose pay levels based on competitor pay and the job's strategic role. Companies that only update data annually may lag the market, as rates continually rise. To lead the market, employers might age data to the end of the plan year and maintain those rates. Policies can also be translated by setting pay a specific percentage above or below the market line. Inconsistencies between policy and practice send incorrect messages to employees.

Pay ranges, where multiple rates are paid for the same job, allow managers to recognize individual performance and incentivize employee retention. A range acts as a control device, with a maximum setting a limit and a minimum setting a floor. High performers should exceed the market median, while average performers stay near the midpoint. Jobs are grouped into grades based on similar pay purposes to enhance flexibility and career movement.

Broadbanding is a technique that collapses salary grades into a few, large bands with sizable ranges, often consolidating four or five traditional grades. This provides greater flexibility, supports broader job responsibilities, fosters cross-functional growth, and encourages lateral movement. Broadbands lack traditional midpoints but can incorporate zones or other control points. Implementing banding requires setting the number of bands based on work differences and pricing them according to market rates, while aiming for flexibility without inconsistency.

The job structure orders jobs based on internal factors, while the pay structure is anchored by external competitive position. Reconciling these two standards can be challenging, as they may lead to different structures. Managers often prioritize external market data, especially when skill shortages drive up market rates. Creating special, market-responsive ranges can address these imbalances without undermining the pay system's integrity.

Market pricing emphasizes external competitiveness, setting pay structures almost entirely on external market rates by matching a large percentage of jobs with market data. This approach blends remaining jobs into the hierarchy created by external rates. Pure market pricing may ignore internal alignment, letting competitor decisions determine an organization's pay. Alternatively, organizations can differentiate their pay strategy to better execute their own goals. Balancing internal and external pressures requires judgment, and strategic differentiation must be well-reasoned to avoid hindering competitiveness.