Updating Salary Structure: When, Why and How?

Maintaining a strong salary structure is imperative for any organization. If the salary structure gets out of sync with the overall labor market, a company may find itself paying employees too much and needlessly increasing operating costs, or paying employees too little and having difficulty attracting and retaining talent. “Most companies try to be good about keeping it up-to-date, but they tend not to do it as quickly as they should,” said Steven Slutsky, a director at PricewaterhouseCoopers Human Resource Services in Philadelphia.

Here are pointers to keep in mind for maintaining a competitive salary structure.

Conduct a review on a regular schedule or tied to specific events. As a general rule, employers should examine the overall salary structure at least every three to five years. The review should determine whether the structure is still aligned with the company’s needs and the labor market.

Some HR executives favor conducting an analysis every 18 to 24 months. The rationale is to catch issues before they become large enough to affect employee engagement and the organization’s ability to attract and retain talent. Moreover, salary-structure issues are less expensive to address early on. Once things have gotten to the point where the business must make significant upward adjustments, the cost of doing so can be considerable.

There are other situations, changes and events that also demand a review of the salary structure, such as the company’s undertaking a merger or acquisition, a significant change in the labor market, and a competitor’s opening a new facility or closing one near the company’s operations. In the last example a plant opening could increase competition for talent, while a plant closing could significantly increase the labor pool and lower the cost of hiring new people.

Listen to managers … up to a point. In some cases front-line managers will bring salary-structure issues to HR’s attention. These managers’ insight can be important in determining if salary-structure issues exist. After all, front-line managers are more likely to hear from employees who think they can earn more elsewhere—before these individuals leave the company. They are also likely to more readily recognize difficulties in filling positions in their department. This insight can indicate that specific areas of the salary structure are out of alignment.

While HR should certainly consider managers’ perspectives when determining whether a salary-structure review is warranted, keep in mind that this is just one side of the story. Managers may not realize that employee feedback is to be expected because the organization has made a strategic decision to set pay levels at a specific point relative to the market, such as at the median or slightly above or below, said Slutsky.

Link the salary structure back to HR strategy and the market. If the salary structure does get out of alignment, it may not be tied closely enough to the company’s total rewards and HR strategy. When that happens, the organization “loses the strategic connection to how the organization competes and drives value through its people,” said Gary Kushner, SPHR, CEO of Kushner & Co. in Portage, Mich. To bring the structure back in line with the company’s goals, link the HR strategy to a clear compensation philosophy that will provide a framework based on competitive positioning in the market and other factors, including regional economic conditions. Moreover, a business in a declining industry, like paper manufacturing, faces different requirements when it comes to maintaining a salary structure than one in a fast-growth industry, like mobile technology or health care.

At the same time, it is important to consider the nuts and bolts that hold up the salary structure. For example:

• Has the organization established appropriate pay grades and maintained updated job descriptions with required skills?
  
  
• Does the company have a clear idea of whether it is paying for the position or for the skills that people bring to it and to the organization?

“Companies are organic and change over time,” said Slutsky. “People in certain jobs may now be doing much more than what is in their job description. It is important to make sure job descriptions are still accurate and reflect the core duties of each position. Don’t fall into the trap of doing the same analysis time after time.”

Look broadly when necessary. Depending on the organization and its talent requirements, the salary structure may need to reflect broader market forces. Particularly in a global economy, businesses may be competing for talent with entities anywhere in the world. However, the level of competition may vary by position. For example, Kushner noted that a company that hires nuclear physicists needs to use national or international market data, while for administrative positions it may base salaries on the local market.

In this type of situation, the company could find that only parts of its salary structure are not in line with the market. So although a more robust approach to keeping the structure in line with the market may be required to attract and keep nuclear physicists, technology workers, engineers and other professionals in high demand, a less aggressive strategy (and fewer updates) may be needed for positions filled by workers less in demand.

Communicate the results. Once the company is ready to adjust the salary structure, it is important to educate and communicate with employees about the changes. Whether salary-structure adjustments go up or down, “make sure employees understand why this is happening,” said Kushner. “Explain why pay for these positions is changing and the process the company went through to come to that conclusion, and identify the necessary adjustment.”

When an analysis reveals that a position is overpaid, a company may “red-line” that position by keeping base pay the same for incumbents and adjusting the pay level downward when filling the job after those incumbents leave.

Joanne Sammer is a New Jersey-based business and financial writer.

Related SHRM Articles:

Creating a Motivational Cash Compensation Program, SHRM Online, June 2022

Fine-Tune Compensation Strategies to Keep Workers Onboard, SHRM Online, June 2022