Creating a Competitive Salary Structure

INTRODUCTION

Each employee in an organization is paid a salary. Salaries vary greatly, with executives
earning as much as (or greater than) 100 times an entry-level employee's salary. This variation
is not by chance. It is rationally established through a salary structure – a hierarchy of salaries.

Organizations develop this structure based upon internal factors (such as current rates, job
relationships, and custom) and external factors (such as labor markets and laws). Salary
structures integrate these factors to create a hierarchy, in which every job of the organization
has its place.

Before establishing a salary structure, you must first have a job structure: a hierarchy of your
organization's jobs based upon their value to the company. Distance Learning Center Courses
33 (Conducting Job Analysis) and Course 34 (Installing Job Evaluation in Your Organization)
teach you how to create a job structure. For the purposes of this course, we will assume that
you have conducted job evaluation for your company, established a job structure, and are now
ready to create a salary structure.

We will teach you how to do this by:

 plotting your organization's jobs on a matrix drawing a line through the scattering of dots
 using this line to determine median salary rates, with which you can establish salary
ranges

You will then learn how to administer and maintain this salary structure, including how to audit
it using research software.

DEVELOPING A SALARY STRUCTURE

The job structure (covered in DLC Course 34 on Job Evaluation) presents the compensation
decision maker with a hierarchy of the jobs in the organization. A dollar value now needs to be
placed on this hierarchy. This value is available from either:

 the jobs' current salary rates

OR

 market data collected from salary surveys

Current Rates

The present wage and salary rates in an organization will clearly influence any changes made
in its current salary structure.

In most organizations there is a fairly well-defined group of jobs that represents an important
segment of the total labor costs of the company.1 Prices assigned to this group of jobs may
greatly affect an organization's competitive position. Rates assigned to these jobs during job-
structure pricing largely determine the competitive salary level of the firm, and salary
structure relationships are built around this cost center.
Market Rates

Most often, however, the job structure is priced out through the use of market rates. This
means the employment of salary surveys. (See DLC Course 73: Analyzing Salary Surveys for
information on wage surveys.) One such source of salary survey data is SalariesReview.com,
which provides median pay data for 4,000 positions in 6,000 cities worldwide.

When you use salary survey data, you must adjust the figures for:

 single rate determination

 planning date
 organization policy

Single rate determination

The salary data do not provide a single rate but a range of figures. Therefore the best single
rate to use, such as the mean or median, needs to be determined. (This set of decisions is
dealt with in DLC Course 19: Quantitative Methods Used in Salary Administration.)

Planning date

Salary survey data predates the effective date of the salary structure you are building.
Therefore, you will need to update (age or trend) the data by multiplying the salary figures by
a constant percentage, representing the salary increase of the interim.

Example: If the data was collected one year ago, you may want to age the data by a
percentage of 2%.

Organizational policy

Your organization must decide whether it will pay:

 above
 below

OR

 at market rate

Most organizations choose to meet the market rate. Those that wish to pay above market hope
to recruite and retain the best talent. Those that pay below usually do so because their
budgets are constrained, or industry (such as nonprofit) dictates this position.

The organization's strategy toward the labor market also requires a salary level policy decision,
since the new salary structure is going to be in operation over time. This decision involves
determining how competitive the organization wishes to be while the salary structure remains
in effect.

There are three basic strategies for an organization's salary policy:

 lag the market
 lead the market
 lead-lag

Lag the market. In this strategy, update the salary survey data to the beginning of your next
compensation year (calendar year, fiscal year, or another appropriate date) and then install
the new salary structure. If a change in the labor market of 10% is assumed for the next year,
then the only time the organization will be competitive with the market is at the beginning of
the year. By the end of the year, any decisions based upon the salary structure will lag the
market by 10%.

Lead the market. In this strategy, the organization wishes to pay above the market rate.
Start the year at 10% above the salary survey data. By the end of the year, the organization
will be paying the market rate.

Lead-lag. Here the organization takes account of the 10% estimated change in the market but
wishes to meet the market at midyear. You can do this by starting the year at 5% above the
market rate. Provided the increase is steady over the year, this strategy will place the
organization ahead of the market the first half of the year and behind it the second half.

These three strategies are illustrated below.

Salary Level Strategies for Adjusting Salary Structures

Pricing a Job Structure

Once you have the job structure (from job evaluation) and the salary rates (from current rates
and/or market rates), you can create a salary structure. The first step is to plot these 2 sets of
data on a grid, in order to create a scatter diagram.

Scatter Diagram

Vertical axis

The dollar value (market rate) for each job occupies the vertical axis.

Horizontal axis

The organizational rankings are on the horizontal axis. There are 3 possibilities for the
horizontal axis:
 market (salary) rate
 job evaluation rates
 negotiated rates

Market rates. Assuming that the organization wishes to pay competitive market rates for
jobs, you will place dollar values on both axes, making a totally consistent structure. Clearly
this alternative assumes that there is a market rate for all (or most) of the organization's jobs
and that this rate is satisfactory.

Job evaluation rates. The most common alternative for the horizontal axis is the set of
ratings developed through job evaluation. Depending upon the method of job evaluation you
used, these ratings may consist of a ranking of jobs from low to high, a series of classification
levels, or a range of points. In the case of the graph above, the job evaluation system placed
jobs into grades of 20 points.

Negotiated rates. Where there is a union, the hierarchy of jobs may be a negotiated ranking
based upon custom or the relative power of a group of unions.

Developing the Pay-Policy Line

To create a smooth progression, you will need to fit a pay-policy line to the plotted points. The
line may be straight or curved, and may fit a number of different methods.

Methods

When plotting job structures of single job clusters, a straight line is usually employed. Types of
lines include:

 low-high
 freehand
 least-square

Low-high line. This is a straight line connecting the highest and the lowest of the plotted
points (often called anchor points). The rates of all intervening jobs are made to fall on the line.
The low-high line appears especially useful in union bargaining of the salary structure because
of its flexibility. When a final bargain is reached, you may implement it by raising either end or
both ends in such a way that reflects the contract. Below is an example of a low-high line.

Multiple Salary Structures

An organization may have several salary structures, one for each broad job cluster, for
instance. The choice may depend on whether job evaluation is formal or informal; if formal,
the choice further depends on which type of method is used.

 The ranking, classification, and factor-comparison methods lend themselves to a single job
structure for the organization. Even these plans, however, are often applied to distinct job
clusters.
 The point method is more likely than any of the other three to be designed for a single job
cluster.

REVIEW OF JOB EVALUATION METHODS

Ranking Rank the jobs in the organization from highest to lowest.

Classification Define classes or grades of jobs and fit the organization's jobs into them.

Factor
Compare jobs on several factors to obtain a numerical value for each job.
Comparison

Rate each job on several compensable factors. Add the scores of each factor
Point Plan
to obtain a total point score for each job.

(These methods are reviewed in DLC Course 34: Installing Job Evaluation in Your Organization.)

Exempt vs. nonexempt jobs

Organizations with more than one salary structure usually have separate structures for exempt
and nonexempt groups of jobs.

 Exempt structures are often divided into professional and managerial groups.
 Non-exempt structures are usually divided into production (or manufacturing) workers and
office (administrative) staff.

There seem to be 2 reasons for these breakdowns:

1. It may be difficult to compare these different types of jobs, in which case the horizontal
axis of the scatter diagram is not useful.
2. More importantly, the slope of the pay-policy line for these groups may be very different.
At opposite extremes are physical laborers, with a very flat slope, and the managerial
group, with a very steep slope. Further, the pay-policy lines will start and stop at different
places, so that there will be little overlap between them.

Discrimination

One problem that can occur in constructing separate structures is discrimination. If a structure
contains most of the female or minority-dominated jobs, then the structure may appear
discriminatory. Therefore, all job clusters that constitute a salary structure need to be
examined for their gender and racial composition. If women and minorities are segregated,
then the composition of jobs in all groups will have to be balanced by gender and race.
Low-High Pay-Policy Line

Freehand line. After you plot the points, you can visualize the trend of the data. In this case,
it is possible for you to draw a freehand line that best describes the plotted points. A freehand
line is not commonly used since software programs are able to quickly calculate the least-
squares line. Below is an example of a freehand straight line.

Freehand Straight Line

Least-squares line. The least-squares line minimizes the overall vertical distance from the
points to the line. Spreadsheets and other software can automatically add such trend lines, or
the slope and intercept of the least-squares can be calculated from the points and the resulting
line plotted. (See DLC Course 49: Regression Analysis Used in Compensation Administration for
instructions for computing a least-squares line.)

Which line should you use?

In most cases, a low-high (anchor-point) line or a freehand line achieves the level of accuracy
inherent in job evaluation results. Furthermore, both permit adjustment to achieve agreement
of committee members, or union and management, on salary determinations.

Professionals or other statistically sophisticated groups, however, may prefer a wage line
calculated by least squares. Experience suggests that the additional accuracy of the least-
squares line (compared with that of a freehand line) is seldom sufficient to offset the added
difficulty of explaining the method involved to the statistically unsophisticated.

COMPLETING THE SALARY STRUCTURE

At this point the salary structure consists of a horizontal dimension and a vertical dimension,
with a pay-policy line derived from the plotting of jobs. You could plot every job in the
organization on the pay-policy line to determine its salary. For the sake of convenience and
practicality though, most salary structures group data on both the horizontal and vertical
dimensions.

• On the horizontal dimension, group jobs into salary grades.

• On the vertical dimension, group money into salary ranges.

Salary Grades

If job structures of individual jobs are developed, as is done through job evaluation, it is
possible to assign an individual dollar value to each and every job. However, simplified wage
and salary structures are easier to administer. On the job side, this means grouping jobs that
are close together in the hierarchy into "grades" for pay purposes.

A salary grade is a group of jobs that have been determined by job

evaluation to be approximately equal in difficulty or importance to the
company.

Using grades, large organizations can save much time and effort. Dealing with 10 salary
grades rather than 100's of job rates is much more convenient. When individual job rates are
used, even small changes in duties may require changes in salary.

Job evaluation method

The following job evaluation methods dictate the type of salary grades you will use.

Point Plan grade contains jobs that fall within a range of points

Factor
grade is a range of evaluated rates
Comparison

Ranking grades are a number of ranks

 a grade consists of all jobs that are comparable to
Classification
the level description

How many salary grades should you use?

There appears to be no optimum number of grades for a particular salary structure, and in
practice, grades vary from as few as 4 to as many as 60. If there are few grades, the number
of jobs in each will be relatively large, as will the increments (midpoint-to-midpoint differential)
from one grade to another. If, on the other hand, there are many pay grades, the number of
jobs in each grade and the increments between grades will be relatively small.

In the end, most organizations use 10-16 grades for a given job structure. Broader salary
structures, of course, contain more grades. For example, salary plans that encompass clerical,
professional, and administrative employees may average 16 grades.

Pay distance between grades is commonly calculated using a midpoint-to-midpoint differential

and they typically reflect:

• 7 – 9% for hourly and clerical jobs

• 10– 12 % for professional and administrative jobs
• Managerial structures may have differentials between grades 20% and higher

The actual establishment of salary grades is a decision-making process designed to:

• ensure that the grades fit the organization and the labor market
• place jobs of the same general value in the same salary grade
• ensure that jobs of significantly different value are in different salary grades
• provide a smooth progression

Broadbanding

Recently, there has been a trend toward reducing the number of

grades in a salary structure. This movement is called
broadbanding. The impetus for this movement has been the fact
that organizations are becoming smaller and the workers must be
more flexible, reducing the number of management levels and
degrees of bureaucracy.

Broadbanding results in reducing the number of salary grades and

making them "fatter." The minimums and maximums for salary rates
are increased, and the number of points covered in the job structure is
increased.

Some companies use broadbanding with the traditional controls inherent in salary grades, such
as midpoints, minimums and maximums. Organizations that use broadbanding in this manner
tend to reduce the number of grades until they are about twice as wide as they used to be.

Advantages. It is claimed that broadbanding increases the prospects for cross-functional

growth and employee development in the organization. Broadbanding helps employees to
move laterally in an era in which promotion prospects have been reduced.
Easier to administer? Whether broadbanding is easier to administer or not is a matter of
your point of view. It is clearly more flexible and gives supervisors a greater ability to reward
their employees without the continuous need to promote in order to provide more financial
incentive.

On the other hand, it can create a much more chaotic system. It also can lead to inconsistency
and feelings of favoritism. Both employees and supervisors have ambivalent feelings when the
supervisor uses personal discretion for something as important as pay.

How to set salary grades

Before determining salary grades, it may be wise to assess how many jobs and how many
employees are affected by the number of grades and the division chosen. This can be done by
plotting each employee on the salary structure matrix and noting whether there is a spread of
employees over the matrix.

Employee acceptance. Since large numbers of employees may be affected by small changes
in salary grades, great care and fairness must be used in determining salary grades.
Grievances can be avoided by seeing that salary grades with large numbers of employees are
not placed in a grade that greatly changes their pay rate.

Because jobs in a salary grade are treated as identical for pay purposes, it is extremely
important that employees accept grade boundaries. For this reason, it is often useful to move
jobs that are very close to the maximum cutoff point into the next higher grade.

Methods

There are a number of ways of grouping jobs into a limited number of grades. We will examine
4 of these approaches:

• cluster
• division
• midpoint-progression
• continuum

Cluster approach

The simplest approach is to make a scatter diagram of the organization's jobs, as is done in
establishing the pay-policy line. When you do this, you can often observe that the jobs tend to
cluster rather than scatter evenly. You can take advantage of this effect by encasing the
clusters horizontally and vertically, as illustrated in the figure below.
Cluster Approach to Salary Grades

Advantage. Clustering has the advantages of simplicity and flexibility: it can be changed each
time the salary structure is adjusted. It tends to be used with ranking or slotting methods of
job evaluation, so small organizations are more likely to use this approach.

Disadvantage. This provides all three dimensions, but none of them is arrived at consistently,
nor are they likely to be symmetrical. This may have a negative impact on salary and career
progression in the organization.

Division approach

Another relatively simple approach is to use the horizontal dimension of the salary structure –
the job evaluation points – to determine the number of salary grades. This is done most easily
by determining a set number of points for each salary grade. Then, starting with the least
number of points, you mark off the lines between adjacent grades. In the figure below, each
salary grade is 40 points wide.
Division Approach to Salary Grades

An alternative to using a set number of points for each grade is to use increasing numbers of
points as you move up the scale. This would answer the difficulty experienced in job
evaluation of determining exact differentials between jobs higher in the hierarchy.

Market rate. In the division approach, the market rate for each grade should be set by
placing the range midpoint at the point where a vertical line from the point value in the middle
of the grade meets the pay-policy line. For the figure above, this is 200 points for level 3.

Job evaluation. This method can be used successfully with a point system of job evaluation
and can also be adapted to other systems, such as classification.

Midpoint-progression approach

This method is a little more sophisticated and allows for broader definition at higher grades. It
focuses on the pay-policy line and the vertical axis of the salary structure.

In this example, the number of salary grades is obtained by determining a standard distance
between the midpoints of adjoining grades. In the figure below, 10% is the distance decided
upon between grades. Starting at the midpoint of the lowest grade, we place the midpoint for
each succeeding grade 10% higher than the lower one. The dividing line between grades is
halfway between the two midpoints. As can be seen, the horizontal-dimension job evaluation
points widen with each higher grade.

Midpoint-Progression Approach

This approach is often combined with increasingly broad rate ranges to make the salary
structure balloon out at the higher levels. The rationale is that at higher levels, positions are
harder to define and evaluate accurately, and greater variation in performance is possible.

Continuum approach

Here, in essence, each job evaluation point on the horizontal axis has its own rate range; there
is no grouping of jobs. The pay-policy line constitutes the midpoints. A standard maximum and
minimum, which are a set percentage above and below the midpoint, are defined. As can be
seen in the figure below, these lines widen as the salary level rises, making the range broader
at the top than at the bottom.
Continuum Approach to Salary Grades

A system such as this requires a lot of confidence in the job evaluation method. It is likely to
engender considerable argument over small differences in the number of points assigned to
jobs. Small technically oriented organizations are more likely to use this method.

Salary Ranges

Just as it is useful to group jobs on the horizontal axis, it is also useful to use a range of salary
for each salary grade created. This range of salary allows an organization to hire less
experienced employees at lower level within the range and reward employees for better-than-
average performance.

The points to define in the range are the:

• minimum
• midpoint
• maximum

Ordinarily the midpoint of the range will be the market rate, the mean or median of the salary
survey data. The range spread – the distance from minimum to maximum – varies greatly but
is usually within a 25 to 60 percent range. Many large salary structures with a variety of jobs
have smaller ranges at the bottom of the graph and wider ranges at the higher levels.

Final Result

Once salary grades and salary ranges are designed, the salary structure is complete. This is
depicted below.

Completed Salary Structure

Review of how to create this graph

The horizontal axis is the hierarchical ranking of the organization's jobs as derived through
internal mechanisms, mostly job evaluation. It is arrayed from low to high.

• The vertical axis is an array of financial salary rates, from low to high.
• When these two sets of data are plotted, it creates a scatter diagram.
• A pay-policy line is drawn through the diagram, using either a hand-drawn line or a line
of least-squares.
• Around this pay-policy line, salary grades are developed using the horizontal
dimension.
• Salary ranges are developed using the vertical dimension.
Any one job can now be assigned to the appropriate salary grade. The actual salary then lies
within the range designated for that salary grade. The midpoint of the salary grade is
considered to be the market rate for the jobs within that salary grade. Movement within the
grade is determined by the organization's pay system policies.

Other Options

The process described here is, of course, not the only method for establishing a salary
structure. In a salary structure study, compensation specialists at 37 organizations were
queried about how they went about establishing their wage structures. The findings showed
that 19 distinct approaches were used, and that only two were performed in as many as 5
organizations. These two were a comparison of market benchmarks with an internal ranking of
benchmarks, and a comparison of job evaluation with market benchmarks.2

ADMINISTERING THE SALARY STRUCTURE

The salary structure is designed to take the organization one step closer to determining what
to pay an individual employee, by defining a market rate or range to be paid for the job. The
implementation of this structure involves a number of issues and problems, which we will deal
with in the remainder of this course.

Administration Issues

Decisions about the design of the salary structure affect the paycheck of all employees. From
the standpoint of equity within the organization, it is important that all parties clearly
understand and accept the method in which these salary structure decisions are made. From
an external perspective, the organization must deal with the question of its competitiveness in
the labor market compared with its values and customs.

We will now examine the conflict between labor market and organizational rates.

Pricing Jobs

When salary grades are used, the rate for a job should be within the range of the salary grade
in which the job is located. A system of code numbers identifying the jobs and their proper
salary grade facilitates control and record keeping.

Some organizations prefer to work with a job structure composed of individual jobs rather than
salary grades. For small organizations (with less than 500 employees), salary grades may be
more challenging to maintain than the benefit provided.

If your company desires to create a job structure of individual jobs (not grades), the
procedures are largely the same as those we have covered. The essential difference is that
adjustments are made to accommodate the different job evaluation plans.

Job Evaluation
Adjustment
Method

Plot points and rates for separate jobs on scatter

Point Plan
diagrams.

Factor Plot evaluated rates. You may choose to plot all

Comparison jobs or only key jobs.

Record jobs by rank. Then make rate adjustments

Ranking
to correspond with the ranking.
Market vs. Evaluated Rates

Job evaluation is an attempt to substitute rationality for a variety of non-rational influences on

wages and salaries, by appraising jobs in terms of their contribution to the organization. The
process presumably produces a hierarchy of jobs that accords with both organizational
requirements and employee values, including customary relationships. This internally
developed job structure is unique to each organization.

Conflict

Market rates, on the other hand, represent an agglomeration of prices paid by organizations of
every size and type within the competitive labor market.

Organizational rates may conflict with market rates because of the following reasons.

• Some jobs are never filled from the labor market but rather are occupied by employees
trained within the organization.
• Some organizations are almost completely insulated from most labor markets, except
in the case of jobs for which they cannot provide training in-house.
• Even if jobs in different organizations are identical, it is unlikely that the job will occupy
the same position within the job hierarchy.
• Even highly skilled jobs may vary in importance to the various employing
organizations.

Severity

The severity of the conflict varies considerably from one organization to another.

• Low-wage organizations may experience conflict on many jobs.

• Organizations employing largely semi-skilled workers, and promoting from within, have
less conflict than organizations employing many highly skilled workers who must be
hired from outside the organization.
• If there is high unemployment in the local labor market, less conflict between market
rates and evaluated rates occurs, even in low-wage organizations.
• Geographically isolated organizations, or those with large numbers of unique jobs,
experience less conflict.

In the end, no job-evaluated salary structure is immune to conflict with market rates.

Solutions

There are various solutions to this conflict.

1. One way an organization could completely avoid such conflict would be to pay at or
above the market on every job.
2. Another basic solution is to develop a number of salary structures. With this strategy, a
job cluster that must be tied closely to the labor market (because it is filled from
outside the organization) will not seriously disturb other salary structures. However,
this alternative may create discrimination in pay that violates the law.
3. A less preferable solution is to exempt certain jobs or job clusters from job evaluation.
This approach is difficult to defend and endangers internal relationships.
4. You could use the guideline method of job evaluation, which in effect determines
internal relationships by market relationships. (See DLC Course 34: Installing Job
Evaluation in Your Organization for more information on this method.)
Salary Structure Maintenance

Internal salary structures face continuous change. Change may occur due to:

• the addition or subtraction of tasks within jobs, according to the needs of the
organization
• changes in technology, with consequent changes in methodology and various
equipment used
• employees leaving the organization and being replaced by others
• employees being transferred and promoted to different jobs

Responding to these changes involves salary structure maintenance. Your organization must
pay particular attention to:

• reclassification
• job descriptions and titles
• unions

Reclassification

Classifying new employees properly and changing classifications when employees change jobs
are essential to maintaining consistent salary structures. Employee misclassification destroys
pay relationships and creates vested interests that are difficult to change. Misclassified
employees may grow to feel entitled to their current salaries and place in the organizational
wage structure, even when the positions they hold do not merit these rewards.

Job descriptions and titles

Job changes call for changes in job descriptions and re-evaluation to ensure that the jobs carry
the appropriate salary rate. New jobs call for job analysis and job evaluation to determine the
appropriate rate. Both cases represent additional effort for busy supervisors and managers,
even if the analysis and evaluation are done by others. As such, there may be a tendency for
managers to neglect these important chores. However, consistent salary structures require
that updated descriptions and evaluations are maintained.

Standard job titles are also an essential part of job evaluation maintenance. Such standard
titles should apply to all jobs that entail identical duties and responsibilities, wherever they are
found in the organization.

Unions

Under union conditions, failure to make such changes can limit the organization's right to
make job changes. In a number of cases, management has lost a considerable portion of its
right to make job changes by failing to make prompt changes in job descriptions. By custom
and practice, employees may acquire the right to do certain work and to refuse to do work not
called for in job descriptions. Major union-management problems have been caused by laxity
in salary administration.

Maintenance procedures

Problems of salary structure administration emphasize the importance of job evaluation

maintenance. Maintenance, at a minimum, consists of:

1. maintaining updated job descriptions and job ratings

 2. insuring that employees are actually performing the jobs outlined in the job
descriptions

Human Resources may be assigned the tasks of:

1. analyzing new or changed jobs

2. insuring that job changes are reported
3. monitoring the description and evaluation files to assess their adequacy
4. verifying that identical jobs have identical job titles
5. receiving and processing appeals and grievances with respect to job ratings

Supervisors. Supervisors are normally responsible for advising Human Resources of any
changes in job content that they are planning to make or have made. They are likewise
responsible for seeing that employees are assigned to tasks and duties included in their job
descriptions. To facilitate carrying out these responsibilities, supervisors may be required to
meet regularly with each employee to review his or her job description and, if the job
description is not adequate, to request a new analysis and evaluation.

Audits. In addition to supervisory requests for job restudy, other methods may be used to
maintain the job evaluation system. Human Resources may be set up to audit jobs in all
departments on a continual basis. Thus, each department's jobs would be subject to regular
audit. Interim checks might be made, in addition, by regularly checking departmental job lists
against a list of standard job titles.

Another device is to limit the life of job descriptions. Thus a job description would be valid only
for a certain period, after which the job would have to be restudied.

Appeals. A further check on the adequacy of job information and the correctness of job values
is the grievance or appeal procedure. Employees should be encouraged to appeal whenever
they believe their job description or job rating is incorrect. If the organization is unionized, the
regular grievance procedure may be used. If the organization is nonunion, an appeal
procedure may be devised. In either case, a request for restudy of the job is made early in the
procedure.

An organization's salary structure should be both internally consistent and externally

competitive. It is internally consistent if it replicates the hierarchy and flow of the work. Pay
differentials between levels will then reflect differences in skills and responsibility.

To determine external competitiveness, you must compare the salary structure to the labor
market. Firms that compete on a cost basis, where labor costs must be kept low, will set their
salary structure below market levels. Firms that need to recruit top-level talent will set their
salary structure above market levels.

Benchmarks

Thus, all organizations need to understand how their pay relates to competitive levels. Rather
than examine every job in the organization, the focus is typically on key jobs, or benchmark
positions.

Benchmark positions are a representative sample of important jobs.

They are:

• well-defined
• stable across organizations
 • jobs for which market data is readily available

The salary ranges for benchmark positions are pegged to the market, establishing the
framework for the salary structure. Then, the salary ranges for the rest of the organization's
jobs can be slotted into position, based on their relative value compared to the benchmarks or
based on their job evaluation points.

Research Software

ERI's Salary Assessor® (SA) software database collects and analyzes available wage survey
data. It provides pay range information for over 5,000 titles in 298 U.S. and Canadian
metropolitan areas. (This expands to 7,200 North American cities, when used in conjunction
with ERI's Geographic Assessor® software.)

Using SA, you can compare your organization's entire salary structure against the market. The
following problem statement will teach you how to use this software to audit an organization's
salary structure.

Problem Statement

The Bank of Sunrise in Tallahassee, Florida has several branches in the Tallahassee area. The
bank's salary structure has 8 levels below the top executives. The table below displays a
benchmark job (one that is representative of positions at that level) for each job level.

LEVEL JOB TITLE AVERAGE ACTUAL PAY RANGE MID- EXPE-

POINT RIENCE

1 Branch Manager 2, Banking $41,753 $42,000 6

2 Mortgage Loan Officer $39,075 $38,000 8

3 Credit Analyst $28,975 $28,000 5

4 Assistant Branch Manager 2, $27,750 $25,600 6

Bank

5 Customer Service Repre- $23,950 $25,400 4

sentative 1

6 Loan Processor $29,000 $18,750 6

7 Loan Clerk 1 $18,075 $16,900 3

8 Teller $14,750 $14,575 3

The table gives the:

• current average base pay for that job

• midpoint of the base salary range
• average experience of the people in each position

Bank's Pay Policy

You've just been named the new Compensation Analyst for the Bank, a position that has been
vacant for the past year. Salaries have not been adjusted for the past 2 years. You have been
asked to review the salary structure and make any recommendations concerning necessary
adjustments. Recruitment and retention have not traditionally been a problem because of the
bank's prestigious reputation and the good working conditions within the bank. Consequently,
management has established a compensation policy of paying slightly (5% or less) below
market rates.

Complaints

While preparing data for your evaluation, you receive an email from a Branch Manager
indicating that he is having difficulty hiring experienced Loan Clerks. You also receive a phone
call from another manager stating that several of her Customer Service Representatives were
complaining that their pay is, "worse than that of the Loan Processors," even though the
position entails more responsibility. So while you are determining whether the bank's salary
structure is in-line with compensation policy and market rates, you are also asked to see if the
salaries for Customer Service Representatives and Loan Processors are commensurate with
the bank's pay policy.

Instructions

Click on the Load Step-by-Step button to follow along with this analysis. You may wish to
print out this PDF tutorial (which will open in a new window).

After you have read this PDF, click on the Next button to try your hand at using this research
software to adjust a salary structure.

SUMMARY

This course explained how to create a rational salary structure. The salary structure is a
combination of the job structure of the organization and the market rates for those same jobs.

Graph

A graph representing the salary structure usually starts with the job structure on the horizontal
axis, represented by the job evaluation values given to the jobs. The vertical axis represents
the market rates expressed in monetary terms. You can plot each job or use only benchmark
jobs on the graph.

Pay-policy line

A line of best fit can then be drawn that creates the pay-policy line for the organization.

The pay-policy line is the starting point for creating the salary structure. The values of both
dimensions need to be grouped in order to make compensation administration more
manageable.

• The horizontal axis, the job structure, is grouped into salary grades. This grouping
may be done in a number of ways as discussed in this course.
• The vertical axis is grouped for each salary grade into a salary range.

This provides the opportunity for the organization to pay differential amounts to people on the
same job or on jobs in the same salary grade.

Multiple Structures

Salary structure decisions, as outlined in this course, attempt to balance internal

considerations and external considerations (market rates). Most organizations achieve this by
developing a number of separate salary structures and by emphasizing flexibility in pricing job
structures. Low-wage employers in competitive industries, especially those operating in tight
labor markets, may have to abandon their interest in internal relationships and concentrate on
keeping jobs filled by paying market rates. In fact, they may have to lower their hiring
standards as well.

Maintenance

Any salary structure is only useful for a limited period of time. Changes in both the labor
market and the organization make redoing the process over time a necessity. You may now
test your competence in these areas by proceeding to the final exam.