When it comes to paying employees, HR managers face a daunting challenge: offering competitive salaries to attract and keep qualified talent, without harming the bottom line. Fortunately, it’s easier than ever to set up a competitive pay practice, which is a common-sense way to set salaries.
In developing a competitive pay practice, employers review internal job descriptions and salaries, and then compare them to similar positions at other companies. You can determine what you should be paying your employees by obtaining salary data from other firms, from public sources, or from colleagues in your industry or networks.
Options for Salary Structures
- Traditional – This type of salary structure uses multiple pay ranges and grades, based on different employee functions. Employees are often categorized into hourly, salary and executive levels. Each position falls into a specific salary range and grade, so it’s less flexible and managers have little control over raises.
- Broadband – Broadband salary structures break employees into larger groups, rather than the narrow ranges of a traditional structure. For example, a company may decide to group employees into administrative, professional and executive categories, with wide salary ranges in each.
- Step Pay – In this type of salary structure, positions are graded into three or more steps, and pay increases are tied to each. For example, a firm may distinguish between Accountant I, II and III, where employees move up to higher levels and salaries based on experience and tenure.
- Market-based – This salary structure is based on what the market is currently paying for similar jobs, based on salary surveys. Technology, professional and financial services companies typically use the market-based salary structure.
5 Steps to Developing a Competitive Pay Practice
If your company is moving toward a competitive pay practice, the following steps can help get you there:
- Get to know your market – Pay attention to trends in your industry and region. Salaries may have dipped after the Great Recession, but they’ve been ticking back up over the past several years. You may find your current offerings lie at the lower end of the scale.
- Benchmark salaries – Identify employees who are at a high risk of turnover by benchmarking salary ranges at least once annually.
- Develop a compensation plan – Some companies prefer to keep their pay policies informal, but planning can pay off too – particularly as the business grows. A structured plan can support organizational goals, while preventing issues with inequities, employee engagement and turnover.
- Find pay inequities – When you fail to seek out inequities, you can put your company at risk of losing valued employees. Avoid these unpleasant surprises by being proactive.
- Communicate your strategy – Boost morale and engagement by increasing transparency. In general, informing employees about the compensation strategy makes them feel valued and aligns their efforts with company goals.
Pros and Cons of Competitive Pay
Competitive pay can move your company toward its goals of attracting and retaining talent. It can also increase productivity, as employees can spend more time focusing on their job duties and less time seeking better paying jobs. Lower turnover can also lead to better morale, increased organizational knowledge and a stronger company culture.
However, overemphasizing competitive pay can lead to lack of focus in other important areas, such as developing a positive company culture, providing ongoing training and employee development, or implementing a wellness plan – which may be necessary to stay competitive in your field and region. In addition, this type of pay structure can result in a lack of employee motivation, since pay is based on the position, not performance. Fortunately, this drawback can be overcome through bonus pay or commissions.
Competitive Pay is Good for Growth
Developing a competitive pay practice can make paying employees easier, while serving to improve recruiting and retention efforts. Take time to review these five steps, and you’ll be ready to implement this practice in any organization.