Developing a solid compensation structure will help you set the appropriate pay ranges for your jobs. If pay ranges are too narrow, you won’t be able to reward high performers. Too broad, and the pay ranges provide very little support for your compensation philosophy.

1. 4 Steps to Building Smart Compensation Structure
Jennifer Ferris, CCP
Compensation Professional
Ian Englund, CCP
Compensation Professional
www.payscale.com

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Agenda
Why have pay structure Requirements for building structure Building Structure
•Step 1: Identify pay schedules
•Step 2: Determine pay grades
•Step 3: Develop ranges
•Step 4: Assign grades to positions & adjust for internal equity Using Pay Ranges Immediate Actions

4. Why have pay structure
4
•Clarifies the market and internal value for each job, and provides a way to manage employee pay effectively
•Quantifies compensation costs & enables budget decisions
•Validates compensation strategy & aligns to business goals
•Provides a tool to talk with employees about development
•Ensures pay equity
•Determines pay for non-benchmark jobs
•Allows ease of administration

5. REQUIREMENTS FOR BUILDING PAY STRUCTURE
Develop a compensation philosophy & strategy
Know your jobs
Conduct a market analysis

6.  Pay Schedules
 Pay Grades
 Pay Ranges
Pay Structure Elements

7. Building Structure
Step 1: Identify Pay Schedules

8. Identify Pay Schedules
oGroups like geographies together with the same set of pay grades
oStreamlines pay structure
oConsider how complex your organization is
oIndustries and/or lines of business
oRetail & Social Services
oSales
oEngineers vs Admin
oLocations

9. 6 Different Pay Schedules:
oHome Schedule– 3 labor markets, within 2.5% of HQ
oSchedule A, Minus 15% Schedule – 4 labor markets
oSchedule B, Minus 10% Schedule – 7 labor markets
oSchedule C, Minus 5% Schedule – 4 labor markets
oSchedule D, Plus 5% Schedule – open
oSchedule E, Plus 10% Schedule – 1 labor market
For example…

10. Building Structure Step 2: Determine Pay Grades

11. Determine Pay Grades
oNumber of pay grades varies in response to:
oSize of the organization
oDistance between the highest and lowest level job
oHow differentiated are the jobs (i.e. levels)
oThe pay increase and promotion policy of the organization
oDetermine the definition or label for each grade

12. Building Structure
Step 3: Develop Ranges

13. oMidpoint Differential.
o=(MidB-MidA)/MidA
oRange Spread.
o=(Max-Min)/Min
oMin relative to Mid.
o=Mid/(1+(Range Spread/2))
oMax relative to Min.
o=Min*(1+Range Spread)
Develop Ranges

14. Considerations
oRange Spread at base vs top of structure
oOverlap between pay ranges

15. Building Structure
Step 4: Assign grades to positions and adjust for internal alignment

16. •Align positions to structure by matching market value with closest range midpoint
Assign Grades to Positions

17. Adjust for Internal Alignment
•Adjust for internal alignment.
•Positions with similar level of responsibility and value to the organization
•Where market is between two grades, use internal equity to tip

18. Example
Internal Title
Grade
Billing & Collections Specialist I
1
Member Services Specialist I
1
Accounts Payable Specialist I
2
Billing & Collections Specialist II
2
Branch Inside Sales I
2
Member Services Specialist II
2
Quality Assurance Analyst I
2
Accounts Payable Specialist II
3
Billing & Collections III or TL
3
Branch Inside Sales II
3
Marketing Coordinator
3
Office Manager
3
Project Coordinator
3
TAC Engineer I
3
Branch Inside Sales III
4
Corporate Accountant I
4
NOC Technician I
4
TAC Engineer II
4
Corporate Accountant II
5
NOC Technician II
5
Project Manager I
5
Software Development QA I
5

19. How do you use pay ranges?
•Determine employee placement in range
•Develop guidelines or policies

20. Understanding Range Penetration (RP)
RP = (EE Pay – Range Min) / (Range Max - Range Min)
•Indicator of how employee is positioned in the range
•Use RP in policies to get specific

21. Employee Placement in Range
Range Midpoint
Minimum
Maximum
$20,000
$32,000
$26,000
Range Midpoint:
Range Minimum:
Range Maximum:
Lower limit of a pay range/band. Pay for new or less experienced employees should be closer to minimum.
The midpoint identifies the proficiency point. Market based ranges have a midpoint that aligns with the target percentile in the market.
The upper limit of a pay range/band. Pay for more tenured employees or star performers should be approaching this number.

22. Employee Placement in Range
Range Midpoint
Minimum
Maximum
$20,000
$32,000
$26,000
Green-Circled Employees
Red-Circled Employees
Employees that are paid below the minimum of the pay range.
Employees that are paid above the maximum of the pay range.

23. Comparing Employee Pay to Ranges
Range Midpoint
Minimum
Maximum
$20,000
$32,000
$26,000
50% Penetration
33%
66%
100%
0%
Range Penetration:
A percentage that shows an employee’s position in the range. The percentage shows a relative comparison to the minimum of the range.
= (Employee Pay – Min) / (Max – Min)
Range Penetration = 0%
Employee’s pay is at the minimum
Range Penetration = 50%
Employee’s pay is at the midpoint
Range Penetration =100%
Employee’s pay is at the maximum

24. Immediate Actions
Gather information about your jobs
oWhat are the key skills, experience, and education required?
oWhat are the top 3 responsibilities?
Talk with managers and executives
oWhere are you recruiting (or losing) your talent?
oBegin to explain the usefulness of pay ranges
Obtain accurate market data for your positions

25. PayScale Delivers Where Other Compensation Providers Fall Short
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Jennifer Ferris, CCP
Compensation Professional
Ian Englund, CCP
Compensation Professional
www.payscale.com