The importance of a pay structure

18 Dec 2019

People can be the determining factor of the success or failure of an organisation. This is why it is very important to attract and retain the right skills to drive company performance. This can be achieved with the right remuneration practices. A well-designed pay structure is the key to successful remuneration practices. Although pay is not the only engagement factor for employees, it is most likely to be an attraction factor, and can certainly be a dissatisfier if it is perceived as unfair or poorly managed.

A pay structure (often called a pay scale) gives a salary range per grade that an organisation or company will endeavour to remunerate within. The purpose of pay scales is to provide guidelines linked to grade. It provides a logical framework on which to base remuneration decisions with regards to recruitment, performance and more.

The ideal pay structure design is one which has the right balance between affordability and competitiveness. Pay structures are typically designed to support both internal equity and external competitiveness. Internal equity refers to the relative grade assigned to different jobs within an organisation. The focus on external competitiveness is on external equity and is based on the organisation’s need to compete in a free market for skills (attracting and retaining talent).

A remuneration structure comprises pay scales based on market data and is anchored at a particular level within the market distribution. The level at which a pay structure is anchored in the market distribution is determined by an organisation’s remuneration policy and that organisation’s affordability. A pay structure is also influenced by the current reality of actual pay distribution. This is why one of the first steps in designing a pay structure is the analysis of the existing levels of remuneration.

Given that the pay structure relies on market data to ensure external competitiveness, a reliable salary survey is required, one example being the 21st Century RewardOnline survey, an independently audited salary survey.

Any pay structure should be managed and updated on an on-going basis. There may be some anomalies that an organisation would need to resolve initially, however applying the following basic principles in the management of the pay structure should deter any future irregularities.

The organisation should have a formal job evaluation system in place. New positions should be evaluated and existing positions should be monitored for any changes in the job profile which would warrant a change in the job grade.
The pay scale should be adjusted annually prior to TGP increases to reflect actual national changes in remuneration over the preceding twelve months – this should be done regardless of whether or not the organisation awards annual increases to employees
The pay scale should be externally benchmarked every two - three years
The pay scale design should be supplemented by a pay progression model.

The basic purpose of a Pay Progression Model is to provide a structured process for movement within a specific pay range attached to a specific pay grade. The model sets out the guiding principles for pay progression across the organisation. Pay progression is affected by pay grades, the range of each pay grade and the levels of hierarchy within the structure. Pay scale progression can be linked directly into performance management and ensures that superior performance is justly rewarded.

Implementing a well-designed salary structure is critical for any organisation. While the objective is to provide fair and competitive salaries in order to attract and retain talent, a well-designed pay structure will encourage internal pay parity while ensuring that individual performance is rewarded fairly.