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Do We Need A Pay Structure?

Posted by Chuck Csizmar | Posted in Articles, Universal Compensation | Posted on 21-08-2017

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6273248505_43d0b56424_oOnce an organization reaches a certain employee population it’s been typical practice for the Human Resources department to replace their ad hoc compensation/reward processes with a more structured program.  A key element of that program development is the establishment of a base salary (pay) structure.  Here you will have an ascending hierarchy of grade level designations (your position is a grade “x,” mine is a grade “y”, etc), coupled with ranges that indicate a minimum-to-maximum value (pay) for each grade.

While distinctions in design can vary amongst organizations the central point of having a uniform structure is very much commonplace in both for-profit and non-profit organizations.

You probably see the “but” coming, don’t you?

Startups And Small Businesses

Just the other day one of my clients, a young and fast-growing high-tech company, explained to me that they didn’t use grades or salary ranges.  They didn’t have a pay structure.  They felt that they didn’t have the time to develop a standardized reward program. “We’re moving too fast,” the CHRO told me, and “We don’t have the time, people or money to focus on an HR project.”

That’s a common response for start-ups and small businesses.  The feeling is that there aren’t yet enough employees to start building an HR infrastructure.  Everyone knows everyone else’s first name and the company Christmas Party could be held at a restaurant.  Also, business leaders are too engaged in more important endeavors: getting the business off the ground, developing products and services and setting up mechanisms to sell their offerings.

Therefore these first generation employees are usually paid on the basis of:

  • Whatever the individual employee could negotiate
  • Whatever the company felt it would take to get chosen candidates to join, or
  • Setting of fixed rates for everyone in a particular job

Little thought is given to pay relationships (equity) or even the short-term impact on payroll expense.  The focus is lock set on creating a business, of getting the ball rolling.  Even job titles become an afterthought, with resultant title inflation slowly infecting the organization, and almost no one has a job description.

I get that.  That’s the reality of getting a business off the ground.  HR takes a back seat.

But it can’t last.

Paying The Piper

Eventually, these poor compensation practices will start to cause real pain within the organization, similar to how too much sugar inevitably causes tooth cavities in children.  Payroll gets out of hand (too high), inequity amidst the staff starts to cause employee relations issues and managers begin to see valued employees becoming disgruntled and heading for the exit.

By the time management starts to realize they have a problem, not only have the problems grown serious and disruptive, but those pay practices that no one cared about earlier have now become ingrained in the small company’s culture. Now it’s not going to be so easy to change course.  Now management risks angering some employees even as they try to steer the ship away from the reefs.  Some of those employees could be valued contributors.

For example:

  • Disconnecting inappropriate job titles is sometimes easier said than done.  Employee egos and self-identification have been blown out of proportion, but to make someone take a step back is difficult.
  • Dealing with outliers who either pop out the top of a salary range or fail to meet the minimum level.  When faced with a competitive pay structure to replace the ad hoc and laissez faire suddenly some employees are found to be overpaid, while others are underpaid.
  • Facing the cost implications of the above.  Raising someone to the minimum value of a pay range is an easy decision, but what if many employees are affected?  And if an employee has been with you for awhile, raising them to the minimum can still be perceived as a slap in the face.
  • Setting grade assignments that reconcile a job evaluation system, competitive market pricing results, and internal equity.  Think of a juggling act where everyone is a potential critic.

So do yourself a favor.  Pay attention to germinating pay issues even as the business passes through its stage 1 and stage 2 development.  Then, when it’s time to standardize and structure your reward programs you will find the road ahead all the smoother for your efforts.

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