A Guide for Creating a Salary Structure

A salary structure is an effective tool for an organization to administer its pay philosophy. A salary structure reflects the relative value of positions in the organization and allows the company a means to pay competitive rates against the market. When properly administered, the structure provides both internal equity and market competitiveness.

Depending on the organization, a different number of grades, grade ranges and midpoint progression may be necessary. A successful salary structure for one organization may not work well for another. When establishing a salary structure, the ranges and midpoint progressions should be tailored in a way that best meets the specific needs of the organization. While there is no standard for developing a salary structure, there are some best practices and free tools to build salary structures a compensation professional should consider.

Market Evaluation

Market evaluation, or benchmarking, is one component of developing the salary structure and should be done for at least 50% of an organization’s positions, according to the WorldatWork Course required for CCP certification: Job Analysis, Documentation and Evaluation. A market evaluation is achieved by reviewing the job description of the position and determining the appropriate job matches in the market. Once the market matches are identified, the position’s market value can be determined by either blending a collection of market matches or utilizing a single market match. When possible, the best practice is to blend at least two survey sources. After completing the market evaluation, a pay line can be developed. This paper assumes that the jobs within the organization have been evaluated and the market data has been identified.

Establishing the Salary Structure’s Pay Line

Following the benchmarking analyses, each position should be plotted on a chart, with the market values serving as the X and Y, as presented in Figure 1. If the organization conducts job evaluations using a point factor system (not discussed in this article), the job evaluation points, may be used for the X-axis instead.

The purpose of plotting each job is to identify logical job groupings based on the market data. Each point on the graph represents a position that has been evaluated and benchmarked. The job’s position on the graph is determined based on the market value and is represented by the pay line, which serves as a graphical representation of the increasing market value.

Job Grouping

Job grouping is the process that formally places positions in grades, creating the internal hierarchy. Job grouping may be done by establishing boundaries (e.g., every $10,000), or by looking at logical groupings based on clusters of positions.

Figure 2 groups the positions based on logical job clusters arising from market data, since both axes are based on market data. (Note: There are only nine job groupings, which may or may not be a sufficient number of grades, depending on the organization’s needs.) While establishing the grade ranges, attention must be paid to where the positions fall in relation to one another. Positions of similar internal accountability and external market data should fall within the same grade. Conversely, it is important to ensure that positions that are not of equal value internally fall in different grades. For example, a financial analyst and a senior financial analyst may fall within the same grade based on job evaluation points, but it is likely that these positions should be placed in different grades to recognize the senior-level position’s increased responsibilities.

Midpoint and Midpoint Progression

After the jobs have been grouped, grade midpoints should be considered. Midpoints can be established through a variety of ways, including averaging the market data for job groupings or by establishing a single midpoint and then determining other midpoints based on midpoint progression. There is no single best approach to the initial establishment of midpoints, provided they support the business needs.
After positions have been grouped into grades, the next step is to ascertain the relative value
of each grade by determining the midpoint progression (sometimes referred to as the differential). The midpoint progression is the difference between the midpoints of adjoining grades.

A best practice is to increase the midpoint progression as the job grades ascend. Increased midpoint progressions may reduce the likelihood for compression, which can lead to better recognition of increased complexity of jobs higher in range and improve retention in higher graded positions. As the ranges widen in more senior-level roles, compression may be more likely to occur. Increasing the midpoint progression may relieve the potential for compression. This can be seen in figure 3, below.

Although a 10%-15% midpoint progression is common, especially in administrative and professional job grades, it is not uncommon for organizations to utilize smaller or larger spreads. However, using smaller or larger midpoint progressions should be done cautiously.

Utilizing a midpoint progression less than 10% may not provide a meaningful distinction among jobs in different grades. Additionally, a salary structure with minimal midpoint progression may also require frequent maintenance as market changes in jobs may move positions into different grades as market fluctuations occur.

Conversely, utilizing too large of a midpoint progression may not allow for enough grades in the organization, unintentionally limiting the differentiation of jobs. A greater midpoint differential, coupled with increased salary ranges in higher grades, acknowledges the significant value and job complexities in senior-level positions. Figure 3 is a sample salary structure that utilizes varying midpoint progressions as the grades move into different classes of positions.

Salary Ranges

The salary range establishes the minimum and the maximum pay for each grade and enables the organization to effectively recruit and retain employees by enabling competitive starting salaries and promotional or merit-based salary increases.

Salary ranges are generally narrower at lower-level positions (administrative or clerical jobs) and become broader throughout the progression of the salary structure.

Broadening salary ranges through the progression of the structure allows the organization to recognize the greater level of responsibilities inherent as jobs move upward in the organizational hierarchy. Additionally, as positions move upward in the hierarchy, the incumbent has a greater impact on the role, and fewer options for promotion become available. Wider salary ranges allow the organization to continue to financially reward incumbents in those higher-graded positions.

How Many Grades?

The number of grades in a salary structure is less important than the overall salary ranges that the salary structure encompasses. A salary structure can be more effectively designed if the number of grades is the result of, rather than the starting point to, the design process.

Although the number of grades within a salary structure is not the most important aspect of the design, the salary structure should be designed so that it is easily understood by all employees and has the capacity for future growth as the market fluctuates and the organization’s needs change. Ideally, the compensation professional should not design a salary structure to meet a certain number of
grades. The number of grades should naturally result from a carefully planned structure with well-thought-out grade ranges and midpoint progressions.

Implementing the Salary Structure

For the salary structure to be successfully implemented, it must be understood by leadership
and employees, represent the organization’s pay philosophy, and be within the financial capacity
of the organization. There are several points to consider when implementing the new salary structure:

• How will the new structure be communicated to employees?
• Will the salary structure be considered fair?
• How will the new pay be financed?
• Should a phased approach be used to implement the structure?
• What will be done with employees above or below the new ranges?

The implementation of the new salary structure is also the point where employees whose salaries fall below the minimum of their pay band receive a salary adjustment. These potential adjustments to salaries should be reviewed with the Finance team to ensure the budget is available and with departmental leadership and managers to ensure that a communication strategy is in place. Tools such as CompTool can be helpful in these types of cost analyses since they can calculate the total cost on the fly.

Communicating the Salary Structure

Pay is a highly sensitive personal issue for employees. The development and communication of the new salary structure must be done with employees in mind. The communication should discuss how the plan upholds the organization’s compensation philosophy and the steps that were taken to ensure that the plan is internally fair and externally competitive.

Maintaining The Salary Structure

While the new salary structure should accommodate the organization’s positions at the time it is created, the structure should be revisited annually. Typically, salary structure movement will lag merit budgets by 0.5% – 1.0%. Historically, and in less turbulent economic times than we have experienced since 2021, typical salary structure movement would be somewhere between 1.5%-2.5% per year. However, in more recent years, wage movement has increased dramatically and structures have needed to be increased more significantly to keep up with wage growth.

In addition to holistic structure movement, individual jobs must be reviewed as well to ensure alignment to the correct pay grade. These market fluctuations necessitate the continuous evaluation of the salary structure and job reviews to ensure that the structure remains an effective tool to administer the organization’s compensation philosophy.

Financing the Salary Structure

A new or revised salary structure will likely affect an organization’s financial obligations. If the cost to adjust the salary structure is significant, the organization may wish to phase in the structure over several years.

Summary

A salary structure (aka grade structure) is an effective tool to administer organization’s compensation philosophy. It serves as a means to establish the relative internal value of positions and allows an organization to align itself with where it wants to be in the market. There is no one right way to create a salary structure; what works for one organization may not work for another. The salary structure must be tailored to the specific needs of the organization. Carefully planned grade ranges, midpoint progressions and job groupings, as well as considerations to the perceived fairness and financial implications, are crucial to developing an effective salary structure.