Best Practices in Pay Range Systems

HR Resource
February 6, 2013 — 2,275 views  
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A best practice is methodology or a technique that makes innovative use of resources such as equipment, technology, data, personnel, etc. that results in a measurable and significant improvement in performance (or operation) of business.

Often a firm's largest costs are the wages and salaries paid to employees. This can go up to 70% of the operating costs of a company, annually. The key to getting the right talent is creating impartial and comprehensive employee compensation plans and pay structures.

Designing best-in-class pay structures requires a systematic and detailed understanding of external factors such as market salary and applicable regulations, and internal factors such as job descriptions, job analysis and employee data.

Employee Compensation and Market Based Pay Structures

Market based pay will help the management understand what elements are driving benefit and salary expectations, which in turn effects recruiting and retention. Certain technologies can provide external data. However, when such data is easily available and yet it is not analyzed in sufficient context, it can result in inflated expectations and salaries.

While getting data from the market is good, it is better to know how to apply it to varying or unique circumstances.

So What Is Market Based Pay?

Market based pay is a formal process where the external value of a job is determined, to help companies face realities of the external market, when competing for talented employees. When a company goes in for market based pay, externally competitive employee compensation structures get established.

There are several advantages of choosing to implement market based pay.

  • You have an objective standard in front of you and you can use it to establish job ranges.
  • A competitive pay range is established, and this helps retain employees.
  • Market based pay needs less maintenance.
  • The results cannot be manipulated easily.

Expertise and skill is required to establish market based pay structures initially. But it will become sustainable once the company culture accepts the initial philosophy. It can also be technically combined with job valuations.

Here's One Way to Do It

Create a report that combines your firm's baseline with market studies and other data (that compare pay). Salary studies can be obtained from outside, but they should be managed in-house. The report should list:

  • Job titles.
  • Points assigned to the position.
  • Present pay structures for that position (if you have more than one person on a position, take an average).
  • Pay offered by external competitors or average pay collected from a survey source.
  • How far you are ahead or behind external sources
  • An overall percentage of how ahead or behind your organization is after combining all the external data.

Importance of Best Practices in Pay Range Systems

Reduce Costs of Operation

  • Improve retention.
  • Eliminate pay and position creep.

Ensure Compliance and Eliminate Risk in Business

  • Minimize audit and examination costs.
  • Limit liability as well as legal costs exposure.

Increase Efficiency in Operations

  • Integrate existing process and systems.
  • Unique value can be developed from job descriptions.
  • HR resources can be focused on value-adding concerns such as talent management.

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