To avoid encountering trouble with your employees and having to face lawsuits on wage discrimination, you need to have a good pay structure that is competitive, fair, easy to administer, and compliant with federal and state regulations.
Striking the balance
The quest to come up with a suitable formula to create salary range is an ongoing challenge for many organizations, as industry and economic factors that determine what is “fair” may change rapidly. If you make the mistake of paying workers too little, your company may alienate and lose its best workers; worse, you may fail to recruit desirable candidates. If you pay too much, on the other hand, company resources may run out.
Your pay structure needs to be competitive with the structures of other companies in your industry; if recruitment is the main goal, strive to make it slightly better than your competitors’ wage structure. Your policy on salary likewise needs to be institutional, meaning, it should provide a solid, sensible, and fair framework on which salaries of other employees and new hires can be based.
The right formula
When creating a policy for your salary structure, you need to follow a formula to create salary range. Keep in mind these objectives:
· A good formula to create salary range should give consistent and equal pay to the employees according to their assigned responsibilities and duties.
· It should encourage productivity while stimulating or motivating employees to give their best at work.
· It should set basic parameters for determining salary range widths.
The most widely-used formula for determining salary is fair is the Compa-Ratio (short for Compensation Ratio), which is a position-specific representation how well an employee is paid compared to industry standards. Each job position in your organization should have a salary range values encompassing the minimum, the midpoint, and the maximum, each representing the industry average for the position.
Divide the base salary by the midpoint industry average to get the Compa-Ratio. If the result is 1.00 or 100%, then the employee is paid correctly based on industry averages. If the ratio is 0.75, the employee is paid 25% below the average.
This ratio may also be used to determine which employees may be entitled to pay raises, and by how much. As a general rule no further increases should be given to employees with ratios of 1.15 and up. For those whose ratios are 1.00, the typical average raise given by the company may be expected. Above-average pay raise may be granted to employees with a ration of 0.80 and below.
Surveys and comparisons
To start improving your company’s salary structure, review any existing salary policies your company may have and find some room for improvement. Start determining salary range widths by listing down the job titles within the company and then researching comparable positions in wage and salary surveys. Analyzing the job positions within the company helps you become more familiar with the responsibilities, skills, and experiences needed or required in each.
Many consulting organizations offer wage and salary surveys for purchase, which include most industries, geographical regions and positions. Doing this research will help in gathering enough salary survey data so you can check what factors in the current state of the market can influence your salary policy. The market research also makes you more familiar with current market trends. Salary benchmarks can also be used so you can easily compare your policy with other companies. You can find salary benchmarks easily on the internet and in salary surveys.
Be sensitive to economics
It also helps to design a salary range that accommodates increases in cost of living. With the fluctuating economy (especially during hard times and recessions), more people are relying solely on their salaries to compensate for daily, monthly, and yearly expenses. Unexpected economic fluctuations can inflict problems on the well being of employees, and on the company itself. Therefore, the company needs to strike a balance; it needs to establish a salary range and policy that can help its workforce stay comfortable during economic downturns without sacrificing the company’s viability during trying markets.
Creating a salary range is an important function for human resource staff members because doing so supports the company’s most valuable assets: the employees. Once the company has come up with a reasonable salary policy, it should be communicated clearly to employees.
