Base Pay Programs: What Works?

Pay is going to be a huge factor in attracting (and retaining) high performers in 2015. What are some of the options out there that work? Here are some ideas for revamping your comp plans from Cassandra Faurote and Karl Ahlrichs, SPHR.

Faurote, who is president of Total Reward Solutions, and Ahlrichs, a consultant and business developer for Gregory and Appel, shared their expertise in a recent webinar presented by BLR® and HR Hero®.

Purpose of a Base Pay Program

There are several simple (but very important) purposes of a base pay program. These programs:

• Provide structure;
• Organize jobs;
• Attract and retain;
• Lay out potential career paths; and
• Evaluate the company’s pay practices.

Faurote emphasizes that a good program must always be balancing internal equity (how one job within the company compares to the next in terms of pay for like skills, responsibilities, and performance) with external equity (how pay aligns with market standards).

Job Families

Job families can be broad based (e.g., management, professional, support) or categorized by function (e.g., finance, marketing, IT, sales), says Faurote. Levels within the job family are determined by job evaluations and descriptions, and then jobs and their corresponding pay are slotted in using a combination of the level description and market data.

Advantages of this program: Establishes career development paths; groups similar jobs or functions; eases slotting in new jobs; it’s easy to administer and communicate.

Disadvantages: Could place a job in a pay range that is not in line with the market.

Are class action lawyers peering at your comp practices? It’s likely, but you can keep them at bay by finding and eliminating any wage and hour violations yourself. Our editors recommend BLR’s easy-to-use FLSA Wage & Hour Self-Audit Guide. Click here for details.

Pay Grade Structure

This program groups jobs of equal value and worth into grades with a competitive salary range, explains Faurote, and this collection of pay grades is structured with a minimum, midpoint, and maximum level for each range.

Here’s a quick process for implementing such a program:

• Take a job worth hierarchy and add in market data.
• Look for break points to develop preliminary grades.
• Check job family grade progression.
• Check supervisor/subordinate relationships.
• Review internal/external inconsistencies and reassign some jobs, if needed.
• Review and update annually or biannually.

This method is often good for companies with multiple levels of jobs, says Faurote—it ensures proper hierarchy and makes it clear when promotions occur.

Step Pay (a.k.a. Seniority Pay)

This is basically an adjustment based on an employee’s time in the job, says Faurote. Employees get increases on a regularly scheduled basis based on length of service, which is seen a lot in union environments. It’s also popular with Baby Boomers, who value tenure, says Ahlrichs. This type of program works well:

• In manufacturing environments;
• When a job’s nature makes it difficult to determine performance (e.g., on an assembly line); and
• For companies that want to reward based on seniority.

Advantages: It’s easy to administer, budget, and communicate.

Disadvantages: No recognition of individual performance; employers must be careful to ensure increases aren’t so frequent that wages start greatly exceeding market rate.

Skill or Knowledge-Based Pay

This program pays the person—not the job, says Faurote. There is typically one starting rate for all employees, and employees advance one level for each new job or skill set they can perform. This is a popular method among the increasingly vital Millennial generation, who tend to be multitaskers focused on career progress.

Advantages: Encourages gaining new skills; promotes flexibility in work assignments.

Disadvantages: Individuals can top out when they learn all of the job skills; pay rates may conflict with market; if employees don’t use all of the skills on a regular basis, employers can end up overpaying.

All you need to avoid exempt/nonexempt classification and overtime errors, now in BLR’s award-winning FLSA Wage & Hour Self-Audit Guide. Find out more.

Market-Based Pay

This fairly straightforward program:

• Is strictly aligned with the market average pay;
• Typically has one pay range per job; and
• Totally ignores internal equity.

Many organizations are using market-based pay these days, says Faurote, and Ahlrichs adds this is especially true of organizations that are in highly competitive industries.

Advantages: Aligns pay exactly with the market so market competitiveness is ensured.

Disadvantages: Requires a lot of maintenance, including the tracking of many pay ranges; can be difficult to determine what an employee’s increase should be when promoted to a different position.

Have Wide Appeal … and Let Everyone Know About It

You have to try to find a way to make your pay program attractive to all generations of employees, says Faurote. And don’t forget one of the most important parts of your compensation program—effectively communicate it to your employees!

In tomorrow’s Advisor, Faurote and Ahlrichs’ top 10 common compensation mistakes, plus an introduction to BLR’s authoritative wage and hour self-audit guide.