Salary Structure

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Creating a Competitive Salary Structure

Each employee in an organization is paid a salary. Salaries vary greatly, with executives earning as much as (or greater than) 100 times an entry-level employee's salary. This variation is not by chance. It is rationally established through a salary structure – a hierarchy of salaries. Organizations develop this structure based upon internal factors (such as current rates, job relationships, and custom) and external factors (such as labor markets and laws). Salary structures integrate these factors to create a hierarchy, in which every job of the organization has its place. Before establishing a salary structure, you must first have a job structure: a hierarchy of your organization's jobs based upon their value to the company. Distance Learning Center Courses 33 (Conducting Job Analysis) and Course 34 (Installing Job Evaluation in Your Organization) teach you how to create a job structure. For the purposes of this course, we will assume that you have conducted job evaluation for your company, established a job structure, and are now ready to create a salary structure. We will teach you how to do this by:

plotting your organization's jobs on a matrix drawing a line through the scattering of dots using this line to determine median salary rates, with which you can establish salary ranges You will then learn how to administer and maintain this salary structure, including how to audit it using research software. DEVELOPING A SALARY STRUCTURE

The job structure (covered in DLC Course 34 on Job Evaluation) presents the compensation decision maker with a hierarchy of the jobs in the organization. A dollar value now needs to be placed on this hierarchy. This value is available from either: the jobs' current salary rates

market data collected from salary surveys
Current Rates
The present wage and salary rates in an organization will clearly influence any changes made in its current salary structure. In most organizations there is a fairly well-defined group of jobs that represents an important segment of the total labor costs of the company.1 Prices assigned to this group of jobs may greatly affect an organization's competitive position. Rates assigned to these jobs during job-structure pricing largely determine the competitive salary level of the firm, and salary structure relationships are built around this cost center.

Market Rates
Most often, however, the job structure is priced out through the use of market rates. This means the employment of salary surveys. (See DLC Course 73: Analyzing Salary Surveys for information on wage surveys.) One such source of salary survey data is, which provides median pay data for 4,000 positions in 6,000 cities worldwide. When you use salary survey data, you must adjust the figures for: single rate determination

planning date
organization policy
Single rate determination
The salary data do not provide a single rate but a range of figures. Therefore the best single rate to use, such as the mean or median, needs to be determined. (This set of decisions is dealt with in DLC Course 19: Quantitative Methods Used in Salary Administration.) Planning date

Salary survey data predates the effective date of the salary structure you are building. Therefore, you will need to update (age or trend) the data by multiplying the salary figures by a constant percentage, representing the salary increase of the interim. Example: If the data was collected one year ago, you may want to age the data by a percentage of 2%. Organizational policy

Your organization must decide whether it will pay:
at market rate
Most organizations choose to meet the market rate. Those that wish to pay above market hope to recruite and retain the best talent. Those that pay below usually do so because their budgets are constrained, or industry (such as nonprofit) dictates this position. The organization's...
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