How to Set a Salary Scale for Your Employees

You need to establish a salary pay scale for employees within your business. Don't hire employees and offer them salaries at random. The salary scale you decide on can influence your business, so choose a compensation philosophy wisely.

The following are the most common methods used to establish pay scales:

  • The going rate: You determine what other businesses in your industry and region are paying for similar jobs, and structure your pay accordingly.

  • Job evaluation and pay grading: You evaluate each job based on several factors, such as how it affects the bottom line, how difficult or dangerous it is, and what kind of training is necessary, and then you develop an appropriate pay range.

    Job evaluation and pay grading works best for large companies that must have some type of structured approach to pay ranges.

  • Management fit: You decide the amount of pay for each employee, without using any system. As you may expect, the management-fit approach usually results in inconsistent pay. Resentment, hostility, and a lack of teamwork can result when inequities are discovered.

You can also look into alternative structures that are based more on what the employee can do and less on what the job description is:

  • Skill-based pay: Pay scales are determined by skill level, not job title. You create a list of skills necessary for each job and develop the criteria that signify the mastery of each skill. As your employees master the skill, they receive pay increases.

  • Competency-based pay: This system bases compensation on an employee’s traits or characteristics, rather than on specific skills. Salaries and raises are based on how well employees acquire the core competencies needed for their positions.

  • Broadbanding: You group several related jobs, such as office assistant and receptionist, into one band — for example, administrative staff. You assign a pay range to that band, but you don’t base it on a job title.

  • Variable pay: This system links a percentage of an employee’s pay to performance and accomplishments. You first establish a base pay rate, and then define group and individual objectives as a variable salary component.

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