By: Bob De Contreras
Why is salary planning important to my business success?
People are the foundation to the building called your
business. Without quality people, your business canít sustain itself and grow.
How do you attract good people? With a satisfying work environment, a quality
benefits program, an appropriate compensation program and a high level of
employee support to achieve their goals. How do you get these employees to do
good work? With an incentive compensation plan. But, you need a plan so that
you donít offer too much or too little compensation. You need a plan so that you
locate your business in a place where human resources are available or you need
to at least know where to attract those quality workers. Here are eight steps
to appropriate compensation planning.
Get your internal/organizational structure right.
As organizations grow, the original and often unspoken structure becomes less
defined and the pay related to the jobs loses its internal rationale. You need
to establish both internal and external rationale for your pay structure. Before
you can do this properly, you need your organization structure to reflect your
business needs and objectives.
Get job grades within that structure right.
With the "outline" of your organization completed, look at each area within the
company to see whether the internal relationships between the jobs are right. If
not, you will probably need to undertake some form of job evaluation exercise to
bring the two into alignment. This is a worthwhile step and may take a little
time, but it will help immeasurably if you do this part properly. Once you have
completed this, it is easy to use the results to create a number of grades
within the organization. Creating job grades makes the management of pay and
employee benefits so much easier. You need to create as few grades as you
reasonably can, to ensure that you reduce grading disputes and to keep the
management of the pay as simple as possible.
Tie pay to the job grades. Once you've
created the job grades you can now attach pay to them. This is easier than it
sounds. You need to take a range of "benchmark" jobs within each job grade and
establish the typical market pay for each of them. By reviewing the pay levels
for all these jobs within a job grade, you can start to create a pay range for
that job grade. You need to be sure that the pay ranges are appropriate for the
organization in terms of the number of grades (as noted above), their bandwidths
and the overlap between them. These may differ depending in the level of the
grade within the organization.
Establish the markets for each job or level. (These will differ
depending on the levels.) When you are setting the
right salary for a job, or the job grade, you need to establish the pay market
for every job. Some jobs, typically at the junior level will be local and the
local labor market will determine their pay, but there will always be jobs where
the normal rules don't apply and you will need to think about the market pay for
them. Executive-level salaries are normally set according to national or
regional job market standards, management, technical and administrative level
jobs are paid according to local, regional comparisons.
Ask: How do other companies of the same size compensate employees in these
positions? How do other companies in your industry compensate them?
Creating job grades and pay ranges helps to make sure that your pay levels are
appropriate for the level of the job within the organization. This will also
help you to avoid falling foul of equal pay legislation.
Get the data right. What are people
being paid elsewhere for the same work? Some people use advertisements in the
newspaper to establish this information, but that's not necessarily the best
way. Locate information from local salary surveys like the one from Capital
Associated Industries (CAI) or on Web sites like
SalariesReview.com. Be careful
about your data source because you will find significant disparity between data
from different sources. Likewise, salary data varies significantly from
city-to-city and region-to-region. The salary data from CAI is contained in a
400 page document with exceptional detail on salary bands and ranges by job
position and by geographic area in North Carolina. The following charts from the
CAI data show how salary data varies.
Figure 1: CAI salary data areas.
Figure 2: CAI data on monthly pay by region by pay grade.
Based on the National Position Evaluation Plan grading system.
Figure 3: One comparison between CAI and Salary.com data
showing variability of local data to national data. Programmer I is grade 8 and
Programmer II is grade 9.
Salary increase planning. Once you've
got the salary plan established itís time to think about salary increases. Your
planning for salary increases is also based on the data you gather from your
salary data source of choice. Again, you should look to local data like that
available from CAI. Using history data and data on specific job positions, you
can tune-in to the right salary increase plan (not too much, not too little).
Figure 4: CAI data on North Carolinaís
average salary increases by job level and compared to the consumer price index.
The Add-ons. When you've created the
job grades and pay ranges you can add the "fancy things" like performance pay,
benefits packages and so on.
In this way, you are not creating compensation in a vacuum, and
you are not simply "following the crowd" with your compensation structure.
Rather, your system is well thought-out.
Figure 5: CAI data on how
North Carolina companies are using incentive pay in two general job categories.
Remember to compensate your "key" people adequately.
These may be your top managers, but they could also be your most solid workers.
Their tenure and knowledge may make them pivotal. Likewise, fair reward for the
rest will ensure that the bulk of your workforce stays focused on their jobs,
not on how unhappy they are with their pay.
To contact CAI: Capital Associated
2900 Highwoods Blvd.,
Raleigh, NC 27604
By: Bob De Contreras
The CEO said,
ďIím billing 5 million dollars a year and my profit is only 180 thousand.
Whatís wrong with my financials? Why am I not making more money?Ē
asked a few questions, looked at the financials, reviewed the organizational
structure, and we saw several areas of the business that needed a tune-up. One
that stood out was a combination organizational/financial problem. This CEO had
a VP of Finance ($150,000 per year), a VP of Sales ($125,000 per year), a VP of
Marketing ($125,000 per year), a VP of Product Development ($110,000 per year),
and a VP of Human Resources ($100,000 per year). Looking at the sales staff we
found 3 sales representatives earning an average of $80,000 per year salary.
When we compared the local, average salary for these positions with what this
CEO was paying, we saw a difference:
Local Average Salary*
* Based on the Salary Survey available from
Capital Associated Industries.
As hard as it
may seem to believe, this CEO was overpaying his key management and staff by an
amount greater than his current profits. That is, over paying compared to the
local average salaries for these positions.
We asked how
he came to decide on the salaries. He said that he wanted to have better than
the average employees so that he could have better than the average products and
services for his customers. That led to the decision to pay better than the
We asked what
data he used to decide on what salaries he would pay and he said that he used a
couple of sources Ė one from the state and one national survey. We discussed
how he had probably made a couple of mistakes. He didnít use local salary data
and he set the salaries too far over the average.
suggested some changes, planning, and restructuring:
your internal/organizational structure right.
organization of his size he needed to consider if he could really afford a sales
manager or if the sales manager was required, that he could not afford three
sales representatives. Likewise, we suggested that he consider a comptroller
rather than the expensive VP of Finance.
grades within that structure right.
Part of his
overstatement of salary for each position was also based on the fact that this
CEO had not considered salary ranges for each of the job positions. Salary
bands and job grades were the next step for this CEO to review.
Tie pay to
the job grades.
The next step
was to tie the new pay ranges to the new job grades. This allowed more range
for salary increases and an effective reduction in salary dollars.
the markets for each job or level and get the data right.
We reviewed the
average salary ranges for the different positions and in the different cities in
the state. This review also showed that employees were being over paid based on
the average salaries for each job title in the cities where he had employees.
This CEO didnít
have an incentive compensation plan except for the sales staffís commission
plan. We worked with him to consider various bonus and commission programs for
all the key managers and sales staff. These plans were based on margin
attainment not revenue attainment. Sales commissions were raised and salaries
It took a year
to get the salaries realigned and to get the incentive compensation plans in
place, but in the end this businessman was able to significantly improve
profitability by bringing his salaries into alignment with average salaries in
the cities where he had employees. These steps are explained and documented in
more detail in the main article of this news letter.
Brought to you by:
Bob De Contreras
RTBA | Cary | Greensboro | Raleigh | Research Triangle Park | North Caroliina
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