In today’s continued competitive labor market, how do HR professionals design a compensation system that not only competes in the market but also aligns with your organization’s values and goals? This is more than a numbers game—it’s a strategic decision reflecting your organization’s commitment to a motivating and equitable workplace. Compensation structures are a tangible expression of your organization’s strategy and values, impacting everything from employee satisfaction to your competitive edge.
Organizations have a plethora of options when it comes to compensation structures. Below are just a few options:
Selecting the Right Compensation Structure
The best compensation structure for your organization is contingent on various factors, such as company culture, workforce composition, strategic objectives and the availability of market data.
Over the past several years, market-based compensation structures have seen a surge in popularity within the United States. These structures rely on benchmarking company roles against those in comparable organizations to gauge the external worth of a job and assess the company’s competitive stance in the market. In a remote work environment where hiring occurs nationwide, these structures are particularly advantageous as they can be adjusted to reflect geographical differences.
Challenges of Market-Based Compensation
Despite their popularity, market-based compensation frameworks come with challenges:
- Data Reliability — The reliability of market-based structures can be undermined by the variable nature of market data. Despite compensation surveys validated by employers being the most dependable source for assessing a job’s market value, the data may be influenced by limitations such as incomplete information, market fluctuations or anomalies from survey participants.
- No Guarantee of Competitive Salaries — Organizations must carefully select relevant peer market data and identify comparable job matches within the data to ensure salary competitiveness. A misalignment between the organization and either the market data source or the specific matches used will often produce erroneous results.
- Potential Internal Equity Disruption — An excessive focus on external benchmarks can lead to internal pay discrepancies that may be difficult to justify, undermining the perception of fairness among employees. Jobs within an organization that are comparable in terms of their value and contribution might be assigned different pay rates based solely on market data, potentially leading to significant salary discrepancies that are difficult to justify from the perspective of the employees.
Integrating Alternative Job Evaluation Approaches
Organizations can address the limitations of market-based structures by integrating job evaluation methods that provide an internal viewpoint on job worth. It’s not unusual for both traditional and banded compensation structures to incorporate such methods to establish compensation families, grades or levels.
The alternative job evaluation approaches below complement market pricing by creating a balanced structure that compares positions not only externally, but also internally. Some of the commonly used methods include:
- Job Ranking – This method involves comparing each position against others within the organization to ascertain its relative importance or “size”
- Classification – Jobs are categorized into predefined structures according to established job class descriptions
- Point Factor – Different levels of certain compensable factors are assigned to each job, culminating in a cumulative point score
- Factor Comparison – This approach uses monetary values as a substitute for point scores
Job ranking and classification methods are considered non-quantitative, as they don’t rely on numerical calculations. On the other hand, point factor and factor comparison methods are quantitative, offering a more systematic and formula-based evaluation of job value. These quantitative methods can yield more consistent and objective assessments of job worth within an organization’s compensation framework.
The art of designing a compensation structure that promotes organizational harmony and stays competitive in the market is a delicate balancing act. In my next post in this two-part series, we’ll look at real-world scenarios where job evaluation methodologies could lead to more favorable outcomes for both employers and their team members.
With budget season approaching, it’s the ideal time to consider your compensation strategies. The Workforce Strategies team at RKL Virtual Management Solutions is here to help you design a compensation approach that’s fully integrated with your organization’s overarching objectives, values and dynamics. Contact me or visit our Compensation Services page to learn more.
