Building a Market-Based Pay Structure from Scratch

Business & Management
#1

Many organizations ask their human resource professionals to create a base pay structure from scratch or to revise the existing structure to meet their changing needs. For HR professionals whose areas of expertise lie outside the compensation arena, such a project can seem challenging at best. See Introduction to the HR Discipline of Compensation.

The compensation system development process, however, does not have to be an overwhelming and dreaded goal. Building a market-based pay structure from scratch encompasses the following steps:

Gathering the background information needed for project success.
Determining the sources of external market data and getting the data ready.
Conducting the market data analysis.
Developing the pay structures.
Calculating the costs of the pay structures.
Implementing and evaluating the new pay structures.
This article walks through each of these major steps to help novices successfully develop a complete pay structure from scratch. Those seasoned in compensation will find the article helpful in keeping their compensation skills current in today’s volatile compensation markets.

Business Case

One of the most basic functions of business management is to establish a compensation scheme that is competitive and equitable and that promotes employee engagement and high performance. Competitive compensation practices are essential to employee recruitment and retention efforts. See Maximize Return on Compensation by Avoiding 7 Common Mistakes.

HR’s Role

HR professionals are key in this process. HR professionals assist managers in determining the functions the organization needs performed, the best organizational structure, the market clearing price for such job functions, and ways to communicate the compensation scheme so that employees perceive it as equitable and so that it encourages their high engagement and high performance. HR professionals must accomplish this responsibility in an environment where the legal landscape is constantly changing under several federal laws. See Compensation Practices Becoming More Formal, Rigorous.