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26Oct 2020

How to Create an Employee Pay Structure

how to create employee pay structure

Creating an Employee Pay Structure: Here’s what you need to do


Developing a compensation structure is a critical element in an organization. It takes a lot more consideration than simply looking at the person’s last salary and determining aamount based on qualification and the years of experience. While that may work for smaller organizations it is neither effective nor recommended for large or well-established organizations in the long run.


Pay structure is employee compensation for different jobs or groups of jobs.  A market-based competitive pay structure makes it easier to not just retain current employees but also makes recruiting, hiring and promotions more focused and easier to execute.


If you’re an experienced HR or an employer struggling to create a fair compensation structure, here are some tips to get you started:-


Conduct Job Analysis and Job Evaluation


Internal job titles and descriptions of an organization are not always aligned with the market. For instance, a VP in your organization may be a senior manager according to the market. Therefore in order to create a market-based compensation structure it is important to evaluate all the jobs as per market standards. Start by outlining job duties, responsibilities and qualification for each position in your organization and look at common job descriptions with duties and responsibilities matching with the position in your organization. Determine the value of each position in your organization.


This is done by comparing each role based on parameters like skills, knowledge, effort required, qualification and impact on revenue. You can extract the market data and compare with what the employee are paid at your organization for similar roles. You can use employee-reported data, surveys, HR data and websites like Glassdoor, Ambitionbox, Payscale etc. to look for such information.


Consider your Company’s Competitive Position


Once you have the market data, you can find out the average salary paid for each position in the market and compare it with your organization. You can find out if you are paying above, below or equal to the market rates. If you are paying below the market rate, you can decide whether you want to pay equal to or above the market rates to retain and attract the best talent.


Develop a Salary Structure for your Organization


With the help of all the analysis you would have done so far, you can now develop a salary structure for your organization. You can decide whether you want to create a salary range for each position by defining the minimum and maximum points or you can create pay grades with different positions grouped together within the same range.


Plan to Update Pay Structures


Market rates change and unemployment rates, cost of labor can fluctuate. Therefore, it is important to update your pay structure based on the market conditions. In fact, an organization should revise their pay structures every 12-18 months. Pay structure revisions can involve asking questions like:-


  • Are your salaries competitive?
  • Are there new positions being created that have to be included in the pay grade?
  • Is there room for performance rewards?
  • Do the employees perceive the compensation structure as fair?


If you feel some employees are underpaid, you can consider giving them a raise in the next appraisal to bring them up to the current market levels. Alternatively, if you feel some employees are overpaid, you can consider freezing their salary until the market rates come down to the level. That, however does not mean that you ignore the good performance or efforts of the employees. You can consider other benefits that do not correspond to the salary like gift coupons, a certificate of appreciation, a vacation etc.


Educate the managers/respective departmental heads


It is imperative to educate your managers on your company’s compensation structure and philosophy so they can administer pay raise, promotions accordingly and also hire new talent keeping the salary structure in mind. Tell them about pay grades or individual salary ranges work, educate them on the process the company used to evaluate job roles in accordance with the market standards, how they administer increments and finally whether and by how much they can divert from the set ranges when recruiting new talent.


Pay structures offer companies an equitable way to offer compensation to its employees. A fair compensation structure won’t just engage and retain employees but also attract great talent that will chart both the company’s and employee’s path to higher growth and pay.