Benefits and Compensation

Stay Market Competitive, Retain Top Talent in 2013

Daniels, Senior Consultant at Keating Advisors, LLC, offered her suggestions at a recent webinar sponsored by BLR and HR Hero.

How to Conduct a Base Pay Structure Review

Daniels says a well-designed and effective base pay system should be:

  • Supported by an agreed-upon organizational compensation philosophy
  • Supported by clear compensation administration policies
  • Driven by up-to-date market data so that it is externally competitive
  • Culturally appropriate and understandable for the organization
  • A tool for encouraging internal equity
  • Cost-effective, recognizing organizational budget realities
  • Supportive of a long-term ability to attract and retain talent
  • Legally defensible

Base Pay Structure Overview—Job Evaluation

Before you can evaluate your base pay structure, you must decide how you are going to evaluate your organization’s jobs. There are various methods of job evaluation, and the most appropriate method depends on your organization and your jobs:

Method

Pros

Cons

Quantitative methods
i.e., factor comparison, point method, compensable factors, Hay Guide Chart (huge administrative load to use)

  • Relatively objective
  • Easy to classify new positions
  • Responsive to pay equity laws
  • Provide detailed methodology for evaluating many jobs in larger organizations
  • Time-consuming
  • Potential disagreement over which factors to include
  • Some factors can’t be defined or measured
  • New technology or field developments can change factors over time

Non-Quantitative methods
simple “whole job” ranking, classification

  • Simplest method is ranking jobs in order of value to organization
  • Classification provide basic definitions for each job “group” or “level”
  • Simpler to administer
  • Easier to communicate
  • Suited to smaller organizations
  • Less objective
  • Less clear on how to classify new positions that may be outside the scope of past precedent

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Base Pay Structure Overview

Once you have settled on a method of evaluating your organization’s jobs and know which jobs fall into similar groupings, you can begin to review your current base pay structure and/or create a new base pay structure.

Daniels offers the chart below to help readers understand the differences between types of structures.

Type

Design Characteristics

Advantages

Disadvantages

Traditional Graded Pay Structures

Range spreads 20-50%

Smaller midpoint progressions (5-10%)

Many pay grades

Very supportive of internal equity (jobs in same grade are paid similar rates because of narrow range spread)

Employees tend to hit max before being promoted, can restrict paying market rates for specialized positions (e.g., IT)

Broadbands

Range spreads 80-120%+

Few pay bands

Wide bands provide utmost flexibility

Lack of structure, lack of clear band definitions, often result in under- and overpaying for some jobs

Step Structures

Range spreads 20-50% small

Smaller midpoint progressions (5-10%)

Divided into small equal steps

Easy to administer & automate, costs are very predictable

Very limited ability to reflect performance, progression through steps is usually based on tenure alone (e.g., teachers)

Market-Based Structures

Range spreads 30-70% (narrower at lower levels, widening as level increases)

Market-data driven midpoint progressions (usually between 15-25%)

Based on objective market data, provide both flexibility and ability to maintain internal equity

Require more frequent analysis of market data to stay up-to-date

Recent research, says Daniels, suggests that more and more organizations (as many as 64 percent) are using market-based structures.

How Many Base Pay Structures?

Commonly, organizations have only one structure; however, sometimes, organizations require more than one base pay structure to suit certain employee populations, such as:

  • Non-Exempt Positions
  • Professional & Management Positions
  • Information Technology
  • Licensed Medical Positions
  • Executives

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Targeting Pay to a Point in the Labor Market

To stay market-competitive you have to target to the market, as indicated by your compensation philosophy.

If your pay structure is less than 2 or 3 years old, you can use annual salary structure increase budget data (found in separate surveys) to determine an annual aging factor for your structure.

If your pay structure is over 2-3 years old, says Daniels, the best approach is to undertake a thorough market pricing analysis.

In tomorrow’s Advisor, more on market pricing, plus an introduction to a unique self-audit guide for FLSA compliance.