The document discusses constructing a compensation system with a pay structure. It describes factors like corporate culture and the external environment that affect pay structures. It outlines steps to build a market-competitive pay structure, including job evaluation, salary surveys, grouping jobs into pay grades, pricing grades based on a wage curve, and formulating a rate structure. The goal is to establish internal pay equity while maintaining external competitiveness.
3. Pay Structure
Useful for standardizing compensation practices
Pay structures include several grades
Each grade contains minimum salary/wage and step
increments/grade range
Pay for each job may be pre-determined through collective
bargaining.
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4. Factors Affecting Pay
Structures
Corporate culture and value
Management Philosophy
External Economic Environment
External “Socio-political” environment
(Unions)
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5. Anatomy of a Pay structure
Pay Structure – consists of a series of Pay Ranges, or
“grades”, each with a minimum and maximum pay
rate
Pay Range - has a minimum pay value, maximum pay
value and a “midpoint”
Midpoint of a range – represents the competitive
market value for the job or group of jobs
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6. Range Spread
– Difference between maximum and minimum pay value
- Usually expressed as % of difference between max and
minimum divided by the minimum
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7. Spread on either side of midpoint
Midpoint – Minimum Maximum– Midpoint
Minimum Midpoint
Midpoint = Max + Min
2
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8. Range Spread
-75% 75%
Minimum Midpoint Maximum
200000 350000 612500
Range Spread Width = 206 %
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9. Range Spread
Vary based on level and sophistication of skills
required for a given position
Entry level positions (skills that are quickly
mastered) have narrower pay ranges
Managerial positions will have broader pay
ranges
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10. Typical Range Spreads
20 – 25 % - Lower-level service, production
30 – 40 % - clerical, technical
40 – 50 % - professional, administrative, middle
management
Range spreads 300% or more with Broad banding
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11. Compa - Ratios
A Statistic that expresses the relationship
between base salary and the midpoint, or
between the midpoint and the market average
Compa-Ratio = Base Salary
Midpoint
Companies strive to pay around a compa-ratio of 100
%
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12. Compa - Ratios
Individual C-R vary according to
How long the individual has been in the job
Previous work experience
Job performance
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13. Compa - Ratios
Person 1 Person 2 Person 3 Average
Base Salary 22500 25000 27500 25000 24500
Mkt Avg
Midpoint 25000 25000 25000 25000 25000
Base Salary
Base Salary
Mkt Avg
Midpoint
Midpoint
Compa-Ratio 90% 100% 110% 100% 98%
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15. Pay Structure
Basis of pay programs is a pay structure - a hierarchy
of jobs with pay ranges
Greater worth of job, higher the pay grade and range
Pay program objectives are as follows:
• Internal equity.
• External equity (or competitiveness),
• Individual equity,
• Process equity,
• Performance or productivity incentives,
• Maximum use of financial resources,
• Compliance with laws and regulations, and
• Administrative efficiency
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16. Constructing a Pay Structure
Step 1: Job Evaluation - Deciding number of pay
structures
Step 2: Salary surveys - Determining external market pay
structure
Step 3: Grouping Jobs - Defining pay grades
Step 4: Pricing each pay grade – Establishing wage curve
Step 5: Formulating rate structure
17. Step 1: Job Evaluation
Systematic process of determining relative worth of
jobs in order to establish which jobs should be paid
more than others within an organization.
18. Step 2: Salary Surveys
(Compensation Surveys)
Salary surveys compare an organisation’s salaries to
those offered in other organisations.
Does the organisation want to compare itself
with:
Organisations in the same or related industries?
Organisations in the same geographic area?
‘Best practice’ companies?
Domestic companies?
Multinationals?
19. Step 2: External Market Pay Structure
Pay Structure for Clerk Jobs
26,000
Market Pay Line
24,000
Annual Salary ($)
21,000
18,000
15,000
12,000
250 500 750 1,200
Clerk I Clerk II Clerk III Chief Clerk
Job Evaluation Points
20. Step 3 Grouping Jobs
Group jobs into Pay Grades or Job
Classes
Groups of jobs within a particular class
that are paid the same rate or rate range
jobs of equal difficulty
21. Step 3: Defining Pay Grades (Internal
Job Structure
26,000
Market Pay structure
24,000
21,000
Annual Salary ($)
18,000
15,000
200-300 301-650 651-1,150 1,151-2,000
12,000
Messenger (200) Mail Clerk II (350) Mail Clerk III (675) Mailroom
Mail Clerk I (220) Clerk II (500) Clerk III (750) Super (1,175)
Clerk I (250) Sec.I (650) Sec. II (1,000) Chief Clerk (1,200)
Recep. (300) Exec. Sec. (1,900)
Job Evaluation Points
22. Hierarchy of Clerical Jobs, JE Points and
Pay Grades
JOB Pt. Grd.
Customer Service Rep. 300 5
Executive Secretary/Admin. Asst. 298
Senior Secretary 290
Secretary 230 4
Senior General Clerk 225
Credit and Collection 220
Accounting Clerk 175 3
General Clerk 170
Legal Secretary/Assistant 165
Senior Word Processing Operator 160
23. Step 4 Pricing Each Pay Grade
Price Each Pay Grade and establish Wage Curve
Wage Curve shows pay rates currently paid for
jobs in each pay grade, relative to the points or
rankings assigned to each job or grade by the
job evaluation committee
24. Wage Curve: Integrating Internal Job
Wage Curve: Integrating Internal Job
Structure with External Market Pay Rates
Structure with External Market Pay Rates
8
7
6
monthly
salary 5
(Rs.000) 4
PAY
3
Line of Best Fit :
2 using Market-Survey data or
current organization data
1
JE Points 40 80 120 160 200 240 280 320
Jobs AB CDEF GHIJ KLM 0P QRS TUV
Grades 1 2 3 4 5 6 7
25. Step 5: Formulating Rate Structure
GR JOBS SALARY (Rs.)
Single Rate I AB 5000
Structure II CDEF 7000
III GHIJ 9000
GR JOBS SALARY (Rs.)
Overlapping I AB 3000–250–4500–500-9000
Rate Range II CDEF 6000–400–8400–750-14400
III GHIJ 10000–600–13600–900-20800
For the sake of simplicity, most large organizations classify jobs into grades as the last step in the job-evaluation process. Typically, the job hierarchy is reduced to a manageable number of grade levels, with the assigned points used to determine where to set up dividing lines between grades. For example, this graphic shows how the hierarchy of 18 clerical jobs is divided into five grade levels.