Salary Structures: Creating Competitive and Equitable Pay Levels

Salary structures are an important component of effective compensation programs and help ensure that pay levels for groups of jobs are competitive externally and equitable internally. A well-designed salary structure allows management to reward performance and skills development while controlling overall base salary cost by providing a cap on the range paid for particular jobs or locations. The following highlights are drawn from the 2010 Culpepper Salary Range Structure Practices Survey.

Key Survey Findings

• 72 percent of surveyed North American companies reported having formal base salary range structures.
• Most companies with formal base salary structures review their structures annually.
• 93 percent use compensation survey market data when designing salary structures.
• 82 percent use traditional salary structures, while 7 percent use broadband structures.
• 55 percent have multiple structures varying by job and/or geographic location.
• Salary range spreads and midpoint-to-midpoint differentials vary significantly by job level.

Salary Ranges and Structures Defined

A salary range is the span between the minimum and maximum base salary an organization will pay for a specific job or group of jobs. A salary range structure (or salary structure) is a hierarchal group of jobs and salary ranges within an organization. Salary structures often are expressed as pay grades or job grades that reflect the value of a job in the external market and/or the internal value to an organization.

Percent of Companies with Formal Salary Range Structures

Seventy-two percent of surveyed companies reported having formal salary range structures (Table 1). As companies increase in size they are more likely to have salary range structures. Less than half of companies with fewer than 100 employees use salary range structures. In contrast, about four out of five companies with more than 500 employees use salary range structures.

Frequency Salary Range Structures Are Reviewed

Salary range structures should be reviewed regularly to maintain a competitive edge in attracting and retaining top talent. Most companies with formal base salary range structures review their ranges and structures annually (Table 2).

Nineteen percent of participants with formal salary range structures reported that they do not use formal salary structures with executives.

Companies choosing "other/varies" indicated that the frequency for reviewing structures varies by type of job, business unit, location or union status. Examples include:

• Some companies with union employees review salary structures based on the length of multiyear labor contracts and review other nonunion jobs annually.
• Some companies in very competitive job markets review salary structures for critical jobs semiannually.

Methods Used to Design Salary Range Structures

The two most common methods companies use to design base salary structure ranges are market pricing using external market data and point factor focusing on internal pay equity.

Most companies use a market-pricing approach with current salary survey data for individual jobs, to design and adjust salary range structures (Figure 1). Only 3 percent of companies rely solely on the point-factor method, which assigns a point value to specific jobs within a company.

In addition, 19 percent of companies blend market-based and point-factor approaches when designing their salary range structures.

Traditional vs. Broadband Salary Structures

Traditional salary structures are organized with numerous layers and range structures (or pay grades) with a relatively small distance between each range. This provides a hierarchal system enabling employees to be promoted from one pay grade to another. When designed correctly, traditional structures enable the recognition of differing rates of pay for performance and guarantee a reasonable level of control over internal compression and salary expenditures.

Broadband salary structures are more flexible and consolidate pay grades into fewer structures with wider salary ranges.

On average, 82 percent of surveyed companies use traditional salary structures, while only 7 percent use broadband structures (Figure 2). Nine percent use a hybrid or mix of traditional and broadband structures.

Single vs. Multiple Salary Structures

Fifty percent of companies with salary range structures have multiple structures varying by job and/or geographic location. There is a strong correlation between job level and number of salary structures. Single salary structures are more common for executives and multiple salary structures are more common for nonexecutive positions (Table 3).

As companies increase in size, they typically have a higher number of salary structures to accommodate more locations and job structures.

Culpepper and Associates conducts worldwide salary surveys and provides benchmark data for compensation and employee benefits programs.

Reposted with permission.

Source: 2010 Culpepper Salary Range Structure Practices Survey, November 2010. www.culpepper.com