Designing Pay Structures for Small Organizations

One of the tools frequently missing from a small employer’s repertoire is a means of providing feedback to employees. Often you’ll hear a small employer say, “We’re too small for that here” or “Our employees already know how we feel about them.” Based on experience, I know that’s not always the case. There is a difference between what the employer thinks and how the employee feels about his or her job performance and standing within the organization.

If establishing a performance appraisal system that is integrated with formal pay structures and variable “pay for performance” is something you are undertaking for the first time, here are pointers on how to begin.

Create job descriptions

Start by obtaining as many salary surveys as you can for each job position within the organization. If you haven’t done so, create job descriptions for each position. At the very least, try to obtain a couple of paragraphs from managers outlining what each of their employees’ job functions are and then formalize the job descriptions later with more detail.

This task can be time-consuming so be sure to plan ahead and offer as much help to your managers as they need. Explain how this will ultimately provide a benefit to them, their employees, and the company overall.

Collect salary data

Formalized salary surveys obtained from large reputable organizations can be costly—sometimes too costly for a small company to justify the expense. If this is the case for your company, begin your search for some less expensive alternatives. Start your inquiry with HR professional organizations, try to source through your networks, and then work your way to speaking with your state and local government Department of Labor. At the very least, they will be able to point you in the right direction.

Most state labor departments have placed their statistical data online and have even drilled down geographical salary data to the county level, where you can make relative comparisons.

You can also perform the obligatory Internet search and see where that takes you. Once you start on this path, dedicate at least a few days to the cause. Try to be patient and keep in mind that each step you take will lead you further in the right direction, eventually yielding results.

Seek process approval

Now that you have your salary surveys in hand, what’s next? Start to draft a feedback/performance appraisal form that you think will work for the type of industry you operate within. Be prepared to get pushback from others within your organization. It’s only natural. It’s new; it requires commitment from the executive team and ultimately affects the entire organization. It may be like hitting a nerve at first. Continue on your path. Prepare your draft and tweak it based on the comments you receive; however, if what others are proposing doesn’t make sense or doesn’t sound right to you, it probably isn’t.

Remember, your job in HR is to be the voice of reason, so make sure you guide and counsel in the appropriate manner. Explain to those who are pushing back your reasoning. If pushback persists, you may have to create a formalized flowchart to explain how you envision the process from start to finish.

Request a pay budget

With salary surveys and an employee feedback document that’s finally been approved, you’ll now need to know how much money you will be allocating to performance appraisal and/or bonus pools. Again, this may be a tough one to nail down. Timing is key on this. Pick the time carefully for proposing your request to the executives.

Establish the grading system

Next, you will need to create the mechanism of how you’ll structure your salary surveys, performance appraisal program and bonus pool against some type of salary grading system. This is an extremely important step for the small employer because it begins to set the base line for your future payroll expense.

Think about this. If you don’t have any salary grading structure in place now, what do you think will happen year after year with salaries over time? What happens if you can no longer afford to give those generous increases you have been giving to your employees if you must take on rapid expansion? What happens if your business sees a temporary decline in sales or business conditions suddenly change outside of your control?

These issues will almost certainly escalate, turning into a negative employee relations issue when you can no longer provide above-industry-average pay raises. This point can’t be emphasized enough, as it occurs at too many small-but-growing employers. Start to formalize your processes while you are still a relatively small company, before you begin to feel those growing pains.

A Final Step: Report Generation

Another oft-forgotten area is report generation. How will you do that now? What will it look like once you have all of your formalized processes in place? What tools could you use to help you? There are many parts to consider, but one of the most important components is to generate reports against some structured input values. Automated reporting is something you will eventually not be able to do without, especially once you have defined the process.

Historical reporting will also help your executives make better business decisions, for instance by showing them how they handled performance and salary/bonus processes the previous year. You can collectively show the progression of your program once performance ratings have been included.

Putting a formalized process into operation isn’t as hard as you may think. Even if you don’t currently have any plans in place, there are resources and learning tools available to assist with whatever process you need within your company. Seek them out.

Robin Rothman recently joined Sage Software Inc., a provider of HR management solutions, working with Sage HRMS as product marketing manager. Her experience includes over 25 years in HR, holding various strategic and tactical management and director roles for companies including Herman’s World of Sporting Goods, Circuit City Stores Inc., Nobody Beats the Wiz, and FedEx Kinko’s.​