Mastering Pay Structures: A Guide to Implementation

When considering what to pay your employees to remain competitive in the market, it's important to first take a step back and understand the right salary structure.

This will vary from company to company. Depending on the stage your business is at, you may be able to distribute more cash as you make profits, while other early-stage businesses may need to rely more on equity capital.

You may want to incentivize various roles through bonuses or tie compensation to the company's financial goals. Whatever is right for you, you need to strategically set the salary structure so that you are fair, equitable and competitive with companies within your ecosystem.

It's important to understand the different tools you can use to pay your employees. You need to ensure you design your salary structure to both support your finances and attract and retain the right talent for your team. The wrong salary structure can destroy your bottom line or cause employees to look for other jobs.

What are salary structures?

In a salary structure, employees' salaries are divided into levels or classes according to the type of job, with a minimum and a maximum salary being set for each level.

This includes any framework within which it is determined how an employee should be paid. As HR experts, we can shine as a strategic partner here.

Elements of the salary structure

HR must come to the table with recommendations and an overview of the framework below and then work with key leaders to design, implement, communicate, revise and manage the salary structure you have established for your company.

Market benchmarking

Role specific - The first thing you need to do is make sure you know what the market value is for a role in a company your size.

For example, an engineer is typically paid more than a customer service representative. This often depends on the complexity of the task, expertise or specific background, and other factors.

There are some great tools HR managers can use to get meaningful market data that even takes into account company size, revenue, funding stage, etc.

Role levels and career stages - As part of the benchmarking process, you should also ensure that you establish a role level or career stage for each role. Ideally, this will be the case across the entire company so that employees can understand how different roles are tiered. However, it is most important to do this within a department if you want to start with a simpler process.

Do you need to know whether an employee is younger than a specialist? What roles are “managers” versus “directors”? Are there multiple levels within a level (e.g. Associate Manager, Manager, Senior Manager)? Are there individual employee roles that are as senior as functional leaders (e.g. a Principle Software Engineer and a Director of Engineering)?

This is important not only for compensation allocation, but also for career development within your company.

Salary components

Cash salary

While this is the most obvious place to start, depending on the stage of your business, it's important to ask these basic questions.

• Are you ready to pay someone a fixed salary?
• Are these full-time or part-time employees?
• Are they exempt or non-exempt (entitled to overtime)?
• Is it a contractor or an employee (don't make this decision based on cost, but based on the scope of the job)?
• Is it more of an advisory role where you can only pay in shares and not cash?
• Will you adjust compensation based on location? Does the answer change if they move to another city?

Yes, most companies pay a base salary for most roles, but even if this is the basis for your business, you have choices to make.

Variable cash compensation

Depending on the role or stage of your business, you may want to consider either a bonus or commission.

As with salaries, the question doesn't have a simple yes or no answer, but again the first two considerations are cash flow and market benchmarking.

It's worth considering whether you need to tie up more money into a bonus for some or many positions to give you more flexibility and improve your operating rate as a business. This way, the bonuses are only paid out if the company achieves certain financial goals.

If you want to introduce individual bonuses for specific functions, make sure they are tied to goals that employees can control and achieve (don't make them soft balls, but fair and motivating ones).

Determine whether these are commissions (which are usually tied directly to sales and revenue targets), non-discretionary bonuses (which are often tied to direct personal metrics such as the success of the account manager), or discretionary bonuses (think Leadership bonuses or corporate bonuses where everyone is tied to a larger corporate goal).

Equity and shares

This really depends on the stage the company is at. Depending on whether it is a Series A company or a listed company, there are two completely different strategies for equity and shares.

Earlier-stage companies often rely more on providing equity capital to support cash flow and attract employees who are excited about the development phase and want to feel like they own and can contribute .

Many of the companies that publish market salary data also report the percentage of ownership (also known as equity), which is based on the size and revenue of the company.

Why are salary structures important?

Salary structures should be consistent with your overall compensation philosophy.

Here are three examples of compensation philosophies I've seen and the industries they come from:

• "We pay competitive salaries to attract and retain the best talent in our field." (Technology)
• “Our compensation is fair, competitive and performance-based.” (Marketing)
• "Our compensation reflects our values that we all pull together." (Startup)

It doesn't have to be complicated, it just has to reflect your culture and the way you structure your salary structures.

The goal of any salary structure is to create consistency and clarity so your team knows how, why and what they are being paid. As an HR professional, this begins with collaborating with the leadership team on compensation strategy and selecting the tools to use to create the compensation structure.

But for the HR team, this is just the beginning. We then need to look at the market and create the salary bands and ranges and do a competitive analysis so we know our structure is right for our company and in line with the market.

And if it isn't, we need to determine how we talk about it with our employees and candidates and bring it to life, how we use it in conversations about merit, promotions, job moves and hiring.

We need to train leaders on how to talk about this, decide how transparent we want to be across different functions, and make sure the team knows how their compensation is set, why it's structured this way, and what their expectations are. achieve his compensation goals.

Common Types of Compensation Structures

There is no right or wrong way to build your salary structure when using the components listed below.

Rather, as we've discussed, it depends on the stage of your company, your compensation strategy, how competitive your employees are in the market, the makeup of your team, and how it all comes together.

Some common examples of different salary structures could be...

High equity, low cash

This is often the case with early-stage companies when revenues are not yet sufficient to pay high salaries. They often want employees with a strong entrepreneurial spirit who are willing to take high risks and achieve high profits in return.

Company-wide bonus

If your business is past the early stages but perhaps not yet (or barely) profitable, a company-wide bonus could be helpful. This allows an employee's total cash compensation (base salary plus wages) to be competitive in the market, but gives the company the flexibility to pay it out only when certain financial targets (such as EBIDTA, sales, etc.) are met.

Multi-level leveling

Especially at larger companies, it's quite possible that there are five different levels of employees on the engineering team before a management role occurs. You can simply call this Engineer I, Engineer II, etc. or use more descriptive terms like Associate Engineer, Engineer, Senior Engineer, Staff Engineer, etc.

The only important thing is that the levels make sense and that it is clear whether they are promotion levels (additional responsibilities, more complex work, etc.) or just compensation levels.

Broad compensation levels

On the other hand, you may decide that you don't want as many levels and make your compensation band wider.

You can choose to have the mean at the 75th percentile, but the deviation on either side of the mean is 30% (instead of the usual 15-20%). This allows for greater salary growth within a role without a promotion step.

Choose a salary structure that is right for your company

You now have the tools you need to create the right salary structure for your company. It will continue to evolve.

What is true for a startup with 25 employees will not be right for a company with 500 employees. As an HR manager, it is our job to ensure that compensation is constantly reviewed and evolves with the company and the team.

We are the expert, the strategic partner and the influencer when it comes to these decisions in our company. By understanding the tools above, you will find the right compensation structure for your company.

Also check out this list of compensation management tools that can help you with many aspects such as: in salary benchmarking, in the creation of workplace architectures and in performance-related compensation.

Empower your company with strategic pay structures tailored to your goals. With IceHrm, optimize compensation to drive performance and retention.