Wage Wisdom: How to Understand And Implement Effective Pay Structures
As you consider what to pay your employees to stay competitive in the market, it’s important to first step back and get a handle on the right pay structure first.
This will vary from one organization to the next. Depending on the stage of your business, you may be able to distribute more cash, if you are profitable, while other companies that are still in earlier stages may need to lean on equity more.
You may want to incentivize different roles through bonuses or have pay tied to company financial goals. Whatever is right for you, you need to strategically decide the pay structure so you can be fair, equitable and competitive with companies within your ecosystem.
Understanding the different tools you have to pay your employees is key. You need to make sure you are designing your pay structure to both support your finances and to attract and retain the right talent for your team. The wrong pay structure can crush your run rate or make employees consider other jobs.
What Are Pay Structures?
A pay structure, or salary structure, organizes employee salaries into levels or grades by job type, with each level having defined minimum and maximum salary ranges.
This includes any framework used to identify how to pay an employee. As an HR professional this is a place for us to shine as a strategic partner.
Elements Of Pay Structure
HR has to come to the table with recommendations and an outline of the frameworks below and then work with key leaders to design, implement, communicate, revise, and manage the pay structure you decide for your company.
Market Benchmarking
Role specific - The first thing you need to do is make sure you understand what is market value for a role at a company your size.
For example an engineer tends to have a higher compensation range than a customer support representative. Often this is based on complexity of the role, the expertise or skill specific background and other factors.
There are some great tools out there that HR professionals can use to get strong market data that will even note size of company, revenue, fundraising stage, etc.
Role Tiers & Career Levels - As part of the benchmarking process, you also want to make sure you are building out tiers or job leveling for each role. In an ideal state you have this across the company so people can understand how different roles are leveled, but it’s most important to do it within a department if you need to start with a simpler process.
You need to know if an associate is more junior than a specialist? What roles are “managers'' versus “directors”? Do you have multiple tiers within a level (example Associate Manager, Manager, Senior Manager)? Are their individual contributor roles that are as senior as functional leaders (like a Principle Software Engineer and a Director of Engineering)?
Not only is this important for compensation mapping, but also for career development in your organization.
Pay components
Cash Salary
While this might be the most obvious place to start, depending on the stage of your organization, it’s important to ask these base line questions.
- Are you at a place where you can pay someone a consistent salary?
- Are they full-time or part-time?
- Are they exempt or non-exempt (aka overtime eligible)?
- Are they a contractor or an employee (don’t make this decision based on cost, but the scope of the role)?
- Is it more of an advisor role where you can just pay in equity, versus any cash?
- Are you going to adjust compensation based on location? What if they move cities, does that change the answer?
Yes, most companies pay most roles a base salary, but there are still decisions to be made even if that is the baseline for your company.
Cash Variable Compensation
Depending on the role or the stage of your company, you may want to consider either a bonus or commission.
Like salaries, it’s not an easy yes or no question, but here too, the first two considerations are cash flow and market benchmarking.
It’s worth considering, do you need to tie more cash to a bonus for some or many roles to give you more flexibility and help your run rate as a company? That way the bonuses are only paid out if the company hits certain financial targets.
If you do want to include individual bonuses for some roles, make sure they are tied to goals they feel like they can control and achieve (don’t make them softballs, but make them fair and motivating).
Identify if they are commissions (usually tied directly to sales & revenue goals), non-discretionary bonuses (often tied to direct personal metrics like a client success reps book of business retention) and discretionary bonuses (think leadership bonuses or company bonuses where everyone is tied to a bigger company level goal).
Equity & Stock
This will really depend on the stage the company is in. Whether you are Series A or a public company leads to two totally different equity/stock strategies.
Earlier stage companies often lean heavier on giving equity to help with cash flow and attract people who are excited about the building stage and who want to feel like they have ownership and skin in the game.
Many of the companies that publish market salary data will also include percentages of ownership (aka equity) for roles based on the size and revenue of the company.
Why Are Pay Structures Important?
Pay structures should align with your overall compensation philosophy.
Here are three examples I’ve seen of compensation philosophy statements and the industries they emerged from:
- “Pay at top market to attract and retain the best talent in our field.” (Tech)
- “Our pay is fair, competitive and is focused on performance.” (Marketing)
- “Our compensation reflects our values that we are all in this together.” (Startup)
It doesn’t have to be complicated, it simply has to reflect your culture and how you are going to design your pay structures.
The goal of any pay structure is to create alignment and clarity so your team knows how, why and what they are paid. As an HR professional that starts with working with the leadership team on the compensation strategy and then what tools to use to create the pay structure.
But for the HR team, that is just the start. We then have to go into the market and create the pay bands, the ranges and do the competitive analysis so we know our structure is right for our company and reflects the market.
And if not, determine how we will talk about that with our employees and candidates and bring it to life, use it in merit conversations, promotions, job changes, hiring.
We need to train managers on how to talk about it, decide how transparent we are going to be across roles, and make sure the team is clear on how their compensation is decided, why it is structured that way and what the expectations are to achieve their compensation goals.
Common Types Of Pay Structures
There is no right or wrong way to build your pay structure if you are using the components noted below.
As we have discussed, it's really more about the stage of your company, your compensation strategy, market competitiveness for your people, the make up of your team and how that all comes together.
Some common examples of different pay structures could be…
High equity, low cash
This is common in earlier stage companies where they don’t have the revenue to support a high payroll yet. They often want people with a more entrepreneurial spirit with a tolerance for high risk and high rewards.
Company-wide bonus
If your company is past the very early days but maybe not profitable (or barely profitable), leveraging a company wide bonus might help. That way someone’s total cash compensation (base plus salary) might be competitive in the market but gives the company some flexibility to only pay it out if they hit specific financial goals (like EBIDTA, Sales, etc).
Multi-tiered leveling
Especially if you are a larger company, it’s very possible you have five levels of individual contributors on the engineering team before it breaks into management roles. You may call this just Engineer I, Engineer II, etc or use more descriptive words like Associate Engineer, Engineer, Senior Engineer, Staff Engineer, etc.
It’s important to just make sure that the tiers make sense and it is clear if these are promotional steps (so added responsibilities, more complex work, etc) or just compensation levels.
Wide compensation bands
On the flip side, you may decide you don’t want as many levels and you make your compensation band wider.
You may decide you want your midpoint to be at the 75th percentile but have it be 30% variance on either side of the midpoint (versus the typical 15-20%). This allows for more compensation growth within roles without a promotional step.
Choose A Pay Structure That’s Right For Your Business
You now have the toolbox to create the pay structure that is right for your company. It will evolve.
What you do as a 25-person startup will not be right for you at 500 people. As an HR professional, it’s our role to make sure pay is constantly being reviewed and evolves with our business and team.
We are the expert, strategic partner, and influencer when it comes to these decisions at our company. Understanding the tools above, you will find the right pay structure to implement for your company at this stage.
You might also want to check out this list of compensation management tools that can help you with many aspects such as salary benchmarking, creating job architectures, and performance-based compensation.