Benefits and Compensation

Pay Grades Are Key to Fair, Competitive Compensation

Whether you want to reward performance, time, knowledge, skills, or competencies, determining pay grades is the first step to creating an equitable, competitive compensation system. Without accurate pay grade determination, it won’t matter how valid the pay survey data you acquire are—your internal compensation will likely be too high or too low.

Pay grade determination is often overlooked, though, as many focus only on pay survey data in a process known as market pricing. But how can you price nonbenchmarked jobs without survey data? You need an internal method to grade and indirectly price them.

Today, we are delighted to have J. Timothy O’Rourke, president and CEO of Matthews, Young – Management Consulting, with us to answer some frequently asked questions about this important compensation topic.


Want to make sure your pay programs are effective? Start on Wednesday, September 16, 2015, with a new interactive webinar, Salary Structure Design for HR: Keys to the Most Successful Pay Programs. Learn More.


BLR: If an organization has never had a formal salary structure, but seems to be able to hire and keep people, is a salary structure necessary?

JTO: The marketplace has a way of making you offer enough to hire people. It may take a lot of negotiation to land the employee you want, but if the total package you are offering is too little, you will quickly learn what it takes. When an employee asks for a raise, another protracted negotiation often takes place, and the timing is never right. You rarely have time to stop what you are doing and research the market for the job in question.

I often hear executives and owners say, “Since we put the formal salary structure in place, we are still making the same decisions as before, but it sure is easier.” It may be that the biggest benefit from structuring compensation guidelines is the time and effort saved when making decisions that should be relatively routine.

All supervisors like to make consistently fair decisions, and with no structure for their decisions, I find that they will work hard —maybe harder than necessary—to make consistently fair decisions. No system will handle all of the decisions that you will face, but a structured approach to compensation will save time and effort on the routine decisions for use on the complicated ones.


Get the most bang for your buck. Join us Wednesday, September 16, 2015, for a new interactive webinar, Salary Structure Design for HR: Keys to the Most Successful Pay Programs. Earn 1.5 hours in HRCI Recertification Credit and 1.5 hours in SHRM Professional Development Credit. Register Now


BLR: What are the prerequisites for building a formal salary structure?

JTO: Properly described jobs are the only real prerequisites. The best job description format for compensation purposes not only describes the essential functions of the job, but also describes the necessary prerequisite knowledge, skills, and abilities (KSAs) that are needed to begin to do the job. Described as such, a market analyst can find surveyed jobs that match the KSAs of the job being analyzed. Then, survey data can be used to slot the job into a properly designed salary structure.

The marketplace is driven by the demand for KSAs, and the supply of such KSAs in the appropriate locations. A good example might be from the IT market. Let’s say you need a coder to build a new system that has been defined by the systems folks.

The price you will pay to attract and retain the coders will depend on the supply of people in your market with the coding language skills defined for the system design. I can code in Common Business Oriented Language (COBOL), but nobody uses COBOL any more. If I knew JAVA, some companies would hire me to code for them.

Tomorrow: O’Rourke’s take on the science (and the art) of building an effective salary structure and an introduction to an interactive webinar, Salary Structure Design for HR: Keys to the Most Successful Pay Programs.