20 QUESTIONS ABOUT COMPENSATION STRUCTURES
We frequently hear questions from clients about job grading and salary structures. Chances are, you too have been curious about what other organizations are doing as it relates to their framework for evaluating jobs. Designing an overall pay structure is one of those core building blocks for a compensation professional, but even the most seasoned compensation expert wants to have an eye on the competitive landscape to validate their approach.
We’ve put together a list of 20 common questions with responses to each. There are very few ‘right’ or ‘wrong’ ways to go about setting up your job leveling and pay structures, but there is one common theme that runs through each response. That common theme is that whatever approach you take should align with your organization’s compensation philosophy and human capital strategy. Implementing or overhauling a compensation structure is a significant undertaking that can have lasting impacts to your organization.
1. Do we really need to have salary structures and job grades?
The short answer is ‘no’, but before you decide to go all free-range to your compensation structure, there are some things you should consider. Here are some perceived pros and cons to having a salary structure and job grades.
We often see the primary objective of an organization’s compensation function is to help attract, retain and engage talent needed by the organization. However, there is also a stewardship accountability as well to make sure there are adequate management controls, not just cost controls, but also controls for planning and organizing. Balancing those objectives against the perceived advantages and disadvantages of a salary structure, some companies have been ditching formal salary structures and replacing with pure market pricing. However, the areas where this is happening is in the most dynamic labor markets and even then, it is still a minority of firms.
The more common approach we see is for organizations to use some form of hybrid approach where they rely primarily on market pricing to evaluate jobs, but overlay market pricing onto a pay structure. Fifty-four percent (54%) of responses to a recent polling we did of 304 organizations indicated that they follow this hybrid approach of using a market pricing on top of a salary structure.
2. Can we use more than one structure?
You sure can use multiple salary structures, if it makes good business sense. Using multiple pay structures adds administrative complexity and adds to the challenges of being able to communicate clearly about your approach to pay. However, the offsetting benefit can be that you have structures that are better connected to the needs of a subset of your workforce.
One area where organizations contemplate having a secondary pay structure is for hot labor markets, such as information technology or engineering. You can use Aon’s Total Compensation Measurement® (TCM) survey to analyze pay data by job level and by job family. Depending on your firm’s labor market scope cuts and the composition of job families you have, you may see a significant difference in salaries across the job families.
3. What’s the right number of job levels?
The ‘right’ number of job levels is going to depend on finely you want to cluster the nature of work activities. Aon’s JobLink™ is our proprietary job evaluation methodology. We use fourteen distinct grade levels defined in our methodology.
4. How do we keep our pay structures current?
There are two methods commonly used:
- Wholesale adjustment of structure based on Salary Increase Survey projections,
- Job-level market pricing
The wholesale method is easier and far less time consuming. For this approach, you simply apply a single increase factor to your entire structure.
The more reliable approach is to refresh to salary survey market matches for each job. If you then use a scatter-plot graph of each market composite, you can then update your pay structure based on the market data points for your benchmark jobs.
5. What’s the right way to assign jobs to pay grades?
Even for organizations who use a hybrid approach of overlaying market pricing onto a pay structure, we would review and evaluate every job and market price as many as possible. There are several internally focused job evaluation methods you could use, such as whole job slotting or job factors plan such as our JobLink methodology.
6. How much pay differential between job levels is most common?
Overall, we see an average differential of about 25% between job levels. The differential is bigger as you start to move into the senior management roles and lower for the hourly and entry-level individual contributors.
7. How much spread should we build into each salary grade?
The amount of range spread, i.e., the distance from the range minimum to the maximum, also tends to increase as you move up higher in the grade structure. At the lower job levels which are typically unskilled or entry-level production workers, the amount of range spread can be as low as 15% +/- the range midpoint. The amount of variation in work activities is small at these lower job levels and there’s no need to have much wider ranges than that. We see range spreads increasing as at higher job levels and could be as much as +/- 25% - 30% for mid-level and senior level management roles.
8. What’s the connection between compensation structure and career path framework?
We believe there is value in having your compensation structure and your career path framework working well together. Our own JobLink model (shown above) includes not just the fourteen global job grades, but also the four career path areas of:
- Individual Contributor
Both the pay structure and the career architecture should also organize work by major job families and sub-families. For example
- Job Family – Finance
- Sub-Family – Tax
When you put grades, career path areas and job families together, you provide clarity to individuals on where they can grow in the organization, both professionally and financially.
9. Can we use one structure to operate in multiple locations?
Yes, this is very common for organizations that have multi-unit operations. Typically, what companies will do is define one pay structure and have all of their jobs evaluated and assigned to a job level. Then, they will have geographically adjusted versions of the same structure to meet the needs of the relevant labor markets for each location.
10. Can we use one job grading structure globally?
Conceptually, building a salary structure that works in multiple countries is similar to designing a structure for multiple cities in the U.S. Using our Global TCM data, we created our Global Cross-Country Analyzer to provide clients with a holistic view of the pay levels across the different countries and regions where they operate. Because the data used for this tool is all derived from our Global TCM database, the outputs are all in sync with our global job leveling methodology.
11. Can pay grades help determine incentive eligibility?
Yes, we see a tight correlation in short-term incentive eligibility based on our JobLink leveling progression. At the lower grade levels, just over half of the incumbents are incentive eligible. The percent eligible climbs steadily as we climb through the job levels before plateauing at the Expert – Principal job levels (8 and 9), where roughly 75% of the incumbents are incentive eligible.
12. Is it normal for companies to communicate their compensation structure to employees?
The amount of pay transparency that is right for each organization is highly dependent on their organizational culture. Cultures that are tightly controlled and secretive may not even be comfortable telling employees what their job grade is or what their individual pay range opportunity is.
A more open culture will support the level of pay transparency to where you will commonly see:
- Job grades included on the job description and internal job postings,
- Employees knowing what their current pay range values are,
- Knowing what jobs are assigned to what grade levels,
- And possibly even knowing the pay range values for their pay structure
13. What do front-line managers need to know about the salary structure?
Front-line managers play a critical role in the communications with employees about pay. Think about how ineffective that moment of truth could be when an employee asks their manager about how they fit into the salary structure and the only response the manager gives is, ‘Go ask HR’. Instead, you should arm line managers with the information they need to have that conversation with their team member.
You should make sure managers are conversant with at least the same information you will share with their team.
14. We just acquired a company, should we consolidate them onto our corporate salary structure?
One of the driving forces behind acquisitions is to achieve efficiencies. Consolidating the acquired company onto the parent’s salary structure is often one of the ways companies try to squeeze out more efficiency. That said, you should do your due diligence to assess the rationale, competitiveness, and cost implications of rolling onto the corporate structure.
15. Do companies typically use pay grades and ranges for their executives?
Pay grades and salary ranges are less common at higher levels in the organization. Pay for senior executives is predominantly done through pure market pricing and decisions are made in comparison to specific peer companies.
From our most recent TCM Executive and Senior Management survey results, we see range midpoints reported only 33% of the time when the base salary median is above $400,000. For lower paid roles, the prevalence of a range midpoint is just over half (55%) of the companies reporting.
16. How does a compensation structure affect salary administration?
Definitely yes. You really shouldn’t make wholesale changes to your pay structure without addressing how all your salary administration processes will be impacted. Whether you are implementing your organization’s first pay structure or moving from a highly-structured pay system to pure market pricing, you should define up front how you are handling:
- New hire pay practices
- Merit increases
- Promotions, lateral transfers, and demotions
- Red circle / green circle rates
17. Our company is in high-growth mode, how do we build a pay structure that will make sense now and 5 years from now?
The key to your success will be in how well you can anticipate what the future needs will be. You will want to ensure you have flexibility in your structure to serve your needs in your current phase of growth. A few things that are likely to happen in a high-growth organization are:
- New jobs
- Additional layers of both staff and management roles, and
- Possibly the revenue scope cuts you need to use for executive and senior management roles
18. We want to transition from a traditional compensation structure to pure market pricing. Are there any tips we should keep in mind?
Adopting a pure market pricing approach after having been on a traditional compensation structure with grades and pay ranges is a significant undertaking. Be clear as to the driving force behind why this change is necessary. This should be helping you achieve your overall human capital objectives more effectively as opposed to, ‘well, this is what we did at my last company’.
Some specific tips you should watch out for though would be:
- Data sources: Ensure you have adequate survey data coverage from reliable sources. With pure market pricing, you will need to have a comprehensive survey library.
- Internal Resources: going the route of market pricing can be administratively easier than an internal job evaluation, but that’s not the same as saying that it is easy. Be sure that you have the staff and the data tools necessary to be able to quickly and accurately market price each job and refresh the results annually.
- Communications: Don’t underestimate the impact this will have on both manager and employee communications.
19. Can exempt and nonexempt jobs be in the same pay grade?
Yes, they can be. The exemption status under the Fair Labor Standards Act (FLSA) is more concerned with pay type (hourly vs. fixed salary) and when overtime pay is required. The real question you should consider though is whether you would want them to be in the same pay grade.
Similar to how we have the support career path separated from the individual contribor career path, you may want to consider having two sepaate salary structures.
20. Should our pay range structure reflect base pay or targeted total cash compensation?
While it’s possible to use either compensation value, the far more common approach is to use base salary. Using targeted total cash compensation might make more sense in an organization where the compensation philosophy puts heavy emphasis on incentive pay.
Where Do You Go From Here?
This Q&A post will hopefully spark thinking for you and provide some perspective on things you may need to consider. You will likely have even more questions as you start to assess what is right for your organization’s philosophy and human capital strategy. No worries though, we have the survey data and consulting expertise to help you navigate what approach is right for your organization. Contact us to learn more.