Designing a Pay Structure

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The first step in designing a pay structure is to establish/identify an organization’s compensation philosophy. During this phase of the design, it is determined where within the market the organization wants to position itself, i.e., at market, as a leader in the market or lagging the market. Once this decision has been made, range penetration strategies must be determined. This phase of the plan design deals with how an organization wishes to reward employees and move their salaries through the respective pay ranges. Today, most private and public sector entities choose to reward “performance” as opposed to “longevity.” Therefore, range penetration involves developing formulas that are tied to performance evaluations or skill/competency attainment.


Once the compensation philosophy has been determined, the actual plan design may begin. Traditionally in the public sector, pay ranges were designed by establishing a “starting rate” and then multiplying that rate by a given percentage to establish the “maximum rate”. Today, compensation professionals determine the “market rate” or mid-point first and then establish minimums and maximums of the ranges. To fully understand this shift is strategy, it is important to define the various segments of a pay range. The mid-point of a pay range should be set at or near the “average rate of pay” or market rate for a position. Employees should be earning close to the mid-point once they are “fully proficient” at their position. The range between mid-point and minimum is considered the “training” portion of the range. Therefore, employees who only meet the minimum qualifications for a position should be given a starting salary that is at the pay range minimum. As the employee becomes more proficient in the position, his/her salary should move towards mid-point. It is generally accepted that this...
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