How do organizations construct pay structures that recognize individual contributions?

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Tamara K. H. | Middle School Teacher | (Level 3) Educator Emeritus

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Organizations can use two different methods to construct their pay structures, the internal equity method and market pricing, and both methods can also be used to establish a consistent way of increasing an employee's salary to recognize the employee's individual contributions.

If using the internal equity method, the organization will create pay gradations. The gradations will specifically have wider ranges of pay at the top levels and narrower ranges at the lower levels. To base pay on gradation levels, an organization must first decide how many gradations it will need based on number of employees and the variety of jobs the employees perform. For example, "A company of 30 people might start with 10 [pay] grades" ("Pay Structures"). Within each grade, an organization will also create a pay range for each grade so that employees have raises they can work towards within their range. For example, an organization will usually make the mid-payment range for each grade 15% higher than the mid-payment range for the grade below it, so that there is a significant pay increase per promotion. Hence, through the internal equity method, employees will be recognized for their individual contributions through 15% pay increases.

When organizations base pay structures on market value, one thing they do is "benchmark" the types of jobs being performed within the organization ("Pay Structures"). For example, one organization might employ both a bookkeeper and an accountant, and while those sound like they may be very similar jobs, their job descriptions will actually be pretty different. Hence, an organization's first step in benchmarking is to identify the different jobs within the organization, and then the organization can benchmark the market value of the job. What's most important in benchmarking is that the market value of the job determines the pay rate, not the person performing the job. When pay is based on market value, an employee's salary is based on the mid-range salary for that specific job within the job market. As the employee continues to work over time, through raises, the employee's salary will be closer to the top pay rate within the market for that particular job. Hence, even with the market value system, an employee's individual contributions are recognized through raises, but the raises are based on the pay ranges within the market value for that specific job. Determining pay structures based on market value is becoming the most popular method.

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