Developing Competency-Based Salary Structure

Everyone wants a just salary structure. In fact, one of the most common reasons for labor problems is the perceived inequity in wages. Even a slight difference from what an employee thinks is the fair amount may trigger a resignation. At the very least, a poorly planned compensation system will cause demoralization.

The main problem here is that everyone has a different idea of what is fair. Many would prefer to base it solely on seniority to eliminate bias, but this would discourage people from improving their performance. Besides seniority and merit there are other factors that come into play, like industry going rates.

Another blunder to avoid is to base compensation exclusively on market rates of similar sized companies in the same industry. This is because the strategic considerations of companies are seldom exactly the same. One company may be focused on giving high pay to their sales force, while your firm relies on massive advertising to bring in sales. You may be overpaying your sales force if you mimic the other company’s pay. Furthermore, it is not certain that their pay structure is correct; you may just be copying their bad decisions.

The best solution is to have a competency-based salary structure with a sufficiently broad range, within which you can vary the pay depending on other factors. This solution, while not perfect, is better than having no system at all. Because its primary starting point is merit, there is a much better chance for the decision to have positive effect on the company’s bottom-line.

Starting a competency-based salary structure begins by establishing a hierarchy of your company’s jobs based on their value to your organization. You must then consider both the present wage structure of your company and the prevailing industry rates. For convenience you must set up job/salary grades to lessen the number of job rates to consider. A salary grade is a group of tasks or jobs that are approximately equal in difficulty or/and importance. Within the salary grade there would be a salary range indicating the lowest and the highest compensation in that grade.

Management must then decide on what will the company’s salary levels will be in comparison to the industry. You may choose to pay lower, equal to, or above average industry rates depending on what you believe is the right strategy for your firm. The majority of companies select the average market rates.

For larger companies, a multiple pay structure is often adopted. In this set up there is a pay structure for blue collar workers, a second pay structure for non-exempt while collar workers, and a third pay structure for managerial and professionally exempt employees. Other types of pay structures frequently adopted are those for top executives and the sales force; these special categories have a far higher degree of variation, with the top earner possibly making more than ten times the starting rank-and-file.

As you can see, the setting up of a salary structure is a tedious task but the fruit of this labor is a more objective basis of establishing base pay. A well-designed competency-based salary structure will not only greatly lessen labor grievances but also attract qualified personnel at a price that is not excessive.

To find out in more detail how to implement this, attend a seminar to be conducted by BusinessCoach, Inc.

Click here to view details of the training program on: Competency-Based Salary Structure Design »

*Originally published by the Manila Bulletin. Written by Ruben Anlacan, Jr. (President, BusinessCoach, Inc.) All rights reserved. May not be reproduced or copied without express written permission of the copyright holders.