If you are a new company, you will be creating a salary structure (also called as Pay Structure) to begin with. If you are an existing company, you will be reviewing and revising your salary structure regularly.
In this article, I will walk through what a salary structure is, using examples.
What is a Salary Structure? Why do we need it?
In any organization, there will be multiple types of jobs in terms of function and multiple levels of job in terms of accountability and responsibility. Hence salary will vary. However, we want to make sure that the process of determining the salary for each employee is fair and there is pay equity among employees. This is where a defined salary structure comes into play.
A Salary Structure allows us to define the min and max salaries for a given employee based on his or her job/role, by creating Grades.
Here is an example Salary structure.
What are Grades? How do we arrive at these grades?
Each organization may have a different number of Grades. The above example has 10 grades.
How each grade is decided and named will also vary by organization.
Smaller organizations may have fewer grades. They may use Job Title as a grade level. So, all employees with the same Job title will belong to same grade.
In larger organizations, where the job titles become too many, you would start grouping similar jobs into a grade. Jobs that belong to the same grade will have the same salary range. Typically, larger organizations have more grades. For example, all the people managers can be part of the same grade regardless of the department they are in. We can define that salary range for each grade.
To summarize, a salary structure has multiple grades, an employee will belong to only one grade at any point of time, all employees within a grade will be paid according to that grade’s limits. As you go from one grade to the grade above, the salaries will increase.
Attributes of a Salary Grade
Let’s take a closer look at key attributes of each salary grade.
In this example grade, the minimum salary is 10,000 and maximum salary is 12,000.
So, the midpoint is 11,000.
It is common for people to use the Midpoint value when they refer to the grade.
How to evaluate a grade?
Range = Max - Min = 2,000. 2000 is the absolute range of salaries in this grade.
Range is an extremely important attribute as it determines the growth opportunity of an employee within a grade. Typically someone who does not have a lot of experience in the role will start off closer to the minimum point. As they become proficient with the job duties, they move to the midpoint. Once they start performing at the highest level for the job, they reach the maximum point. This allows for an employee to grow within the same grade.
If your range is too small, then the growth opportunities are less. If it is too large, then the employee may be in the same grade for too long and not have an opportunity to grow to the grade above.
Each grade can have a different range and we already know that each grade’s minimum salaries are different. So, we need a way to measure this range in a normalized way and that is where Spread comes in.
Spread % = Range / Min.
In this illustration, 2,000 range for a grade with 10,000 as minimum means the spread is 20%.
Let’s take a look at our example again, with Spread % and Range added.
As you can see, the range is not the same for all grades. Typically, range and spread will increase as you go to higher paying grades.
For the ‘Analyst’ grade, the range is $3,913. Spread is $3913/$13,043. This is 30%.
How do you evaluate the overall salary structure?
Now that we understood how each grade can be defined and evaluated, let’s understand how the overall salary structure can be evaluated.
A couple of key measurements about your salary structure are based on comparing one grade to the next.
How is the growth progression from one grade to the next?
In other words, how does the salary midpoint improve from one grade to the next. This is measured as ‘Midpoint Differential % or Midpoint Progression.
(Higher Midpoint – Lower Midpoint) / Lower Midpoint
How much is the overlap between one grade and next?
Overlap determines employees’ movement from a grade to the grade above.
If your overlap is very small, then you would have to promote the employee to the next grade if you want to increase their salary. This could be motivating for employee but it could be a much higher cost for the organization.
On the other hand, if your overlap is very large, you can promote an employee to next grade, without increasing the salary much. This movement from one grade to next may not be motivating for the employee though.
It must be a fine balance where the employee motivation can be created with promotion opportunities while giving the organization some flexibility in cost management.
Here is our example salary structure with all the attributes we discussed.