<b>Internet Explorer is no longer a supported browser on imercer.com.</b> For an optimal experience on imercer.com, please use Chrome, Edge, Firefox, or Safari.
Welcome to imercer | Questions? Call
With most companies using a formal salary structure, knowing how to administer and assess your salary structure is a critical skill for compensation professionals. Understanding what type of salary structure is right for your company is important. Making sure the design of the structure supports your compensation and talent strategy is paramount.
Once you have the right structure in place, you need to know how to keep track of it and when to adjust it. With the increased demand for pay transparency and employees asking to see ranges, it’s more important than ever that you proactively manage the effectiveness of your salary structure. Over time, all structures, and the assignment of jobs to ranges will need tweaking. Having in place a way to identify opportunities for improvement will help you head off major misalignment and disconnect.
Regardless of the type of structure you have in place, it’s important to keep tabs on these 5 things:
Another thing to watch for is how particular ethnicities, genders, or other protected classes are positioned within ranges. It’s important to always have an eye on pay equity — a bigger topic that requires its own article.
Basic math, along with inflation, dictates that you adjust your overall salary structure on some sort of regular interval.
Several times a year, Mercer asks companies about their plans for adjusting salary structures. In the most recent version of the Compensation Planning Survey, 74% of companies responded that they adjust their pay structures annually.
The same survey asks participants what adjustment they plan to make. Of the respondents who do plan to make a pay structure adjustment, the average adjustment is 2.9%, which follows the pattern of being a percentage point or so below the merit increase budget. However, keep in mind there is some variety in the responses both by employee segment (e.g., executive, professional, etc.) and by industry. Make sure you have a data source that will provide you with intel relevant to your industry.
Keeping your salary ranges and structures healthy is something you can automate by reporting on certain metrics regularly. A compensation management tool can make this an automated process. Even in a spreadsheet, once you’ve identified the metrics you want to watch and set up the formulas, it can become a fairly easy part of your compensation management responsibilities.
Here are a few useful formulas to get you started.
Salary Compression Ratio: This ratio measures the difference in pay between employees in different job levels or with different levels of experience. It helps identify potential issues of pay compression within an organization. The formula is:
Salary Compression Ratio = Average Salary of Higher-Level Employees / Average Salary of Lower-Level Employees
Salary Range Penetration: This ratio assesses how employees' salaries compare to the salary range for their respective positions. It helps determine if employees' salaries are within the appropriate range. The formula is:
Salary Range Penetration = (Employee's Salary - Minimum Salary of the Range) / (Maximum Salary of the Range - Minimum Salary of the Range)
Pay Equity Ratio: This ratio compares the average salaries of different demographic groups within an organization to identify any potential pay disparities. The formula is:
Pay Equity Ratio = Average Salary of Group A / Average Salary of Group B
Compa-ratio: This ratio measures the relationship between an employee's actual salary and the midpoint of the salary range for their position. This ratio compares an employee's current salary to the target or reference point within the salary range. The formula is:
Compa-ratio = (Employee's Salary / Midpoint of Salary Range) * 100
What happens if you don’t adjust your pay structure?
Employees are in jobs that are assigned to grades or ranges in salary structures (i.e., minimum, midpoint, and maximum). Each year, the employee gets an annual salary increase while in the same job. If the salary range never changes, what eventually happens? The employee’s pay ends up at the top of the salary range.
Of course, to some degree, that is the intention – there should be a maximum value that a company will pay for any job and that is represented by the maximum of the salary range.
However, by not adjusting your salary ranges you are not accounting for changes in the economy that impact the labor market, such as inflation and a constricted supply of labor.
If your employees all end up at the top of their salary ranges, even with a career development plan in place to facilitate promotions, you’re going to have a morale situation on your hand which will likely lead to turnover.
Mercer provides a wealth of resources to help you keep your salary structures in shape, including salary surveys, guidance on determining whether pay is competitive, policies and practices reports, and much more. Reach out to one of our associates at firstname.lastname@example.org or 1-855-286-5302 to find just the right tools for your organization.
1The employee’s performance also impacts position in range, and that can vary from year to year, so it’s not possible to align years of experience with position in range. Variations in performance will explain deviations from expected employee positioning