4 Steps to Building Smart Compensation Structure

Jennifer Ferris, CCP Compensation Professional

Ian Englund, CCP

Compensation Professional

www.payscale.com

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14,000 Positions 3000 Customers 11 Countries

250 Compensable Factors 40 Million Salary Profiles

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Agenda Why have pay structure

Requirements for building structure

Building Structure • Step 1: Identify pay schedules

• Step 2: Determine pay grades

• Step 3: Develop ranges

• Step 4: Assign grades to positions & adjust for internal equity

Using Pay Ranges

Immediate Actions

Why have pay structure

4

• Clarifies the market and internal value for each job, and provides a way to manage employee pay effectively

• Quantifies compensation costs & enables budget decisions

• Validates compensation strategy & aligns to business goals

• Provides a tool to talk with employees about development

• Ensures pay equity

• Determines pay for non-benchmark jobs

• Allows ease of administration

REQUIREMENTS FOR BUILDING

PAY STRUCTURE Develop a compensation

philosophy & strategy

Know your jobs

Conduct a market analysis

Pay Schedules

Pay Grades

Pay Ranges

Pay Structure Elements

Building Structure Step 1: Identify Pay Schedules

Identify Pay Schedules

o Groups like geographies together with the same set of pay grades

o Streamlines pay structure

o Consider how complex your organization is

o Industries and/or lines of business

o Retail & Social Services

o Sales

o Engineers vs Admin

o Locations

6 Different Pay Schedules:

o Home Schedule– 3 labor markets, within 2.5% of HQ

o Schedule A, Minus 15% Schedule – 4 labor markets

o Schedule B, Minus 10% Schedule – 7 labor markets

o Schedule C, Minus 5% Schedule – 4 labor markets

o Schedule D, Plus 5% Schedule – open

o Schedule E, Plus 10% Schedule – 1 labor market

For example…

Building Structure Step 2: Determine Pay Grades

Determine Pay Grades

oNumber of pay grades varies in response to:

o Size of the organization

o Distance between the highest and lowest level job

o How differentiated are the jobs (i.e. levels)

o The pay increase and promotion policy of the organization

oDetermine the definition or label for each grade

Building Structure Step 3: Develop Ranges

o Midpoint Differential.

o =(MidB-MidA)/MidA

o Range Spread.

o =(Max-Min)/Min

o Min relative to Mid.

o =Mid/(1+(Range Spread/2))

o Max relative to Min.

o =Min*(1+Range Spread)

Develop Ranges

Considerations

o Range Spread at base vs top of structure

o Overlap between pay ranges

Building Structure Step 4: Assign grades to positions and adjust for internal alignment

• Align positions to structure by matching market value with closest range midpoint

Assign Grades to Positions

Adjust for Internal Alignment

• Adjust for internal alignment.

• Positions with similar level of responsibility and value to the organization

• Where market is between two grades, use internal equity to tip

Example

Internal Title Grade Billing & Collections Specialist I 1 Member Services Specialist I 1

Accounts Payable Specialist I 2 Billing & Collections Specialist II 2 Branch Inside Sales I 2 Member Services Specialist II 2 Quality Assurance Analyst I 2

Accounts Payable Specialist II 3 Billing & Collections III or TL 3 Branch Inside Sales II 3 Marketing Coordinator 3 Office Manager 3 Project Coordinator 3 TAC Engineer I 3

Branch Inside Sales III 4 Corporate Accountant I 4 NOC Technician I 4 TAC Engineer II 4

Corporate Accountant II 5 NOC Technician II 5 Project Manager I 5 Software Development QA I 5

How do you use

pay ranges?

• Determine employee

placement in range

• Develop guidelines or

policies

Understanding Range Penetration (RP)

RP = (EE Pay – Range Min) / (Range Max - Range Min)

• Indicator of how employee is positioned in the range

• Use RP in policies to get specific

Employee Placement in Range

Range Midpoint Minimum Maximum

$20,000 $32,000 $26,000

Range Midpoint:

Range Minimum:

Range Maximum:

Lower limit of a pay range/band. Pay for new or less experienced employees should be closer to minimum.

The midpoint identifies the proficiency point. Market

based ranges have a midpoint that aligns with the

target percentile in the market.

The upper limit of a pay range/band. Pay for more tenured employees or star

performers should be approaching this number.

Employee Placement in Range

Range Midpoint Minimum Maximum

$20,000 $32,000 $26,000

Green-Circled Employees Red-Circled Employees

Employees that are paid below the minimum of the pay range.

Employees that are paid above the maximum of the pay range.

Comparing Employee Pay to Ranges

Range Midpoint Minimum Maximum

$20,000 $32,000 $26,000

50% Penetration

33% 66% 100% 0%

Range Penetration: A percentage that shows an employee’s position in the range. The percentage shows a relative comparison to the minimum of the range. = (Employee Pay – Min) / (Max – Min)

Range Penetration = 0% Employee’s pay is at the minimum Range Penetration = 50% Employee’s pay is at the midpoint Range Penetration =100% Employee’s pay is at the maximum

Immediate Actions Gather information about your jobs

o What are the key skills, experience, and education required?

o What are the top 3 responsibilities?

Talk with managers and executives

o Where are you recruiting (or losing) your talent?

o Begin to explain the usefulness of pay ranges

Obtain accurate market data for your positions

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Jennifer Ferris, CCP Compensation Professional Ian Englund, CCP Compensation Professional

www.payscale.com