Managing reward: Base pay and salary structures
Section three of the Personnel Today Management Resources one stop guide on managing reward, covering: base pay, pay surveys, pay setting, salary structures and pay progression systems. Other sections .
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Base pay
Base pay, whether expressed as hourly rate or annual salary, is set by organisations using a mixture of external (ie, market based) and internal comparisons. Although some organisations claim to be entirely market based and objective in their pay setting decisions, it is in practice unwise to ignore internal relativities.
The rates of pay enjoyed by existing employees and the differentials which operate between managers and team members will always be sensitive subjects. Employees tend to have a fuller understanding of internal relativities than their line manager supposes and will invariably possess a strong sense of what 'fair and equitable' means to them. At the other extreme, those organisations which emphasise internal comparisons cannot remain aloof from market pay rates if they are to attract new employees into the organisation. Furthermore, pay progression which does not broadly align itself to market movement (generally underpinned by consumer/retail price inflation (CPI/RPI indices) over time, will store up pay pressures which ultimately result in either industrial action and recruitment difficulties or employees leaving.
Regardless of whether the organisation's preferred approach to pay setting emphasises external (market competitive) or internal (equitable) comparison, the most fundamental skill required in a competent pay analyst is the ability to compare like jobs - the art of not merely comparing apples with apples, but being able to differentiate between Granny Smiths and Golden Delicious.
In most labour markets commercially available market pay data are readily available. The major international pay consultancies (eg, Watson Wyatt, Towers Perrin, Hay, Hewitt, Mercers) publish survey data on a commercial basis in report form, often extending to function/job family specific reports for say finance or IT professionals. The price paid by organisations submitting data to the survey provider is normally lower than the price payable by non-participating organisations. In addition companies often collaborate to share data on a confidential basis within their sector.
Examples of private club surveys are the Food Review Group and the Hotel Employers Group surveys. Surveys such as these require membership of the 'club' - something usually extended on an invitation-only basis by existing club members. Where the private club sponsors a survey conducted by consultants retained by the club, then the expense of the survey will usually be shared equally between club members.
The key considerations when selecting suitable survey sources include:
How many organisations participate in the survey?
Are they representative of competitor organisations? (ie, those you would expect to recruit people from or lose people to the businesses concerned)
What is the overall sample size for jobs against which you wish to benchmark - is it statistically significant?
How well is the data presented - is it fit for the purposes for which you want to use it?
Is the survey methodology rigorous, eg, is an acceptable proportion of the sample matched year on year?
Do the job descriptions/benchmark jobs align with the job roles you are seeking to match against survey data?
How often is this survey updated, because you will need to maintain market data which is no more than 12 months old?
Does purchasing or participating in the survey represent value for money?
When applying these tests, 'one-off' internet surveys or those produced by recruitment agencies, executive search firms or business magazines will tend to fall short, whereas well established surveys from the larger providers generally fulfil all of the above criteria. These tests should be applied equally to benefits, pensions or international assignment policy surveys.
Pay setting
In setting the rate of pay for a job, it is important to remember that in many countries the minimum hourly rate of pay will be set by law. The UK has had a statutory National Minimum Wage since the late 1990s updated annually (£4.85 for adults from 1 October 2004), France has the SMIC (expressed as a monthly minimum) and the US operates a Federal Minimum Wage with variations by state.
Beyond statutory obligations it may be that not only minima, but all pay rates are set by a national collective agreement (as applied to many public sector workers in the UK), by agreement with the trade union representing employees in a certain company or workplace or by reference to an industry-wide (sectoral) collective bargaining agreement. The latter approach is particularly common in mainland Europe.
In the absence of these constraints, pay rates can be set by reference to whatever mix of (formal or informal) internal and external benchmarking the company chooses. However, the guidance given above, concerning the selection of surveys to benchmark against market pay rates, remains best practice in informing pay setting decisions.
Where pay is set by reference to market data this process is commonly described as 'market pricing'. The foundation of market pricing is of course a rigorous job matching methodology, whereby any particular job is carefully benchmarked against survey data, examining features of the job such as:
Job title
Reporting line (ie, to which post does the job report)
Qualifications, experience or competencies required to perform the role
Accountability for resources (budget, capital spend) or impact on sales turnover, profit, business reputation etc
Number and nature of direct reports
Global reach (domestic versus significant international responsibilities)
Location (eg, for the same job London rates of pay may differ markedly from those in say Northern Ireland).
Market pricing is by far the dominant approach to pay setting in the US where there is a proliferation of data sources and a more process driven business culture than that which prevails in the UK. It is important to note that in many countries market pricing is a challenging exercise because companies are reluctant to share their pay data, even anonymously, in a commercially available survey. This is more often determined by the national culture of the country in which the business is parented - citizens of some societies are simply more at ease in disclosing 'how much they make'.
Salary structures
Salary structures can take many different forms although it is more common to find hourly paid workers in receipt of a spot rate ('rate for the job'), and salaried employees having their pay progression managed through some form of salary structure. At the highest levels of an organisation (eg, directors, chief executive, chairman, and so on), salary setting and progression tends to revert to individual rates based on the perceived value of the individual to the organisation. In effect, paying for the rarity value of the person and their distinctive contribution to the organisation rather than paying for a 'commodity' job role.
Smaller companies are often an exception to this general observation, in that they rarely recognise the value of a salary structure until the organisation exceeds around 200 employees. This view is substantiated by the latest CIPD Reward Management Survey indicating that as organisations move up towards 250 employees the need for a coherent reward strategy tends to be recognised by managers as a valuable development. As a result, informal or spot rate systems are replaced by more structured approaches.
Salary structures are efficient means of managing either market based or internally focused pay differentials. They help to ensure equity, provide a logical framework to inform salary setting and progression decisions and assist budget planning and overall control of payroll costs.
Salary structures are typically based around grades, levels or similar job classification systems. The most effective approaches to salary setting and progression structures will be those which align themselves to recruitment selection, talent management and benefits entitlement in a way which facilitates a joined up HR strategy. Although there are many different descriptions applied to salary structures they are really only two types:
i) those which centre on the individual job or person
ii) those which cluster jobs of similar type into a band, range or role level.
The key consideration in designing a salary structure is firstly to determine the basis for the grades or levels which in turn will align to the number of salary ranges or salary bands (terms used interchangeably) to be used. At one extreme this may be determined by a job evaluation system (see Section 2 ) or, at the other end of the spectrum, a lighter touch approach to job levelling based on the competencies required to operate at a particular organisational level.
The questions which could be asked to inform the decision include:
What is the business need (eg, to define career ladders as well as manage pay more effectively)
Where is the organisation starting from (eg, already grade-based)?
What are the pros and cons of different approaches in this organisation (eg, job families/functions, individual,
How important is consistency, transparency or equal pay?
Will this structure need to travel (eg, internationally, across different divisions or companies in the group)?
An example of descriptive job levelling appears opposite. In this example it is a four level structure for an IT job family, including benchmark jobs for each level:
Once jobs have been defined and levelled, they should be benchmarked against comparable jobs in either commercially available or bespoke pay surveys (see previous paragraph on pay surveys). Thereafter, the actual salaries of current job holders can be compared against market pay data and illustrated in a scattergram. Comparing different market positions (eg, median market, upper quartile market) against actual incumbent data. This provides a high impact visual analysis to inform decision-making, as shown above.
Visual presentation of such data greatly assists decisions about the most appropriate width of salary bands. Lines (either straight or curved, based on preferred market positioning and progression) can be drawn on either side of the line of best fit and then translated into actual salary bands, similar to those shown in the table and bar chart below. In this example there are six job levels and the degree of overlap and band width is clearly visible. The wider and fewer the number of bands the more likely the structure will be 'broadband'.
Pay progression systems
The organisational environment or prevailing reward philosophy will significantly determine the principles which drive pay progression. The main types of pay progression system which are easily identifiable include:
Service-related
Competency-based
Merit- or performance-related
Cost-of-living based
Age-related (unlawfully discriminatory in some countries)
Some combination of the above factors.
Service-related pay, in its simplest form, is a service-related progression structure which gives employees a step or spine point salary increase after every year or service, generally tied to a common date of increase for all employees. It may or may not be accompanied by a cost-of-living or performance-related increase at some other time of the year (see Kent Police case study in Section 9 ). In the public sector, service-related pay progression systems continue to be widespread, although in private sector organisations they are a relatively rare find. This is not true, however, of all countries. For example, it is commonplace in private sector collective agreements in mainland European countries, such as Spain, to find service-related pay progression structures.
Competency-based is, as the name suggests, a system of pay progression which justifies an increase in salary or step up to a new pay point upon meeting a new level of competency or upon attainment of a particular formal qualification. Typical systems could be progression through pay points for passing through NVQ levels in say a catering or retail company, or passing professional exams in accountancy.
Merit- or performance-based, or similarly branded approaches such as 'contribution-based' pay progression are more likely to advance an employee through a particular salary range than a series of pay points or spot rates. In an era of low inflation, 'merit only' increases are becoming ever more dominant and formal or informal judgements about individual performance or contribution to the business determine the rate at which someone progresses through the salary band.
The objectivity and equity of pay progression decisions is highly dependent on the quality of the performance management system. An example of a formulaic progression matrix detailing recommended increases based on position in salary range and individual performance is shown above. Whether or not a formula approach is adopted will be determined by the prevailing culture of the organisation.
Cost-of-living based pay is an increasingly rare form of pay progression system, its decreasing incidence correlating with the decline of collective bargaining, low inflationary pressures and - in the public sector - Government initiatives for greater pay flexibility locally in lieu of formerly nationally prescribed approaches. Where trade union pay bargaining or statutory pay review bodies operate (eg, the health service or the Armed Forces), cost-of-living increases still significantly determine the rate of pay progression - albeit increases to spot rates or spine points and allowances rather than the rate at which an employee progresses through a salary range.
Combination formulas are also common in the public sector, as illustrated in the example below of teachers pay. In this case, main grade teachers enjoy incremental progression through a pay spine based on years of service (and at the point of commencement on academic qualifications) and in addition receive a cost-of-living adjustment informed by the recommendation of a statutory body responsible for reviewing teachers pay. Once a teacher reaches the top of the pay spine they are then able to apply to pass through various thresholds to higher pay points based on evidence of competency or merit. The result is an entitlement progression up to the top of the main grade pay spine and thereafter competency - or performance-based progression.
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Do |
Do not |
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Remember that thorough job matching is the only reliable basis on which to interpret survey data |
Conduct job matching as a back office (HR only) exercise - always involve those line managers who understand the jobs to be matched |
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Accept that your ability to match jobs against survey benchmarks depends on your understanding of the job you are matching |
Allow yourself or others to job match on the strength of job title alone |
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Evaluate the pros and cons of alternative surveys before participating |
Think that survey data will answer questions about the right rate of pay - the data merely informs the management judgement required |
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Salary structures | ||
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Job level |
Key characteristics |
Jobs within level |
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1 |
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2 |
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3 |
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4 |
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Example of broadband salary structure
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Low |
High |
Band width |
% overlap |
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L1 |
50,000 |
85,000 |
55% |
50% |
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L2 |
35,000 |
70,000 |
100% |
57% |
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L3 |
25,000 |
55,000 |
120% |
67% |
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L4 |
20,000 |
45,000 |
125% |
60% |
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L5 |
15,000 |
35,000 |
133% |
50% |
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L6 |
10,000 |
25,000 |
150% |
N/A |
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Merit-based performance appraisal | |||
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Performance rating |
Low |
Mid |
High |
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Exceeds expectations |
8% |
6% |
4% |
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Meets expectations |
4% |
3% |
2% |
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Performance shortfall |
2% |
0% |
0% |
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Too early to assess |
3% |
3% |
3% |
Spine for qualified teachers in England and Wales (excluding London and fringe allowances)
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Spine point |
01/04/2004 £pa |
01/04/2005 £pa |
01/09/2005 £pa |
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Main pay scale | |||
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M1 |
18,558 |
19,023 |
19,161 |
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M2 |
20,025 |
20,526 |
20,676 |
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M3 |
21,636 |
22,176 |
22,338 |
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M4 |
23,301 |
23,883 |
24,057 |
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M5 |
25,137 |
25,764 |
25,953 |
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M6 |
27,123 |
27,801 |
28,005 |
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Upper pay scale | |||
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U1 |
29,385 |
30,120 |
30,339 |
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U2 |
30,474 |
31,236 |
31,464 |
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U3 |
31,602 |
32,391 |
32,628 |
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U4 |
32,766 |
33,585 |
33,831 |
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U5 |
33,978 |
34,827 |
35,082 |
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Section two: Job evaluation and grading Section three: Base pay and salary structures Section eight: International assignments Section ten: Resources/ jargon buster
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