19

Developing a Salary Structure

BY MARY JANE SINCLAIR, SPHR

I worked at a company that conducted an employee opinion survey. One question asked if employees thought they were paid high, low, or average. The cumulative results correlated exactly with the salary survey results. In jobs where the salary surveys indicated that average salary was high relative to the market, the average employee responded that they were well paid. In jobs where the average salary was low relative to the market, employees responded that they were not paid well. My conclusion is that people have a pretty good sense of how well they are paid.

If you are about to develop and implement a salary structure, there are a few fundamental questions to be answered before you begin. In addition to compensation philosophy and strategy discussed in Chapter 18 (Compensation: An Introduction), consider:

    What is the size of your organization? Are you a small company with fewer than 500 employees? A large company with 10,000 employees?

    Where is the organization in its life cycle? Are you in a growth spurt with new products/services being introduced and new markets being penetrated? Do you have a startup organization with few staffers but growth planned?

    What work needs to be done to produce/provide the organization’s goods or services?

These questions are also fundamental to workforce planning. Once these questions have been answered, it is necessary to address what employees are doing. This is accomplished by performing a job analysis—one of the most often overlooked, misunderstood, and poorly implemented processes.

Job Analysis

A job analysis identifies and describes what is happening in jobs in the organization. It helps to differentiate job requirements and performance requirements on the basis of job content, job specifications, and working conditions.

In conducting a job analysis, it is important to obtain information about:

    A job’s context or its purpose, its work environment, and its place in the organization.

    A job’s content or duties and responsibilities.

    The specifications and qualifications, which are often referred to as KSAs:

    Knowledge, the information necessary for task performance.

    Skills, the level of competency or proficiency.

    Abilities, traits, or capabilities necessary.

    Behavior—how people in the job are expected to act in accomplishing the job.

To do this:

    Get direct employee and supervisor input.

    Collect data from multiple incumbents and supervisors.

    Use a technique that yields concise data, is easy to update, and limits bias.

Be wary of:

    Lack of management support.

    Insufficient training of those participating in the project.

    Incumbent distortion of data, either accidentally or on purpose.

    Insufficient time allowed for the project.

Conducted and implemented accurately, a job analysis will help organizations develop:

    Job descriptions—written descriptions that detail each job’s requirements such as title and duties.

    Job descriptions are discussed in Chapter 5 (Job Descriptions).

    Job specifications—written statements of the necessary qualifications for an incumbent to have a reasonable chance of performing a job. The focus will vary for trained and untrained workers.

    Trained: Focus on length of service or previous performance.

    Untrained: Focus on interests or ability to be trained.

    Job competencies—critical success factors that lead to enhanced performance. Competency models define sets of competencies required for success in a particular job. They identify core competencies that align directly with key business objectives.

Conducting a Job Analysis

These steps are essential in conducting a thorough and effective job analysis:

1.    Identify the reason for doing the job analysis.

    Determine desired outcome.

2.    Select the method(s) to be used.

    Decide what positions will be analyzed.

    Review available resources such as organization charts, job descriptions, work flow charts, and so forth.

    Determine sample size.

3.    Choose the analysts.

    They may be external consultants or internal staff such as human resources or line personnel.

4.    Train the analysts in the method(s) to be used.

5.    Prepare for the analysis.

    Set up appropriate documentation.

    Establish time frames.

    Communicate the project and its purpose to the entire organization.

6.    Collect data.

7.    Review and verify.

    Involve supervisors to review what’s been collected.

    Return to original source to verify data and ask any follow-up questions.

    Consolidate the results.

8.    Develop job descriptions and job specifications.

Job analysis methods are described in the following chart.

Type	Methods	Comments
Observation	Direct Observation observes and records work. It observes things like input/output, tasks performed, work environment, tools and equipment, and who else is involved in completing the tasks. Cameras, video recorders, or personal observation are the most often used tools for this method. Work Methods Analysis is used by industrial engineers to determine standard rates of production, which are then used to set pay rates. This analysis includes two methods: time/motion study and micro-motion analysis.	Although these methods provide a realistic review, they must observe the complete work cycle to be effective. In some jobs the work cycle occurs at infrequent or irregular intervals. It is best suited for short-cycle jobs, such as production or processing. There are often issues that arise due to sample size, or workers changing what they normally do because of the observation. In addition, care must be taken to observe average workers under average conditions.
Interview	Involves questioning individuals about the work being performed, working conditions, success factors, and behaviors. Interviews are done with both the employee and the supervisor, and often involve group interviews with groups of employees who have the same job. Can be unstructured (no prepared questions) or structured (sequencing and questionnaires may be used).	Depending on conditions, the workplace is the best option for the interview site. Interviewers must be trained in conducting interviews and taking notes. Best suited for professional jobs.
Questionnaire	Closed-Ended Method involves developing and distributing a well-designed questionnaire to collect a wide array of job data in a short period from both employees and managers. Two common methods are the Position Analysis Questionnaire (PAQ) and the Common Metric Questionnaire (CMQ). The PAQ consists of 195 job elements describing such human work behaviors as interpersonal activities, job context, mental processes, and work output. The CMQ has five sections of questions: Background, Physical and Mechanical Activities, Work Setting, Contacts With People, and Decision Making; and can also include a matrix to respond on frequency, criticality, and consequence of error. Open-Ended Method has no prepared inventories, but asks a series of questions about what is being done, when, how and by whom.	Questionnaires are best used when a large number of jobs must be analyzed and there are insufficient resources. They are less time-consuming and are usually replicable on a second administration. Problems can arise when the survey population finds that the language in prepared questionnaires does not match their jobs and often complain that the reading level is too difficult.
Work diaries or logs	Each of these methods involves asking the employee to record daily activities or tasks. Three of the most commonly used methods are: the Diary Method, which asks employees to write down what they do during the day; a Job Analysis Checklist, which has employees check items on a prepared list of tasks (these lists are either developed internally or purchased from an outside source); and Task Inventories, which have employees respond to tasks listed by interview.	Work diaries or logs should contain activities performed at infrequent or irregular intervals, such as weekly, monthly, or quarterly. They are useful when working with professions or on jobs requiring a high degree of technical or scientific knowledge. An oral record can be made using a digital recorder. Problems can arise when there is too much variance in writing skills, employees have difficulty remembering what they did earlier in the day, or when the tool being used does not include important parts of the job.
Combination	Combining the above methods may prove useful. For example, a questionnaire may be provided before a face-to-face interview is conducted, or an interview may follow an observation for clarification.	Each method has pluses and minuses and it is recommended that at least two methods be used.

    Appendix: Job Analysis Interview Questions.

Job Evaluation

Once information has been collected in the job analysis, the job evaluation process begins. Job evaluation is a systematic approach to determine the relative level, complexity, importance, and value of each job. These factors may vary within the same industry, among industries, and within organizations. Even within a single organization, different skills will be valued differently in different areas. Job evaluation assesses both the job content and the value of the job.

Before embarking on job evaluation, consider the following:

    There must be clearly defined and identifiable jobs. If job descriptions exist, they should be reviewed and updated as necessary.

    All jobs in the organization must be evaluated using the method selected.

    Job evaluators need to have, or be able to attain, a thorough understanding of jobs within the organization. They should also be trained in the provisions of the Fair Labor Standards Act.

    Look at jobs, not at the people in them.

    Job evaluation is more art than science, but objective judgments can be made.

    Assessments must be made based on jobs being done in a competent and acceptable manner.

    The method selected must make it possible for jobs to be evaluated relative to other jobs in the organization.

    The results of the evaluation must be acceptable to all participants.

    The method selected will result in the organization’s ability to examine duplication of tasks and reveal any gaps.

The following factors are typically included in most evaluation systems. This is not an all-inclusive list, and not all of these factors need be part of the system:

    Training, education, or qualifications.

    Complexity of work being done.

    Knowledge and skills needed.

    Interactions within and outside of the organization.

    Problem-solving.

    Independent judgment.

    Accountability and responsibility.

    Degree of supervision needed.

    Cross-training requirements.

    Decision-making authority.

    Supervision of others.

    Working conditions.

    Degree of difficulty filling the job.

There are several standard steps to be taken in job evaluation. Care should be taken not to skip or short-cut any of the steps if the results are to have credibility.

1.    Introduce the concept of job evaluation to management and employees.

2.    Obtain management approval as well as commitment to time and resources needed for the system to be successful.

3.    Select and train a cross-functional job evaluation team.

4.    Review and select the job evaluation method.

5.    Gather information on all internal jobs. Use the most up-to-date job descriptions, any existing job process descriptions, and so forth.

6.    Use the selected job evaluation method to compare and rank jobs in a hierarchy or in groups.

7.    Link the ranked jobs to the compensation system or develop a new system.

8.    Implement the job evaluation and compensation systems organization-wide.

9.    Review the job evaluation system and the resulting compensation decisions periodically to ensure equitability and that the system remains current.

There are five common job evaluation systems:

    Ranking.

    Classification.

    Point Evaluation.

    Factor Comparison.

    Market Comparison.

Before making a selection, carefully review and research systems and examine their fit for the organization.

Type	Method	Pros and Cons
Non-Quantitative	Ranking—typically assigns more value to jobs that require managerial or technical competencies, those that supervise others, those with decision-making authority, and those that exercise independent judgment.	Advantages: Easiest, fastest, and least-expensive approach. Also easy to understand and communicate. Disadvantages: Subjective and often based on opinion. Often requires re-ranking whenever new jobs are created within the organization.
Non-Quantitative	Classification—uses job descriptions to develop a list of standards for each category of jobs. Matches all jobs to the standards for each category based on similarity of tasks, decision-making exercised, and contribution to the overall goals of the organization	Advantages: Simple once categories are established. New or modified jobs can be assigned within the existing system. Disadvantages: Subjective and jobs might fall into several categories. Similar titles might describe different jobs from different areas. Takes a great deal of care on the part of the evaluators.
Quantitative	Point Evaluation—the value of a particular job is expressed in monetary terms. First, identify compensable factors, then assign points that numerically represent the description and range of the job. Examples of compensable factors include skills required, level of decision-making, number of reporting employees, and working conditions.	Advantages: Often viewed as less biased than other methods because the evaluations do not assign total points until all of the compensable factors are identitied and evaluated. Disadvantages: Subjective decisions are made about classification and associated points. Job evaluators have to be aware of their own biases and work to make sure they are not at work in the evaluation.
Quantitative	Factor Comparison—involves ranking jobs that have similar responsibilities and tasks according to the points assigned to compensable factors. Jobs are then analyzed in the outside labor market to establish a market rate. Jobs are compared to benchmark positions according to the market rate of each job’s compensable factors to determine job salaries.	Advantages: Results in customized job-ranking. Disadvantages: Time-consuming and subjective process.
Quantitative	Market Comparison—job evaluators compare compensation for the organization’s jobs to the market rate for similar jobs.	Advantage: Jobs are tied to the market and the rates can easily be modified as the market changes. Disadvantages: Requires careful selection of benchmark positions and accurate market-pricing surveys.

Compensable factors play a vital role in several of the job evaluation methods. It is critical that these factors be developed carefully.

    Identify the organization’s internal values.

    Review the job content of the group of jobs.

    Identify five to 12 factors.

    Obtain buy-in for the chosen factors.

    Identify the highest and lowest levels/degrees of each factor.

    Identify a logical progression that reflects reasonable differences and creates intermediate levels.

    Develop a job-worth hierarchy consistent with the organization’s perception of relative job worth.

    Establish the proper number of levels.

Quantitative evaluation methods use a scaling system to evaluate the value of one job as compared to another and assign a score. Quantitative evaluation methods include:

    The Factor Comparison Method ranks jobs on compensable factors such as skill, responsibility, effort, working conditions, and supervision. It identifies factor weights and assigns dollar values to each factor. These dollar values are then added together for each individual position and the resulting total becomes the wage rate for the job.

    The Point Factor Method assigns a point value based on a compensable factor. Compensable factors reflect the dimensions along which a job is perceived to add value to the organization; these factors are used to determine which jobs are worth more than others. Each job receives a total point value and its relative worth can be determined. The Guide Chart-Profile or Hay Plan is a best-known method.

Sample compensable factors are:

1.    Knowledge.

2.    Task Complexity.

3.    Independent Judgment.

4.    Customer Satisfaction.

5.    Error Impact.

6.    Degree of Confidentiality Required.

7.    Supervisory Responsibility.

8.    Mental/Visual Ability & Effort.

9.    Education.

10.    Physical Requirement.

The following is a sample Factor Summary Sheet using a senior computer programmer and showing the first five factors in the previous list.

Completed Factor Summary Sheet for Senior Computer Programmer

Factor	Points
Knowledge	360
Task Complexity	252
Independent Judgment	336
Customer Satisfaction	234
Error Impact	288
Degree of Confidentiality Required	198
Supervisory Responsibility	96
Mental/Visual Ability & Effort	108
Education	90
Physical Requirement	20
TOTAL	1,982

Working With Pay or Salary Surveys

Once the value of each job has been established within the organization, it’s time to look externally and gather information from salary surveys. Salary surveys should answer four critical questions:

1.    What is the labor market for your jobs?

2.    How will the data be used?

3.    How frequently will you update the data?

4.    How will you communicate the results?

Two considerations must be addressed: position match and data match.

Position Match

    Start with job families to match—low to high.

    Look for exempt and non-exempt positions to include.

    Match base pay to base pay.

    Match duties, not titles.

    Closely examine experience and education requirements.

    Look at scope of position in terms of company size, budget responsibility, industry, and so forth.

Data Match

    Use a simple average in evaluating the survey results, not the median.

    Use data with at least 10 participating organizations and 15 incumbents in the survey job.

    Use data that is as close as possible to your geographic labor area.

    Use three surveys at a minimum.

Once collected, review the data carefully. Consider how your job levels and families compare to the external data, internal equity, and financial impact of the results. For example, will salaries need to be increased?

Creating a Pay System

Depending on the pay philosophy the organization has selected, salary ranges or pay grades may be established. Salary ranges may be unique to each position or grouped into salary grades. If salary grades will be used, the right number of grades will have to be selected and developed.

    There is no magic formula for establishing the number of grades.

    They need to fit each organization’s needs.

    They need to distinguish between different levels of jobs and provide room for salary growth.

    There should not be so many that the distinction between them is insignificant.

Many organizations have different grades for exempt and non-exempt positions. Others develop separate grades for executives. How broad these grades are is typically influenced by things like tenure and difficulty levels of the jobs within each category. Regardless of how the organization chooses to represent salary grades, the pay philosophy (lead, meet, or lag the market) will drive how midpoints (the middle of the range) will be set and the width and overlap of the grades. The organization should also consider its organization profile and the value of its overall rewards package.

The use of quartiles and percentiles shows how groups relate to each other and can be used to determine if an organization leads, lags, or matches the labor market. The following shows the range for one job grade as reported in a salary survey:

Once midpoints are determined, the actual range for each grade must be established. There is no hard and fast number for range widths. Organizations should determine these widths after considering the impact these ranges will have in terms of employee motivation and longevity. Midpoints should be adjusted annually to ensure that the organization remains competitive.

Most organizations create wider ranges for higher-level jobs and narrower ones for entry-level positions. In typical pay structures:

    Executive grades have a range width between 50 and 60 percent.

    Professional grades between 40 and 50 percent.

    Hourly grades between 30 and 40 percent.

In addition, most organizations determine the difference they want to see between grade midpoints.

Employees should understand that salary ranges are attached to jobs and are career ranges, and that minimums and maximums of salary grades should be taken seriously. When pay variations occur, they need to be addressed.

Pay variations include:

    Green-circle rates, which occur if employees’ salaries are below the minimum. This may happen when trainees are hired and will be given raises as new skills are required. Once they are fully qualified, they should be at the midpoint of the range, because this is tied to market value.

    Red-circle rates are rates above the pay range maximum. Employees will generally only receive a raise if the maximum of the range goes up. This can happen when employees are moved into these pay grades as the result of transfers or recalls after a layoff.

If green circles happen as the result of implementing new grade structures, it is generally considered appropriate to adjust employees to the new salaries called for in the new grades. Red-circled employees are usually not reduced to the new maximum but rather are frozen at their current salary. One tool that is useful in these situations, as well as in measuring the effectiveness of a salary program, is a compa-ratio.

Compa-ratios index the relative competitiveness of internal pay rates based on range midpoints and are calculated by dividing the pay level of an employee by the midpoint of the range. Given a range of $6 to $10 an hour, a midpoint of $8, and a salary of $6 an hour, the compa-ratio is: $6 divided by $8 or 75%. A compa-ratio less than 1.0 means the employee is paid less than the midpoint. A compa-ratio greater than 1.0 means wages exceed the midpoint. These calculations can be used to assess employee, department, and company positions in salary ranges.

Minimum	Midpoint	Maximum
$6	$8	$10

Pay	Compa-Ratio = Pay/Midpoint
$6 $6/$8 = 75%	$10 $10/$8 = 125%

Two final topics to consider when developing a salary structure are broadbanding and salary compression.

Broadbanding

Broadbanding is the combination of a number of salary grades into new ones with a much wider spread between minimum and maximum. Whereas a typical salary range might have a width of 40 percent, a broadband range would have a width of 100 percent. This technique is very frequently used during reorganizations and results in fewer, wider ranges. It is an effective way to reduce the number of grades or classifications.

Its advantages include streamlining the organizational hierarchy, facilitating internal movement, and putting added trust in management. The disadvantages include the lack of a true midpoint and the inability to use compa-ratios. Broadbanding may also lead to inequities, a lack of cost controls and a severe reduction in opportunities for promotions.

Salary Compression

Salary compression occurs when the pay spread between newly hired or less-qualified employees is small in comparison to longer-term, more experienced employees due to rising starting salaries. This phenomenon generally occurs when organizations fail to raise pay range minimums and maximums over time, when there is a shortage of qualified candidates for particular jobs, and when hourly employees’ overtime and base pay is higher than that of their supervisors.

Periodically monitoring market rates and the effectiveness of the organization’s pay practices by studying compa-ratios will help prevent salary compression and should be a part of the organization’s process improvement efforts. This is also important in monitoring pay equity in the organization.

Developing a salary structure is an often-overlooked activity that plays a key role in an organization’s success when done with care and attention to the organization’s goals. Many surveys have shown that people leave organizations when they feel they have not been paid fairly for what they do.

Time and resources spent developing a salary structure and communicating the process to all employees will result in fewer departures and higher motivation. Though not easily done, it is effort well spent.

Discussion Questions:

1.    What information would be important for your organization to capture on a job analysis questionnaire?

2.    Given the various methods for generating job analysis data and information (observation, questionnaire, diary/log, interview, or combination), which would be the most effective for your organization and why?

3.    What compensable factors—those measurable qualities, features, requirements—are critical to jobs in your organization when conducting job evaluations?

4.    How does your organization address pay rates below the minimum (green circle) and pay rates above the maximum (red circle)? How do you deal with employees who have topped out?

5.    Considering geography and industry, what are some options for salary surveys for your organization?

About the Chapter Author

Mary Jane Sinclair, SPHR, is president of Sinclair Consulting in Wharton, New Jersey, and has more than 30 years of human resources experience with emphasis on compliance, compensation, management development, and training. She consults with a variety clients and industries including Fortune 500, privately held companies, government agencies, and non-profits.