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Why organisations need a pay structure

By Memory Nguwi

A PAY structure is a series of grades showing each grade’s minimum, midpoint, and maximum salary.

What anchors the pay structure is that jobs have been adequately evaluated and put in grades. The grades show the relative value of jobs to the organisation.  A pay structure can be developed based results of a job evaluation.

Others who may not have a job evaluation system in place prefer to use market pricing. In market pricing, jobs are ranked based on the market salary. This could be the median or the 75th percentile.  The two approached all can lead to the development of a pay structure. The critical question for most people is why would their organisation need a pay structure.

Internal equity

A pay structure brings internal equity; when employees feel what they are paid relative to other people in the organisation is justified by variation in job content and performance.  When jobs are put in a grading structure, and a pay structure is developed based on a grading structure, most employees accept salary differentiation supported by a credible pay structure.

If your organisation does not have a pay structure, people may start by not complaining. As the organisation employs more people, you will begin to hear complaints around salaries; specifically, people start questioning why John earns more than Grace when they are all doing similar jobs. The only cure is to commission a job evaluation and a pay structure project. You can not explain equity issues away, and they need a pay structure that is properly run.

External equity

External equity is your employees’ feeling about how well they are paid compared to similar positions outside your organisation. The reference point is usually the market. When your employees start raising issues indicating that they are underpaid compared to the market, you must remember to refer to external equity. The only solution is to develop a pay structure anchored on a chosen market position for the company. This could be the median or the 75th percentile, or even 90th percentiles subject to affordability and sustainability.

Pay structure

The pay structure allows you to have a procedure for paying staff based on performance and skills scarcity. Although not recommended, other organisations factor in the experience and education level of the individual employees. The guiding principle is that new employees and less experienced employees are paid close to the minimum of their grades.  It would help if you targeted to deliver your top performers around the midpoint. Only exceptional talent should be paid close to the maximum.

Process equity

This deals with how employees perceive fairness or equity in the administration of the salary and benefit system. Process equity is strongly influenced by the system’s openness, communication of the system to employees, and participation in the system’s design.

 Pay and  grades

The relationship between pay and grades can only be brought to life through a pay structure. If that connection is not established, your organisation will likely have frequent pay complaints from employees.

Benefits structure

The pay structure allows you to align your benefits with the grades and pay structure. For example, you may find that roles in a particular grade are entitled to certain benefits that vary from the other grades. It is always advisable to have both a pay structure and benefits structure.

 Pay range

The pay range in the difference between the maximum and minimum salary in a grade. It helps you to vary people’s salaries based on performance. A pay structure has ranges because there is an acknowledgement that while a grade groups jobs of equal value, the individuals occupying those roles do not bring equal value. The range then allows you to differentiate what people will earn based on performance. Each grade provides for a range of pay. Within a pay grade range, there is a minimum, median, and maximum pay. The preferred range in the current environment is from 20 to 60 percent.

 Staff turnover

With a haphazard salary administration system, you will likely experience significant staff turnover. It is also likely that you will find it hard to retain competent staff. A good pay structure that is well administered sends a strong message to your employees and potential employees that you are organised.

 Salary progression

The percentage change in the median value (mid-point) from one adjacent pay grade to the next. It is important to note that the progression affects the size of the entire organisation’s wage bill; the smaller the progression, the smaller the size of the wage bill, and the larger the progression, the larger the size of the wage bill. Progressions tend to vary from 10 to 40%. It is also important to mention that lower differences are normally found in low grades with unskilled, semi-skilled and clerical workers.

  Remuneration policy

The pay structure helps you to manage a clean remuneration system. For your pay structure to have a longer life span, you need to support it with a remuneration policy. The remuneration policy will spell out how the pay structure will be adjusted to consider changes in the market, such as cost of living and general market salary movements. Suppose you do not have a pay structure, you probably experiencing several HR challenges related to staff retention and attraction.  If you are in this situation, the best option is to have a job evaluation done and a proper pay structure designed for your organisation.

  • Nguwi is an occupational psychologist, data scientist, speaker and managing consultant at Industrial Psychology Consultants (Pvt) Ltd, a management and HR consulting firm. Visit ipcconsultants.com

 

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