Approaches to Employee Pay Levels in Your Organization
One of the main tasks in any effort to create an equitable and effective wage and compensation system for employees is to develop a consistent protocol for setting pay levels for every job in your organization. In setting the actual pay scale for specific jobs, you have several options.
The more essential a job is to the fundamental mission of your company, the higher its job value and, thus, its pay range is likely to be. Job value is determined by using one or more of the following job valuation methods.
Job ranking and leveling
How this approach works: You make a list of all the jobs in your company, from the most senior to entry-level employees. Then you group the jobs by major function — management, administrative, production, and so on. Working on your own or with other managers, you rank jobs by the degree to which they generate revenue or support revenue-producing functions.
Eventually, you produce a ranking or hierarchy of positions. In the process, you create a measure of internal equity. As a result, employees feel that they’re being treated fairly. Keep in mind that you’re not rating individuals — you’re rating the relative importance of each job with respect to your company’s revenue goals.
The rationale: In large companies, you may want to use a reasonably structured approach to decide what pay range to apply to each job. The more systematic you are as you develop that structure, the more effective the system is likely to be.
The downside: Creating and maintaining a structure of this nature takes a lot of time and effort.
Market data and pay trends: “The going rate”
How this approach works: You look at what other companies in your industry (and region) pay people for comparable jobs and set your pay structure accordingly. You can obtain this data from government and industry websites and publications. Robert Half publishes a variety of salary guides focusing on professional disciplines such as accounting and finance, law, technology, advertising and marketing, and the administrative field, which you can find at Robert Half International.
Rationale: The laws of supply and demand directly affect salary levels. Benchmarking salaries (and benefits) is important to ensure that you’re paying people competitively.
The downside: Comparing apples to apples can sometimes be difficult in today’s job market. Many new jobs that companies are creating are actually combinations of jobs in the traditional sense of the word. As such, they can prove difficult to price, because you can only go by how other companies pay. Still, it’s a good starting point.
How this approach works: The owner arbitrarily decides how much each position is paid.
Rationale: A business owner has the right to pay people whatever he deems appropriate.
The downside: After people are on the job, inconsistent wage differentials often breed resentment and discontent. Lack of a reasonable degree of internal equity diminishes the spirit of teamwork and fairness. Without any sort of rationale, employees can only wonder why some people are paid more than others.
How this approach works: In unionized companies, formal bargaining between management and labor representatives sets wage levels for specific groups of workers. These are based on market rates and the employer’s resources available to pay wages.
The rationale: Workers should have a strong say (and agree as a group) on how much a company will pay them.
The downside: Acrimony arises if management and labor fail to see eye to eye. In addition, someone else — the union — plays a key role in your business decisions. Also, in this system, employees who perform exceptionally well can feel shortchanged because less proficient colleagues in similar positions receive the same pay.