Retain Top Employees with a Competitive Compensation Structure

Understanding Employee Classifications

Most people are familiar with classifications for full-time versus part-time employees. Other classification types need to be taken into consideration though. Employee classification types include:

• Full-time – employees who work at least 30 hours per week* on an ongoing basis.
• Part-time – employees who work less than 30 hours per week* on average on an ongoing basis.
• Temporary – employees who are hired for a set length of time to work on a specific project.
• Seasonal – employees hired to help during peak seasons.
• Contingent workers – outside workers who are under contract for specific services but are independent of the organization.

*As established by the IRS to determine benefits eligibilities.

The proper classification is determined by the number of hours worked and the anticipated time frame in which the role will be needed.

When considering pay structure, the primary focus is on employees rather than contingent workers.

Types of Employee Compensation Structures

How you structure employee pay will have a direct effect on perceptions of pay equity and employee performance and retention. Research shows employees who believe they are not paid fairly are 50% more likely to look for another job. There are several options when it comes to determining pay structure, and the right choice depends on the individual organization.

Market Reference Points:

Market reference structure matches roles within an organization to comparable market roles. Employers review market data for pay reference points to ensure organization pay stays with the market.

With this option, there is no set pay range progression, as pay is dependent on what the industry market is doing. Employers must review reference points at least once a year to compare pay equity. Market reference is best for jobs that are hard to fill or require more competitive salaries to attract employees.

Traditional Pay Structure:

Traditional structures involve a collection of pay ranges with set minimums, midpoints, and maximum pay levels for a role. The difference between minimum and maximum points typically ranges from 40% to 60% and are based on a progression from entry-level to executive-level positions.

Employee level is based on the role, responsibilities, education, skill sets and experience of the employee. This structure is meant to ensure jobs with similar responsibilities will receive equitable pay.

Broadband Pay Structure:

The broadband structure assigns pay levels based on a position in the company rather than on the role. This option makes it easier for employees to move across departments without requiring pay adjustments but can have a negative impact on the employee’s perception of pay fairness.

Broadband structure does offer more flexibility when it comes to compensating for specialized positions but makes the pay progression less clear for employees.

Step Structure:

The step structure sets pay scales based on specific benchmarks such as performance or time in the company. This structure is clearly defined making it easier for employees to understand how their compensation is set.

Step structure does have some downsides. Some employees who are doing more work than an employee who has progressed further based on these benchmarks may see the progression scale as unfair.

To determine the best compensation structure, employers need to determine what forms of compensation will be included.

Types of Compensation Included in Pay Structure

Compensation includes more than just salaries or bonuses. Understanding the different forms of compensation will help determine what is included in the organization’s pay package and how to structure pay.

Salary and Wages:

Salary and wages involve the base pay an employer agrees to pay an employee on a set schedule. Salary is a set amount for the year paid in increments on a weekly, bi-weekly, or bi-monthly basis. Wages refer to a set amount paid on an hourly basis.

Commissions:

Commissions include compensation beyond salary and wages that is based on meeting certain criteria. This is an incentive to meet specific benchmarks during a set period. A common method of commission pay is paying a percentage of sales based on meeting sales quotas.

Bonuses:

Bonuses are another form of compensation beyond base pay. Bonuses are paid based on meeting certain performance criteria rather than on revenue benchmarks.

Equity Packages:

An equity package is an offer to an employee to have a financial stake in the company, such as stock options. These packages provide a cash value for employees based on the company’s growth, providing an incentive for helping the company to meet its goals.

Benefit Packages:

Benefits include support offers such as insurance, retirement plans, wellness programs, educational support, or other options that provide value to an employee’s overall well-being. Employers may choose to pay all or part of the cost for these benefit options.

Non-Financial Compensation:

Some forms of compensation are not financial but provide extra perks for employees. This can include flexible schedules, career development programs, comped or reduced costs on products, etc.

The different options involved in a compensation structure provide incentives to attract, retain, and motivate employee productivity. The options an organization chooses will depend on the employees it wants to attract.

How to Determine the Best Pay Structure

There are several factors involved in determining the best compensation structure to meet an organization’s needs. A few items to consider include the company goals and values, industry-standard practices, and budget. As a company grows, reviewing these structures is important to ensure compensation is fair and continues to meet the demands of the job market.

Develop Clear Job Descriptions

Defining company job descriptions helps determine the best compensation structure to attract top talent. Ensure job descriptions are clear and outline all responsibilities and qualifications required for each role. Compare internal job descriptions to industry data to help determine the market value for each role within the organization.

Outline Clear Levels

Look at role levels to determine which positions are entry, mid, manager, or executive level. Consider skills and level of responsibility required for each role and compare internal compensation to market value to ensure company pay remains competitive.

Clear job levels and descriptions make determining the compensation structure needed easier. This helps determine if benchmarking, graded systems, or some other system will work best to fill the roles needed.

Review Pay Structure Regularly

As an organization grows and changes to meet new regulations and industry requirements, the pay structure that works best will also shift. It’s important to review pay structures, comparing internal structures to the market, to ensure internal compensation structures remain competitive.

Executives should ask questions such as:

• Do we offer competitive salaries?
• Do we have new positions that need to be evaluated to fit into our pay structure?
• Do we provide incentives to encourage employee performance?
• Does our pay structure meet our career development structure?
• How do employees feel about our pay structure? Do they believe it’s fair?
• What is included in our pay structure?

Maintaining a competitive compensation structure ensures the company will continue to grow and increase revenues.

Maintain Growth with a Competitive Pay Structure

A company’s compensation structure has a direct effect on the company’s growth. Competitive compensation increases employee morale, productivity, and company revenue and growth. To attract and retain top talent, employers need to be ready to provide the right incentives.

HR Service, Inc. can help review and develop a competitive pay structure that helps attract and keep the right talent, grow a thriving company, and increase your company’s reputation. Learn more about how we can strengthen your compensation plan.

Written by: HR Solutions Team and Penny Clark