Remuneration practices vary in different countries/institutions depending on institutional arrangements in relation to setting, reviewing and adjusting remuneration. Salary structures are an important component of effective compensation programmes.
They provide an ideal platform for organisations to ensure that pay levels for job groups are competitive externally and equitable internally.
A well-designed salary structure allows management to reward performance and skills development, while controlling overall base salary cost by providing a cap on the range paid for particular jobs or locations.
The two most common methods companies use to design base salary structure ranges are market pricing using external market data and point factor focusing on internal pay equity.
According to the Society of Human Resource Management, there are five steps to designing a pay structure. These are as follows:
Step 1 – Job analysis: This is the process of studying and documenting the requirements and contents of jobs in an organisation, the outcome of which are job descriptions.
Step 2 – Job evaluation: This is the process of determining the relative worth of jobs in an organisation, the outcome of which is hierarchical ranking and grading of jobs.
Step 3 – Pay policy identification: This is the process of determining whether the organisation wants to lead, lag or meet the market in compensation. Pay policies can vary across job families and job levels.
Step 4 – Pay survey analysis: This is the process of analysing compensation data gathered from other comparable employing entities in a survey of the relevant labour market.
Step 5 – Pay structure creation: This is the final step, in which the internal structure is merged with the external market pay rates (Step 4) in a simple regression to develop a market pay line. The market pay line can be adjusted up or down and then, pay grades and pay ranges are developed.
Note: A market pay line is a ‘line of best fit’ created by co-relating the job evaluation points on the X axis and the external salary data on the Y axis. The resulting regression line can then be used to predict the base pay (on the Y axis) for a specific number of job evaluation points (on the X axis). The equation for the simple regression line can be represented as: y=mx+b; in which y is the predicted base pay.
Salary decisions are usually based upon specific aspects. These are, the worth of jobs, level contributions to the organisation’s objectives, individual and organisational performance, internal and external equity, level of skills scarcity, and budget considerations.
The guiding principles or precepts guide organisations in the design of a salary structure, irrespective of changes in its goals, strategies, type of work, or the top management.
The eight principles in the design and administration of management compensation programmes are as follows:
Strategic objective: This principle ensures the link between pay dynamics, objectives and vision of an organisation. As provided in the constitution, the objective of public service compensation structures is to ensure that public services are able to attract and retain the skills required to execute their functions.
Completeness: This principle ensures that the totality of remuneration and benefits are included in the compensation and benefits framework. Public service pay structures should be complete with all associated benefits to avoid ambiguity, and therefore, ensure transparency as per the constitution.
Competitive: This principle ensures that pay opportunities are consistent with the desired competitive practice. The constitution and SRC Act, 2011, require that SRC ensures that public service pay structures consider fairness, and compensates public servants based on the principle of equal remuneration to persons for work of equal value.
Flexibility: This principle ensures that pay structures are responsive to organisation and market dynamics. SRC set a four-year review cycle upon which to review pay to incorporate prevailing labour market realities and national economic dynamics.
Performance based: This principle ensures motivation of employees by demonstrating the link between performance and pay to encourage and reward excellent performance. It encourages profitability and general service delivery. The constitution requires that SRC recognises productivity and performance in the execution of its mandate.
Appealing to employees: This principle ensures that the compensation programmes consider employees’ personal and career goals and objectives. This is to ensure attraction and retention of requisite skills.
Simplicity: This principle ensures that the compensation programme is clear, understandable and easy to interpret, both for employees and the general public. This feeds to the constitutional principle of transparency.
Affordability/sustainability: This principle ensures that the compensation programmes are consistent with both short and long-term fiscal health of an organisation, and all compensation adjustments must be made within this context.
Benefits: This principle ensures that pay systems provide for more than just the basic pay and remunerative allowances. Health benefits, retirement, and other financial and non-financial benefits are important elements of competitive compensation. It co-exists with the principle of completeness.
Legality: This principle ensures that the determination of compensation programmes and structures are founded and supported by strong statutory and legislative framework, including labour relations laws on workforce compensation. This is to minimise litigation.
Futuristic: This principle ensures that compensation programmes are linked to the strategic plans and aspirations of an organisation. It should, therefore, be used as an enabler to the attainment of such aspirations.