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Designing a Base Pay Structure

Designing a Base Pay Structure. Jayendra Rimal. Introduction. Strategy: Develop a link between work required, performance demonstrated and pay provided to each employee. Guidelines for developing pay structures:

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Designing a Base Pay Structure

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  1. Designing a Base Pay Structure Jayendra Rimal

  2. Introduction Strategy: Develop a link between work required, performance demonstrated and pay provided to each employee. Guidelines for developing pay structures: • Minimum and maximum levels of pay (considering ability and willingness to pay, concern for profitability, government regulations, union influence and market pressure) • The general relationships among levels of pay • Whether the pay structure should lead, lag or lead-lag the market • The division of the total compensation (what portion goes into base pay, into benefits, merit pay or pay-for performance)

  3. Some Pertinent Questions • What is the lowest rate of pay offered that will entice people? • What is the rate of pay to ensure incumbents will stay? • Does the organization want to recognize seniority and meritorious performance through base pay? • Does the organization want to give different rate of pay for identical jobs? • What is considered the sufficient difference in pay rates? • Does the organization wish to recognize dangerous jobs? • Should there be a difference in changes in base pay progression opportunities among jobs of varying worth? • What should be the relationship between promotion and changes in base pay? • Do policies permit incumbents to earn rates of pay higher than established compensations? • Will the pay structure accommodate adjustments?

  4. Pay Structure Architecture Determining a Pay Policy Line: • This is a line of best fit that best represents the middle pay value of jobs that have been evaluated to have a particular worth. • A line of best fit produces a trend line by minimizing the sum of the squares of the vertical deviations around that line. • This best represents the middle pay value (the central tendency) of all jobs used to establish a pay policy line. • Using the pay policy line, organizations set minimum and maximum pay levels, range and relationship among pay rates.

  5. More Than One Pay Structure • It is quite usual for large organizations to have multiple pay structures that focus on the forces that influences the actual pay. • Blue collar workers, white collar salaried staff, managerial or professional employees and senior executives may be some of the structures. • Sometime legal considerations must be taken into account too. • What are the prescribed minimum standards? • The influence a geographical area or industry labor market has on wage rates. When employment rates are high, minimum rates must be high to attract job seekers. But if it is too high, it could limit competitiveness and profitability. If it is too low, the number of suitable candidates may be inadequate to meet standards. Salary survey could, thus help in this regard. • Usually the CEO earns the highest pay but it is relatively harder to relate the contribution at this level as compared to the lower levels. At this level job is designed to fit the knowledge, skill and even the style of the CEO.

  6. Developing Pay Grades Pay grades are convenient groupings of a wide variety of jobs or classes similar in work difficulty and complexity requirement but possibly with nothing else in common. The maximum pay of a pay grade states that this is the most that work produced by someone holding a job in this grade is to the organization. The bottom pay places a minimal value on the contributions of the assigned jobs. Some types: • Single rate pay grade • Two tier wage plan • Range or spread dimension • Pay grade width • Determining pay grade minimum and maximum rates of pay • Internal design consideration • Broadbanding

  7. Pay Sectors, Education, Experience and Training It may be useful to review the education, experience and training requirements for jobs within each pay grade: Pay sectorEducation, experience, training I Less than high school education, no experience to a max of 2 years, no formal training III Completion of bachelor’s program, 3 years related work experience, formal training V Completion of Masters program or extensive related work experience (10 years), formal training with valid registration VII Knowledge gained through formal education and job experience that establishes jobholders as masters of a professional field of work

  8. Any questions?

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