What Are the Options an Organization Has in Determining Ranges & Rates for Pay?

by Neil Kokemuller
Internal equity is a key consideration in setting pay scales.

Internal equity is a key consideration in setting pay scales.

Digital Vision/Digital Vision/Getty Images

Companies have a number of compensation strategies to apply when making pay and pay scale determinations. A common mistake among small businesses is not having a strategy at all but simply paying employees what the owners believe is fair compensation. Your pay structure should align with long-term human resource strategies and company cultural values.

Pay for Performance

A common approach to compensation is called pay for performance. In this approach, you simply base pay on how the employee performs his role or how the employee's performance benefits the bottom line. In assigning initial pay, you might start with a base salary that considers the worker's prior experience and accomplishments. You make adjustments in pay based on the employee's ability to meet certain predetermined production goals or development milestones. A benefit of this strategy is that it motivates the employee to perform better to earn greater pay.

Competitive Parity

A simple pay structure that requires some industry research is a competitive parity system. In this approach, you analyze competitors and base your pay range on what competitors pay. If you find the industry norm is a range of $30,000 to $35,000 per year for a certain job, for instance, you would make a salary offer within this range. As an employee gains more experience, he can rise to the higher levels of the range. This approach offers some cost control benefits, but you may have to exceed competitor pay to attract superior talent.

Skill-Based Pay

Some employers simply negotiate pay with an employee on the premise of supply and demand for workers with specific skills. They review the availability of workers who can perform certain tasks or qualify for a given position and pay based on that demand. In highly specialized fields, someone with strong qualifications can often demand more pay in this type of setup. If you operate a facility that employs many unskilled or low-skilled workers, you have much better ability to attract employees and control costs using this approach.

Other Compensation Considerations

When you customize pay for employees, such as with a role-based or skill-based structure, you risk internal alienation of lower-paid workers. However, you can potentially attract top talent. A competitive parity approach allows you to keep costs in line with industry norms, but it doesn't give you much advantage in attracting or keeping workers. A performance- or merit-based system works well with employees driven by accomplishment, such as salespeople. However, it is often more difficult to implement in jobs where performance is hard to quantify or when employees face numerous obstacles in meeting performance standards.

Photo Credits

  • Digital Vision/Digital Vision/Getty Images
Suggest an Article Correction