what is a compensation structure

by Prof. Nikko Streich DVM Published 3 years ago Updated 2 years ago

What is compensation & How to define Compensation Structure?

The pay structure should be equitable internally and competitive externally.
It must reflect the value of the job.
Fix the salary range of the job based on the market trends.
Job role or job description is important to structure a Compensation plan.

A compensation structure, also known as a salary structure, is a framework that a business uses to determine compensation. A good structure sets pre-existing guidelines to delegate these pay increases in a fair, unbiased manner, as opposed to using inconsistent factors like negotiation or previous salary history.Aug 11, 2021

Full Answer

What is compensation and how is it determined?

Compensation is defined as the total amount of the monetary and non-monetary pay provided to an employee by an employer in return for work performed as required. Essentially, it's a combination of the value of your pay, vacation, bonuses, health insurance, and any other perk you may receive, such as free lunches, free events, and parking.

What are the advantages of a job-based compensation structure?

What Are the Advantages of a Job-Based Compensation Structure?

Pay for Value. In a job-based pay structure, you essentially get paid for the value of the work you perform for the company.
Fairness and Equality. Though not 100 percent certain, job-based pay can reduce the likelihood of gender discrimination in pay.
Clear Steps to Higher Pay. ...
Pay Comparisons. ...

How to set competitive compensation structures?

How to set up a pay structure

Conduct job analysis and job evaluation. Internal job titles and job descriptions may not always be aligned with the market (e.g. ...
Determine the form of your employee compensation structure. Benchmarking (or market pricing) where each job is assigned an individual salary range based on market trends.
Plan to update pay structures. ...
Educate managers. ...

What are the objectives of compensation?

Objectives of Compensation Management

Acquire qualified personnel. Compensation needs to be high enough to attract applicants. ...
Retain current employees. ...
Ensure equity. ...
Reward desired behavior. ...
Control costs. ...
Comply with legal regulations. ...
Facilitate understanding. ...
Further administrative efficiency. ...
Motivating Personnel. ...
Consistency in Compensation. ...

More items...

What is compensation structure example?

For example, the military grades all active-duty employees, paying them the same amount per grade and rank regardless of job type.

Which compensation structure is best?

Grade Range compensation structures are best when: Your organization is large, well-defined, and has extended management hierarchies. Pay progression within grades occur at all levels of the organization. You want the flexibility to offer more frequent level changes and promotions earlier into an employee's career.

What is a compensation plan structure?

What is a compensation plan? A compensation plan, also referred to as a “total compensation plan,” encompasses all of the compensatory components of a company's strategy – employees' wages, salaries, benefits and total terms of payment.

Why is it important to have a compensation structure?

A well-designed salary structure allows management to reward performance and skills development while controlling overall base salary cost by providing a cap on the range paid for particular jobs or locations.

How do you develop a compensation structure?

Salary structure: How to create a compensation structureEstablish value for each position in your company. ... Consider your company's competitive posture. ... Define compensable leverage for your company. ... Look at external inequalities. ... Develop a salary structure for your organization. ... Get your current employees up to par.

What is your current compensation structure?

Current Compensation means all regular wage, salary and commission payments paid by the Company to a Participant in accordance with the terms of his or her employment, but excluding annual bonus payments and all other forms of special compensation.

What are the 4 components of compensation?

This refers to the mix of the four basic components of compensation—base pay, wage add-ons, incentives, and benefits—that we employ....Components of compensation include the following four items:Base pay, either an hourly wage or salary. ... Wage and salary add-ons. ... Incentive pay for performance. ... Benefits.

What are the four types of compensation?

The Four Major Types of Direct Compensation: Hourly, Salary, Commission, Bonuses. When asking about compensation, most people want to know about direct compensation, particularly base pay and variable pay.

What are the types of compensation plan?

Types of Compensation Plans for Compensating Employees Beyond Commissions:Straight Salary Compensation. Straight salary refers to the basic salaries and wage given to the worker. ... Salary plus Commission. ... Commission Only. ... Territory Volume Compensation Plans. ... Profit Margin/Revenue Based Compensation Plans. ... Residual Commission.

How do you create a compensation and benefits structure for your employees?

Develop a program outline. ... Designate an individual to oversee designing the compensation program. ... Develop a compensation philosophy. ... Conduct a job analysis of all positions. ... Evaluate jobs. ... Determine grades.More items...

What is the simple definition of compensation '?

compensation. / (ˌkɒmpɛnˈseɪʃən) / noun. the act or process of making amends for something. something given as reparation for loss, injury, etc; indemnity.

How can compensation structure be improved?

7 Compensation Tactics To Help Retain EmployeesPay employees salary and incentives. ... Keep the incentive part of your plan simple. ... Establish SMART goals. ... Determine what your competitors are paying. ... Modify salaries based on employees' geographic location. ... Use merit increases to reward top performers.More items...•

How can compensation structure be improved?

What are the different types of compensation systems?

Compensation System – 5 Important Types: Piece Rate System, Commission System, Bonus System, Skill-Based System and Merit Pay SystemPiece rate system.Commission system.Bonus system.Skill-based system.Merit Pay system.

What are the different types of compensation plans?

What is HCL salary structure?

HCL Technologies Ltd. Jobs by SalaryJob TitleRangeAverageJob Title:Senior Software EngineerRange:₹391k - ₹1mAverage:₹734,505Software EngineerRange:₹218k - ₹915kAverage:₹417,060Technical SpecialistRange:₹591k - ₹2mAverage:₹1,265,144Team Leader, ITRange:₹561k - ₹2mAverage:₹1,095,4653 more rows•Aug 23, 2022

What structures are companies using the most?

PayScale’s 2018 Compensation Best Practices Report includes insights from a survey of 7,000+ business leaders, HR and Compensation Professionals using current best practices in compensation. We asked a number of questions about how people structure their compensation plans.

How do you pick the structure that’s right for your organization?

So now we’re up to the million-dollar question. How do you pick the right structure? As with all things related to comp, HR, organizations, and people, there is no one right answer. There are, however, things to think about:

Why do we need compensation structures?

Compensation structures help simplify fair pay and market pricing analyses, making it easier to evaluate pay across job groups. As the market changes, HR professionals can adjust their compensation structures to assure that employees within the same pay structure are paid equitably compared to their peers.

Why is a traditional pay structure easy to manage?

A traditional pay structure is easy to manage and communicate because you can visualize how a large number of grades show distinct levels of responsibility.

How do job range structures work?

Job range structures put each individual job into their own unique salary grades by mapping the pay ranges for jobs at their market rate.

Why is the grade range larger in broadband compensation?

Because broadband compensation structures have a greater minimum to maximum salary range spread, the grade range is larger to accommodate salaries for additional jobs within it . In other words, the total number of grades in the structure is noticeably smaller. Each band shows a wider salary range spread, larger midpoint progression between each salary grade, and less overlap between grades when it comes to differing jobs with similar pay.

What is broadband pay structure?

Broadband pay structures consolidate the many grades found in a traditional salary structure into a few wider salary bands. In broadband pay structures, the salary ranges are wider than in grade-range compensation structures. Broadband pay structures tend to place greater emphasis on career development rather than job promotion, since employees stay within a single band for much longer.

Why are step structures important?

Step structures are easy to manage and automate because their pay increases are based entirely on employee tenure. These compensation structures result in all employees receiving salary increases at a fixed rate. If your organization has a smaller compensation budget, or you prefer not to base your compensation philosophy entirely on individual performance, a step structure is a good choice. Civil service roles, such as first responders, often use a step structure.

What is grade range compensation?

Grade range compensation structures help align jobs which are considered similar in terms of responsibilities and rank into specific pay grades. When an employee is promoted, they can be moved from one pay grade to the next. As employees learn new skills and take on new roles with additional responsibilities, they’ll have opportunities to move to superseding pay grades, increasing pay (and pay potential) along the way.

What is compensation structure?

What is Employee Compensation Structure? Also known as a “wage structure” or “salary structure,” a compensation structure is the strategy you use to determine how each employee in your company is paid. It considers information like the length of employment, industry minimums and maximums, and merit.

Why Do You Need a Structured Employee Compensation?

To cut out emotional complexities and ensure fairness among your employees , a structure employee compensation program is necessary. It’s also a useful tool to motivate teams to meet and exceed the goals that will result in achieving those higher pay tiers. A compensation structure can attract good workers to your organization, too.

What is the salary increase from one pay grade to the next?

The salary increase from one pay grade to the next is typically incremental (typically an increase of$1K-3K). This ensures that even a high-performing employee doesn’t hit the maximum pay limit for their position too quickly.

Why is it important to have a clear compensation plan?

Developing a clear plan and communicating it to job candidates is vital to getting the right workers on board. It’s also a significant aspect of your company culture; having everyone know how they will be compensated can clear up confusion and potentially limit legal issues. When people know their compensation structure, they feel empowered to work harder for pay increases as well.

How to create a compensation plan for a job?

1. Establish Value for Each Position. Determine what each job title in your company is worth.

What is the basis for both your base salary and your salary caps?

The market data you collect can become the basis for both your base salary and your salary caps.

What is market based pay?

By researching market data based on what other employers are paying for similar job positions, you can determine what you should pay. This structure still uses pay grades, and it can be set at a minimum that’s on par with what your competitors pay. This is the most popular system, and it can alleviate anxiety over not paying your workers enough to retain them.

What is compensation structure?

Compensation structures create a fairer and more predictable process for determining an individual’s compensation. The alternative to setting up formal pay structures is to determine salaries based on:

Why do we need structured compensation?

Pay structures (also know as salary structures or compensation structures) help companies offer equitable, competitive salaries and map out employees’ path to growth and higher pay. They enable companies to attract and retain talented people.

How to determine pay grade?

Using benchmarking to set salaries. For example, you could use market data to determine a pay grade’s salary range. If a pay grade includes three different positions (e.g. administrative officer, office manager and personal assistant), you can average the salary midpoints of these three positions to find the midpoint in your pay grade’s range.

What is pay structure?

Pay structures define employee compensation for different jobs or groups of jobs. They involve setting salary ranges and pay grades based on market data and job roles. Here’s our guide on why and how to set up a pay structure:

Why is competitive compensation important?

Competitive compensation packages play an important part in persuading candidates to accept job offers. Also, companies may end up paying managers the same salary as what their direct reports should earn, or even paying employees more than the maximum salary for their job.

What is pay grade?

Pay grades are groups of jobs (often sorted by business function) that have the same or similar internal value as defined by your job evaluation process. For example, customer support specialists and customer support technicians may belong in the same grade if they demand the same skills and education and have the same level of responsibility. In this case, the salaries of every customer support role in the same grade would fall between the same minimum, midpoint and maximum range.

How many ways can companies create their compensation plans for base salary?

There are two ways companies can create their compensation plans for base salary:

What is traditional salary structure?

Traditional salary structures are organized with numerous layers and range structures (or pay grades) with a relatively small distance between each range. This provides a hierarchal system enabling employees to be promoted from one pay grade to another. When designed correctly, traditional structures enable the recognition of differing rates of pay for performance and guarantee a reasonable level of control over internal compression and salary expenditures.

What percentage of companies have salary range structures?

Seventy-two percent of surveyed companies reported having formal salary range structures (Table 1). As companies increase in size they are more likely to have salary range structures. Less than half of companies with fewer than 100 employees use salary range structures. In contrast, about four out of five companies with more than 500 employees use salary range structures.

What is salary range?

A salary range is the span between the minimum and maximum base salary an organization will pay for a specific job or group of jobs. A salary range structure (or salary structure) is a hierarchal group of jobs and salary ranges within an organization. Salary structures often are expressed as pay grades or job grades that reflect the value ...

Why should salary range structures be reviewed?

Salary range structures should be reviewed regularly to maintain a competitive edge in attracting and retaining top talent. Most companies with formal base salary range structures review their ranges and structures annually (Table 2).

Why do companies have a higher number of salary structures?

As companies increase in size, they typically have a higher number of salary structures to accommodate more locations and job structures.

How often do companies review their salary structures?

Most companies with formal base salary structures review their structures annually.

Why is salary structure important?

Salary structures are an important component of effective compensation programs and help ensure that pay levels for groups of jobs are competitive externally and equitable internally. A well-designed salary structure allows management to reward performance and skills development while controlling overall base salary cost by providing a cap on ...

How to create a salary structure?

1. Establish value for each position in your company. The first thing you should do is figure out the value of each position in your organization.

Why is salary structure important?

Having a solid salary structure makes it easier to manage your salary expenditure. Not to mention, it can help you retain your current employees, as well as make your recruiting, hiring and promoting efforts more focused and easier to execute.

What is the competitive posture of a company?

The competitive posture of a company is its overall salary level compared to market average (i.e., median) across the benchmark jobs. Are the salary rates for your employees currently above, below or comparable to the rates of your competitors? You should decide what competitive posture is in the best interest of your company.

What is compensable leverage?

Compensable leverage refers to how much more or less salary rate increases in your company, overall, compared to the market rate increase for higher-paid positions in the organizational hierarchy.

What does it mean when a company has inequitable pay rates?

Inequitable salary rates within a company – both positive and negative – are likely to be perceived by employees as unfair, causing pay dissatisfaction.

What are some ways to compensate a person?

Another option is to get creative and find other ways to compensate the person. This might include establishing incentive or bonus plans (i.e., variable pay).

Why is compensable leverage important?

It’s important to determine the desired compensable leverage for your company. This will allow you strike a balance between providing attractive salary increases to employees for promotional opportunities and maintaining an affordable salary practice.

What is a salary structure?

A salary structure is a payment structure that comprises different components of the total compensation package that a company offers to an employee. The company uses a salary structure to determine how much salary it should pay the employee. A salary structure may have pay grades with minimum, middle and maximum salary ranges. An employee's educational qualifications, skills, work experience and job responsibilities are some of the factors that may determine their pay grade. By understanding the salary structure for a role, employees can find out how much they can potentially earn and negotiate their salaries better.

Why do companies use salary structures?

When paying salaries to employees, companies generally use a salary structure to ensure fairness and compliance in compensation. Salary structures ensure pay parity between employees working in the same role and position. By understanding how employers use a salary structure to organise payments, you can find the minimum and maximum earning potential for a specific job role and make better career decisions. In this article, we describe what a salary structure is, explain how to calculate it, look at its different components and demonstrate how to make a salary structure.

What are the methods for defining salary components?

The methods for defining salary components may vary as per the policies of different companies. The most commonly-used methods are:

How to calculate bottom up salary?

Bottom-up salary structure: In this type, you first calculate the gross salary and then divide each salary component from that. So, if your gross salary is ₹P and the basic salary is 50% of the gross salary, and the allowances are 25% of the gross salary, your basic salary is P x 50%, and your allowances are P x 25%.

What is CTC in accounting?

Cost to Company (CTC): It is the total amount that the company directly or indirectly spends on an employee as their salary package. It consists of the gross salary and the deductions for provident fund and gratuity.

What is tax efficient salary structure?

A tax-efficient salary structure consists of different salary components. These can allow employees to get tax deductions and reduce tax liabilities. Employees usually benefit when the basic salary and dearness allowance are not too high, a house rent allowance that is not more than 40-50% of the basic salary, a leave travel allowance that pays travel fare expenses in India and a children's education allowance that does not exceed ₹2,400 a year.

What is the basic salary?

Basic salary: This is a fixed, taxable amount that is 40-45% of the CTC and forms the base income of the employee before any allowances or deductions. The designation and industry primarily determine the basic salary.

4 Key Types of Compensation Structure

The goal of a compensation structure is not to constrain pay, but to ensure existing resources match organizational objectives. Given the ever-changing nature of work, the workforce, the demand for remote work, and the competitive landscape, compensation structures have to be flexible enough to adapt with the times. There are four main types of com...

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How Are Companies Currently Structuring Compensation?

Payscale’s 2022 Compensation Best Practices Report includes insights from a survey of 5,000+ business leaders, HR and Compensation Professionals using current best practices in compensation, including how they structure their comp. Although the COVID-19 pandemic affected different organizations in different ways, for many, it had a significant impact on pay, ra…

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Determining Which Compensation Structure Is Right For You

How do you pick the right structure? When it comes to identifying the approach that works best for the business, there are a few things to consider: 1. Are you a growing organization?If you don’t yet have a grade structure, going through the exercise of developing a grade structure can accomplish a few things for your organization. It can help set up an infrastructure that prepares …

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