How to Create an Employee Pay Structure Made for Growth

When starting a small business, you’re likely thinking about your mission, vision, and how you can create the best business possible.

Choosing the business slogan, creating a business plan, finding an office space or a storefront, are all fundamental aspects of creating a successful small business. On top of all that, you can’t forget to focus on job recruiting, interviewing, and ultimately hiring new employees. These are the building blocks to a business, but what many don’t consider when starting a business is employee retention. 

Employee retention is something all business owners should think about when hiring new employees. You want to hire someone who is going to be around for the long-haul and be a team player. You want someone who is willing to learn and help your business grow. To hire someone like that, you have to be an appealing employer. One way to be an appealing employer is to create a pay scale that allows room for growth. 

By creating the pay structure that allows employees to get raises and promotions, you become more desirable to prospective employees. When starting a business, you want to keep the employees you hire and make them feel appreciated. By keeping your employees happy, you can keep your clients and customers happy as well.

We have created a guide that outlines how to create a pay structure made for growth as well as the benefits it may have for your business.

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Choosing a Compensation Structure

There are 3 common types of compensation structures: 

  • Traditional 
  • Broadband
  • Market Based

Depending on which structure you use will determine how your pay structure is formed. Market based is the most used structure, while broadband is the least. Traditional is still used intermittently. 

Below is more information about each compensation structure.

Traditional Structure

In traditional structures, there are pay grades assigned to each job position. As employees gain promotions based on skill, time at the position, or another measurement of success, they will move up to the next pay grade. Typically, when an employee is promoted, they receive an incremental pay increase. The amount of increase should be researched and figured based on your company’s budget and your industry. Promoting employees this way ensures that top performers don’t hit the maximum pay increase too quickly. How employees receive promotions should be documented in your company’s pay structure. 

Broadband Structure 

This pay structure is not as popular because the pay increases may seem arbitrary to those who don’t understand the pay grade of the company. Broadband structures have higher salary ranges but fewer pay grades. An employee can receive a raise without moving up a pay grade. This structure requires you to have a thorough pay structure process so that employees understand why certain people are receiving raises. In addition to that, the pay structure should be thoroughly documented to prevent any discriminatory actions from occurring.  

Market Based Structure

This is the most widely used compensation structure. This method requires you to research how much your competitors pay and allows you to set your pay above or below that. It still uses pay grades and you can set your pay grade to be the minimum of what competitors pay. Many business owners prefer this structure because you can give employees room to grow while still being on par with competitors. The Bureau of Labor Statistics is a great resource that allows you to compare job rates.

Steps to Create a Pay Structure Made for Growth

Most businesses have a hierarchical structure. Whether it is Owner, Manager, Employee or CEO, President, Vice President, there needs to be a clear distinction between job titles. Creating a distinction between these titles when you start your business will put you on the path to success. Creating a pay structure is a useful tool that allows you to document how employees will receive raises. Having a good structure can attract better employees, and allows your employees to know what goals they need to work towards to achieve a promotion.

When creating a pay structure that allows employees to grow within the company, there are certain steps you should follow that will allow you to create the best plan. The steps to create a pay structure are as follows:

  1. Establish Value for Each Position in Your Company
  2. Understand Your Position in Your Industry
  3. Determine Compensable Leverage
  4. Conduct a Pay Equity Analysis
  5. Implement Salary Ranges
  6. Inform All Employees

More detailed information about these steps and how to implement are outlined below. 

1. Establish Value for Each Position in Your Company

Whatever your business may be, there is likely a hierarchy in employees. Lower-level employees report to a manager and managers likely report to the business owner or potentially a district manager depending on the type of business and business size. When you are establishing a value for positions in your company, take a look at market value. Finding out what competitors are paying will give you an understanding of what your prospective employees are looking at and let you know what kind of compensation you should offer. 

When comparing prices in the market, pay attention to jobs that have similar duties and responsibilities. This will allow you to create a benchmark so that you can accurately calculate the proper value for each position in your company. This process will not only allow you to set up a proper pay structure, it will also give you a greater understanding of the market. 

2. Understand Your Position in Your Industry

Once you’ve calculated the dollar and percentage amount of each position in your company, you’ll need to understand where you sit in your industry. Is your company at the top, middle or bottom of the industry? Depending on the answer to this question, it will determine if you need to pay your employees more or less than market value. If your company is low on finances, you may need to pay your employees less than market value to make up the difference. Conversely, if your company is at the top of your industry, you may be able to afford to pay your employees more. Determining your standing in the industry will also give you an outlook on what you can afford to pay your employees. 

3. Determine Compensable Leverage 

After you’ve figured out your company’s standing in the industry and created a salary that is properly enticing to potential employees, you need to determine your company’s compensable leverage. Compensable leverage is how salary rate increases and how they compare to market value. When someone gets promoted, they should still feel like they are getting paid market value and the differences between pay grades should be influenced by this as well. Without determining compensable leverage, you may end up paying your employees below market value and ultimately this could increase your employee turnover rate. 

4. Conduct a Pay Equity Analysis

Conducting a pay equity analysis is similar to determining compensable leverage. This step requires you to analyze the skill set of your employees as well as certain demographic details such as age, and location. You should also use this time to determine if any employees are being paid something that is higher or lower than market value. You’ll want to make sure there are no discrepancies in any of your employee’s salary as it relates to the market value of the industry you’re in. Before conducting this analysis, HR and Legal teams should collaborate. HR and Legal need to work together to make sure that employees don’t feel discriminated against. Doing this will also cut down on pay dissatisfaction among employees.

5. Implement Salary Ranges

After you’ve gone through all the steps listed above, it’s now time to create your salary ranges. Creating titles for each position in your company may make this process smoother. When implementing salary ranges you’ll want to choose a minimum and maximum cap for each position. Based on your employees’ work experience, you can decide what kind of salary increase they’ll receive based on promotions. Most employers implement an increase annually for skills and performance evaluations. 

6. Inform All Employees

Once you’ve completed these steps, you should inform all employees about the changes. Being open and honest about new policies, especially ones involving pay, is the best way to ensure employee satisfaction. There may be times when employees ask for a promotion or a raise, but their skill set does not align with higher pay, or there may budget cuts that aren’t allowing anyone to have a raise at that time. Being transparent is the best way to show employees what is and is not possible at the given time. 

The Benefits of Creating a Pay Structure For Your Business 

Creating a pay structure may seem like a tedious task that you don’t need to go through to have a successful business. You don’t need to create a pay structure in order to start your business; however, there are many benefits to having one. When creating a pay structure for your business it benefits your business by:

  • Creating Predictable Spending
  • Establishing Growth Opportunities
  • Increasing Employee Retention

Creating Predictable Spending

This is the biggest benefit of creating a pay structure. Once you know all the positions in your company and you have them properly labeled, you can easily predict how much you’ll be spending on salaries or wages. If you’re a small business this may be particularly important. When trying to get your business off the ground, everything should be properly mapped out so there are no surprises. As your business grows, you can change things and slowly start to increase salaries. A pay structure is a great resource to have and will help make budgeting planning simple.

Establishing Growth Opportunities

Employees work better when there is a goal to reach. It’s hard to stay motivated when you believe that your job has no purpose and that you’ll never see any upward progress. By creating a pay structure, you create growth opportunities for your employees. Having a goal to reach will help keep employees motivated to do their best work and could increase productivity in your organization.

Increasing Employee Retention

When employees are working, it’s nice to know that there is something to look forward to. Creating a pay structure may help you increase employee retention. Giving employees growth incentives and opportunities, not only makes them more productive but also gives them something to look forward to at work. When employees are happy they are more likely to want to stay at their job. This will also create a healthier work culture. When everyone is happy with their salary and benefits, it makes work a more pleasant place and a more enjoyable experience.

Create Your Business’s Pay Structure with Canal HR

Creating a pay structure is overall beneficial to your company. Though it will take time, research and planning it will be integral to how your business functions in the long run. Canal HR works hard to ensure the happiness of employees and employers.

When you start a business, there are a lot of things that you have to focus on to ensure its success, your HR department does not have to be one of the things you worry about. Canal HR can help you with not only your payroll but your human resource needs as well. There is a common misconception that small businesses don’t need an HR department but they do. There are many instances that can be avoided by having an HR department from the start. We have a host of experts available to help you navigate pay structures and keep your employees happy and ready to work. You don’t have to do this all by yourself, contact us at any time and we’ll come up with a plan that works for you. Let us manage your HR and payroll so you can manage your business.

If you would like to learn more about our professional employer organization (PEO) you can contact us by phone at 504-470-0904. We can’t wait to help elevate your organization and supply you with fantastic payroll and human resources services.

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