Pay Structures PDF

CHAPTER 6 Pay Structures 6.1 Understanding what a pay structure is...

CHAPTER 6 Pay Structures 6.1 Understanding what a pay structure is A pay structure comprises grades or levels (for example, Paterson A, B, C, D, E and F) that have pay ranges attached to them. These pay structures are derived from market information, and an organisation typically uses a market reference point for the midpoint of their pay scale, e.g. the market median/50th percentile. Table 6.1 provides an example of market reference percentile definitions. Typically, benchmark remuneration data is presented in ranges (via percentiles) and the ranges are defined as shown in Table 6.1. Table 6.1: Definitions of percentiles Portion of salary Percentile Explanation Minimum 0P The lowest salary Lower quartile (Q1) 25th percentiles The salary above which 75% of salaries fall, when they are ranked in order of size Median (Q2) or 50th percentiles The salary above and below which 50% of salaries fall, Midpoint when they are ranked in order of size Upper quartile (Q3) 75th percentiles The salary above which 25% of salaries fall, when they Copyright © 2019. Knowledge Resources. All rights reserved. are ranked in order of size 90th percentile (Q4) 90th percentiles The salary above which 10% of salaries fall, when they are ranked in order of size Maximum 100P The highest salary Average N/A The arithmetic mean of all the numbers; this result would be different to the median because it is influenced by outliers, whether high or low. 87 Bussin, Mark. Remuneration Handbook : Fourth Updated Edition, Knowledge Resources, 2019. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/nmmu/detail.action?docID=5987178. Created from nmmu on 2023-08-02 16:37:22.  The Remuneration Handbook for Africa Table 6.2 illustrates an example of a pay structure. Table 6.2: Example of pay structure Market Total Guaranteed Package Paterson Grade 10th 25th 50th 75th 90th A1 26,628 30,000 33,144 34,543 39,384 A2 38,514 44,783 53,184 55,499 63,768 A3 56,220 65,760 70,158 72,913 77,040 B1 50,115 61,457 76,093 83,937 91,752 B2 60,408 64,566 80,640 91,736 105,871 B3 73,716 89,457 110,108 123,950 140,073 BU 91,034 112,839 130,431 149,033 173,616 C1 130,016 154,787 176,689 198,475 227,652 C2 165,087 190,419 202,090 235,646 272,445 C3 190,419 210,453 243,543 272,664 309,395 CU 254,760 293,556 336,638 366,883 412,184 D1 286,727 337,917 391,480 453,999 502,632 D2 407,065 452,192 508,027 566,225 634,709 D3 463,008 518,914 590,286 659,287 729,720 DU 598,840 678,820 750,000 825,000 908,774 EL 717,686 813,641 920,333 1,031,233 1,181,520 EU 956,000 1,080,000 1,211,766 1,391,541 1,611,038 Copyright © 2019. Knowledge Resources. All rights reserved. 88 Bussin, Mark. Remuneration Handbook : Fourth Updated Edition, Knowledge Resources, 2019. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/nmmu/detail.action?docID=5987178. Created from nmmu on 2023-08-02 16:37:22.  Chapter 6: Pay structures Figure 6.1: Graphic example of market data 6.2 Why organisations have pay structures Once organisations grow too big for the owner to manage personally, job grades and pay structures provide defensible systems and procedures for implementing the pay policy in a consistent way. The purpose of a pay structure is to provide guidelines as to which pay scale employees are on, linked to their grade. It provides a logical framework on which to base remuneration decisions. The application is shown in Table 6.3. Table 6.3: Possible application of a pay structure Instance Application Recruitment Managers can grade the job and offer a salary in the pay range (according Copyright © 2019. Knowledge Resources. All rights reserved. to the remuneration policy). Performance Employees who demonstrate sustained superior performance could move through the pay scales more quickly. Competence and skill Some remuneration policies have a progression policy that allows demonstration individuals who apply relevant competence and skill to move up the pay scales more quickly. Business needs or scarcity The business imperative is particularly applicable in Africa during of skill transformation of organisations. This, together with scarcity of some skills, sometimes leads to “anomalies” in the pay structure, but these are defensible. Ultimately, the organisation is looking for a pay structure that is equitable from both an external and internal perspective. 89 Bussin, Mark. Remuneration Handbook : Fourth Updated Edition, Knowledge Resources, 2019. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/nmmu/detail.action?docID=5987178. Created from nmmu on 2023-08-02 16:37:22.  The Remuneration Handbook for Africa 6.3 Features of well-designed pay structures The features of well-designed pay structures are set out below and could serve as a checklist when designing pay structures for your organisation: The pay structure supports the remuneration, HR and business philosophy. The principles of internal and external equity are upheld. Grades and scales reflect the organisation and work design. Logical metrics are used when determining the number of grades, pay scale ranges, pay slope, overlap, differentials and when best practice has been considered. They are flexible enough to respond to internal and external pressures. They allow superior performance to be rewarded. They ensure consistent decision-making and application of the remuneration philosophy. Implementation is not disruptive or costly. They clearly show career movement, pay opportunities and career ladders. They have appropriate stakeholder buy-in. They are legally defensible. They are affordable yet competitive. One of the most difficult challenges in pay structure design is getting the balance right between affordability and competitiveness. To do this, one size may not fit all and we recommend that best fit is more important than best practice. 6.4 What influences the design of pay structures? Not all pay structures are the same as organisations compete by differentiating their pay structures. Factors most likely to influence your structure are: Supply and demand – the market rate for the job or grade. This would vary per country. Cost of living. The financial position of the organisation or industry. Management decisions – policy. Copyright © 2019. Knowledge Resources. All rights reserved. Trade unions and negotiated settlements in place. The current salary/wage structure. The number of grades from top to bottom. Market stance/target market percentile as identified in your remuneration strategy. Consider the following before designing a pay structure: Strategic issues such as: ◦◦ Whether the structure is able to support a organisation’s business strategy. ◦◦ Compatibility with total reward design strategy (including fixed pay, variable pay, incentives and employee experience initiatives, likely non-cash in nature). ◦◦ Guaranteed pay to variable pay ratio. 90 Bussin, Mark. Remuneration Handbook : Fourth Updated Edition, Knowledge Resources, 2019. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/nmmu/detail.action?docID=5987178. Created from nmmu on 2023-08-02 16:37:22.  Chapter 6: Pay structures Competitive practices – specifically, external equity and the organisation’s stated comparative position to the market as per your remuneration strategy. The organisation’s job and workplace design approach to produce internal equity. Administrative policies of the organisation. Funds available. 6.5 Developing a pay structure This section outlines the key considerations in the design and development of pay structures. It focuses on internal and external equity as the main anchors. 6.5.1 Internal equity Internal equity starts with a process to determine the relative grade assigned to different jobs within an organisation. In addition, internal equity assesses how reasonable these grades are and how this links to actual pay for the job. Internal equity can be examined on two levels, namely horizontally (between departments) and vertically (within one department). Internal equity is a key consideration in developing pay structures not only within a job family, but also among various job families that have common job grades. Without a grade structure it is difficult to create a pay structure, as there is nothing to “anchor” the pay ranges on. Establishing internal equity The first step in establishing internal equity is carrying out job grading and ensuring that there is understanding of the outcome. 6.5.2 External competitiveness This is the second consideration in the design of a pay structure. The focus in this area is on Copyright © 2019. Knowledge Resources. All rights reserved. external equity and is based on an organisation’s need to compete in a free market for products and services. Part of this competition is the management of labour costs – ensuring that the labour force is neither overpaid (leading to a higher cost than necessary for the organisation to provide/ produce its product/service) nor underpaid (possibly leading to a high turnover or labour unrest which could harm productivity). Pay mix is important as all components of the remuneration package must be added together to get a holistic comparison to the market. In simple terms, external competitiveness speaks to the organisation’s ability to attract and retain the key talent it needs to be successful. 91 Bussin, Mark. Remuneration Handbook : Fourth Updated Edition, Knowledge Resources, 2019. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/nmmu/detail.action?docID=5987178. Created from nmmu on 2023-08-02 16:37:22.  The Remuneration Handbook for Africa Indicators of competitiveness Low turnover or a lack of competitors for labour is not an indicator of a lack of competitiveness in an industry or that the remuneration system is working perfectly in the organisation, since turnover could be for a number of different non pay-related reasons.1 Once it is established, however, that employees are leaving to move to other organisations, reliable remuneration data regarding these organisations should be obtained via salary surveys. It is essential for an organisation’s HR strategy to be tied directly to the data gathered on any defined competition. Who is surveyed? Organisations usually conduct surveys to benchmark against organisations similar to them in all or some of the following characteristics: Size and structure. Industry type (products, services). Geographic location. Revenue/income size. Required job skills. How to obtain the data The key methods of obtaining required data are shown in Table 6.4. Table 6.4: How to obtain data – with implications, advantages and disadvantages Method Cost Time Reliability & Confidentiality Detail? validity High reliability; Published Annual validity = 3 Low High Some Printed publication months old – 9 months old Published High reliability; Copyright © 2019. Knowledge Resources. All rights reserved. Low Immediate High Some Web-based always valid Customised High 6 – 8 weeks High High Yes survey Shared industry Low 6 – 8 weeks High High Yes survey Free information/ No cost Fast Low High No network 92 Bussin, Mark. Remuneration Handbook : Fourth Updated Edition, Knowledge Resources, 2019. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/nmmu/detail.action?docID=5987178. Created from nmmu on 2023-08-02 16:37:22.  Chapter 6: Pay structures Before deciding to conduct a survey, consider the following: Time. Costs. Usefulness of data. Survey purpose. Ensure that you also take account of hidden concerns such as the difficulty in persuading peer organisations to participate and confidentiality. When you receive a report, consider: Participants and sample size Definitions of remuneration components Job matching and statistical methodology Data validation and “trimming” Date of validity The interpretation and analysis Always remember: The market does not move equally year on year. An average is not a reliable reflection – the median is a more robust view Below 50th percentile does not mean below market Data should not be weighted or smoothed – unless identified in the report The biggest organisation does not necessarily pay the most Percentiles do not reflect the spread of pay of employers – it is the spread of employees Carefully choose your comparator group You do not need to pay more when the business is in a more profitable position – go back to your strategy! 6.6 Designing an effective pay structure Copyright © 2019. Knowledge Resources. All rights reserved. Follow the steps below to ensure that you have taken account of internal equity and external competitiveness when designing your pay structure. Steps one to three are based on the assumption that the organisation is using a point- factor job evaluation plan. Step four onwards are the same for both point-factor and classification systems. Complete these steps to design the pay structure. Note that steps one to five are related to determining internal equity and steps six to ten are used to establish external competitiveness As a general guideline, as job levels increase, the reliance on external data (as opposed to internal considerations) also increases. 93 Bussin, Mark. Remuneration Handbook : Fourth Updated Edition, Knowledge Resources, 2019. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/nmmu/detail.action?docID=5987178. Created from nmmu on 2023-08-02 16:37:22.  The Remuneration Handbook for Africa Table 6.5: Steps to designing an effective pay structure Step Action 1. Review overall point differentials. Internal relativity 2. Rank order jobs by total evaluation points. 3. Develop job groupings. 4. Develop preliminary point bands. 5. Check intra-family and supervisory relationships. 6. Incorporate market data. External relativity 7. Review market inconsistencies. 8. Smooth out grade midpoints. 9. Review differences between midpoints and market references. 10. Resolve inconsistencies between internal and external equity. Table 6.6 contains a detailed breakdown of the pay structuring procedure along with a focus on key issues and questions to ask. Table 6.6: Pay or structuring procedure Action Explanation Key issue Key questions to ask Review Review all job evaluation Do any job Do the evaluators fully overall point points to see if any job evaluations understand their jobs? differentials evaluations stand out from the appear to be Is the job description or group. During this step, make “out of place” questionnaire complete? any points changes necessary either vertically Is the job being to reflect the internal value of or horizontally? compared to the correct the job. peer group? Is the rater evaluating Copyright © 2019. Knowledge Resources. All rights reserved. the job or the person? Rank order Rank all jobs in ascending or Does the Does the hierarchy of jobs by descending order. hierarchy of reflect the differences in total number positions make functions of the various of evaluation intuitive sense? positions? points Has the position been overrated or underrated? Do the differences in points reflect the degrees of difference between positions? 94 Bussin, Mark. Remuneration Handbook : Fourth Updated Edition, Knowledge Resources, 2019. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/nmmu/detail.action?docID=5987178. Created from nmmu on 2023-08-02 16:37:22.  Chapter 6: Pay structures Action Explanation Key issue Key questions to ask Develop job To develop groupings, look for How to develop Where are the natural groupings break points. Ensure that the job groupings break points? levels identified are compatible that are How many levels should with the number of levels in the meaningful and there be to accommodate organisation. not contrived. levels within the organisation? Develop Salary-grade point bands Determining the Wider point bands will preliminary (ranges) can be developed as width of each require fewer grades point bands either absolute point spreads or point band (pay and will group a larger percentage-based point spreads range per grade/ number of jobs together. across a range. level). Related questions to ask include: ○○ Is this in line with the organisation’s corporate policy? ○○ Are jobs with similar skill, effort and responsibility being grouped together? Check intra- This last step in the internal Peer and Are there enough levels family and equity process focuses on subordinate/ between supervisor and supervisory checking the evaluations to superior subordinate positions? relationships ensure that they represent relationships. Do the set levels all levels and reporting accurately reflect levels relationships within the within job families? organisation. Ensure that you determine if jobs of similar skill, effort and responsibility are within the same salary level. Check that dissimilar jobs are Copyright © 2019. Knowledge Resources. All rights reserved. not placed within the same level and that subordinate/supervisor positions are not placed in the same grade. 95 Bussin, Mark. Remuneration Handbook : Fourth Updated Edition, Knowledge Resources, 2019. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/nmmu/detail.action?docID=5987178. Created from nmmu on 2023-08-02 16:37:22.  The Remuneration Handbook for Africa Action Explanation Key issue Key questions to ask Incorporate Use the preliminary data How to obtain Are the market numbers market data gained in steps four and five. the best fit reliable? Add market data to identify between internal Are the job matches differences between the way evaluation and appropriate? that the organisation and the market value. How many open grades market value a particular set are needed to meet of jobs. future needs? Is it possible to keep the market comparisons current? Review market The organisation must now The organisation Is the number of grades inconsistencies decide the importance of must decide selected still accepted? the internal values that have whether it Can the differences been placed in its positions. can accept the between the midpoints It must also decide whether salary structure be smoothed without the organisation can afford with varying affecting the integrity to pay differently from the percentages of the market market. Can the organisation between its competitiveness? risk the internal integrity of midpoints. How important is it to be the remuneration programme aligned to the market? by relying more heavily on the market value of these positions? Smooth out In this step, a decision must The organisation Is smoothing out always grade midpoints be made about where it is must decide necessary or desirable? most important to be most whether there At what point is it competitive and where the most is an ideal advisable to stop payroll money is at stake. At midpoint- the smoothing-out this point, you must test to see to-midpoint process so that the which midpoint-to-midpoint percentage salaries generated are Copyright © 2019. Knowledge Resources. All rights reserved. percentage increment is most spread. competitive but the logical to use. payroll Rands are not used ineffectively or irresponsibly? 96 Bussin, Mark. Remuneration Handbook : Fourth Updated Edition, Knowledge Resources, 2019. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/nmmu/detail.action?docID=5987178. Created from nmmu on 2023-08-02 16:37:22.  Chapter 6: Pay structures Action Explanation Key issue Key questions to ask Review Any large differences The organisation Which jobs have a differences between proposed midpoints must determine greater need to be between and individual job-market the percentage competitively paid? midpoints benchmarks must be identified. factors to be Can a job be underpaid and market used in order without affecting the references to smooth the organisation’s ability midpoints. to attract and retain employees? Can the organisation afford the financial implications of overpaying some jobs? Resolve Note that most organisations The organisation What is the inconsistencies are willing to accept midpoints must determine organisation’s culture? between internal that are within 20% of the what is more What is the and external competitive market. To manage important, organisation’s stance on equity inconsistencies and decide internal or the consistent treatment what adjustments to make in external equity. of its employees? balancing internal values and Is there a high turnover external competitiveness, the in the organisation? organisation must take into Is it in a low-level or a account its corporate culture high-level job family? and ability to pay. The result of the above procedure is a structure which shows how each evaluated position relates to each other job internally and how they relate to the market. 6.7 Terminology Copyright © 2019. Knowledge Resources. All rights reserved. This section provides definitions and explanations for terms that are key to salary structuring. Table 6.7 provides definitions that are essential for understanding and applying pay structures in the workplace: 97 Bussin, Mark. Remuneration Handbook : Fourth Updated Edition, Knowledge Resources, 2019. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/nmmu/detail.action?docID=5987178. Created from nmmu on 2023-08-02 16:37:22.  The Remuneration Handbook for Africa Table 6.7: Definitions of pay structuring terminology Term Definition Pay structure The pay structure refers to the pay scales attached to grades and the way in which these scales are structured; their range, slope overlap, differentials and market positioning. Pay ranges The pay range refers to the width of the pay scale, that is, the distance between minimum and maximum pay for each grade. It is usually measured in terms of the percentage above and below each midpoint, or the full range from minimum to maximum pay scale point. Pay overlaps The extent to which the maximum of the lower grade overlaps with the minimum of the next higher grade. It is dependent on both the pay range and the pay slope. Pay slopes The steepness or angle of the pay curve The percentage difference between the pay for one grade and another Provides a useful tool for measuring and comparing pay slopes. Pay ratio The ratio between the CEO’s pay and the lowest pay. The highest salary divided by the lowest salary. Understanding the terminology used to report remuneration data is essential for interpreting the remuneration data. Percentiles are used to report remuneration data because they exclude extreme numbers. The average is used in conjunction with the median to see which way the data is skewed. If the data is: Positively skewed, the median will be greater than the average. Negatively skewed, the median will be less than the average. 6.7.1 Anatomy of a pay structure Each pay structure has a number of pay or salary ranges. 6.7.2 Components of a pay range Copyright © 2019. Knowledge Resources. All rights reserved. The following diagram reflects the key components and decision points in the design of a pay structure: 98 Bussin, Mark. Remuneration Handbook : Fourth Updated Edition, Knowledge Resources, 2019. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/nmmu/detail.action?docID=5987178. Created from nmmu on 2023-08-02 16:37:22.  Chapter 6: Pay structures Slope Salary Pay range Overlap Grade Figure 6.2: Components of a pay structure A pay range often has the following components: a minimum value, maximum value, and midpoint or central value. In simple terms, a market reference point is used as the starting point for the pay scale design, and is typically used at the midpoint of the scale. In the example below, we note that there are many decisions to be considered, one of which is which market point to reference: Market Total Guaranteed Package Paterson 10th 25th 50th 75th 90th D1 286,727 337,917 391,480 453,999 502,632 Proposed Pay Scale Paterson Lower guide Midpoint Upper guide Copyright © 2019. Knowledge Resources. All rights reserved. Example 1 D1 -13% 391,480 +15% Example 2 D1 293,988 337,917 388,605 Figure 6.3: Components of a pay scale design Once the midpoint is selected, the next steps are to build the range around the midpoint. 99 Bussin, Mark. Remuneration Handbook : Fourth Updated Edition, Knowledge Resources, 2019. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/nmmu/detail.action?docID=5987178. Created from nmmu on 2023-08-02 16:37:22.  The Remuneration Handbook for Africa Calculation of a pay range The difference between the maximum and the minimum value in the salary spread is the “range spread” or width of the range. This is normally expressed as a percentage of the difference between the minimum and the maximum divided by the minimum. Example of a pay range calculation Maximum – Minimum R 90 000 – R 60 000 Minimum R 60 000 = Total 50% Calculation of the midpoint spread Calculation of the spread on either side of the midpoint can be done using the following formulae: Midpoint – Minimum Minimum and Maximum – Midpoint Midpoint Example of midpoint spread In this example, the maximum is R90 000 and the minimum R0 000, therefore the midpoint is R75 0000. The spread on either point of the midpoint is therefore equal in Rand terms on either side of the midpoint, and is calculated as follows: R75 000 – R60 000 R60 000 Copyright © 2019. Knowledge Resources. All rights reserved. = – 25% of midpoint R90 000 – R75 000 R75 000 = + 20% of midpoint Note: although the %s are not equal on either side, the Rands on either side are equal and the midpoint is thus an exact midpoint. 100 Bussin, Mark. Remuneration Handbook : Fourth Updated Edition, Knowledge Resources, 2019. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/nmmu/detail.action?docID=5987178. Created from nmmu on 2023-08-02 16:37:22.  Chapter 6: Pay structures The question of uniformity In the example above, the range spread is 50%; the spread does not have to be uniform throughout the pay structure. Variations in range spreads are influenced by the level and sophistication of skills required for a given position. For example, entry-level positions with skills that can be quickly mastered usually have narrower pay ranges than supervisory, managerial or high-level expert/technical positions. Ranges for positions Table 6.8 shows typical range spreads for different salary bands found in an organisation. Table 6.8: Typical range spreads in Africa Percentage spread* Typical jobs that would fit into a broad-band 20–40% Lower level service, production and maintenance 30–50% Clerical, technical, specialist 40–60% Higher level professional, middle management 60% and over Higher level managerial, executive and expert technical *The higher pay ranges are typical in more broad-banded structures that have fewer numbers of levels/grades. How to choose a pay range width When choosing a pay range width, note that the width of the range will determine the maximum and minimum salaries. As the range gets wider, maximums increase, minimums decrease and midpoints may remain constant. Ranges should be designed with midpoints that reflect the “going rate” and minimums and maximums should as far as possible be market-related. Problems related to poor selection Copyright © 2019. Knowledge Resources. All rights reserved. When minimums are too low, the organisation will be forced to pay the employee a higher amount in the range to remain competitive. Further, this narrows the position’s long-term earning potential. In turn, a high maximum may provide higher long-term earning opportunities which are more costly than is required for the organisation to be competitive. What is a midpoint? A salary range midpoint is an essential element in pay management. It is often used as a reference point or “target”. The midpoint is the focus point because it is typically set to equal the market reference point e.g. the market median. Remember, though, that the midpoint should not be the organisation’s only market reference. It may differ by level in the organisation as well as by job family. One may target the market upper quartile for business critical skills. 101 Bussin, Mark. Remuneration Handbook : Fourth Updated Edition, Knowledge Resources, 2019. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/nmmu/detail.action?docID=5987178. Created from nmmu on 2023-08-02 16:37:22.  The Remuneration Handbook for Africa Compa-ratio (CR) The compa-ratio (short for “comparative ratio”) is an important tool for managing remuneration costs and is often related to the midpoint. This statistic expresses the relationship between the incumbent’s salary and the reference. Compa-ratios can be calculated for individuals, groups, departments or the organisation as a whole using the formula: Incumbent salary x 100 Midpoint (or own chosen market reference salary) The result will always be relative to 100; -100 means an exact match to the market reference; while over 100 means the incumbent is ahead of the reference point, e.g. 125 = 25% ahead of the reference, and vice versa. Most organisations try to have a workforce compa-ratio of close to 100 to their own midpoint for competent performers with a good track record. Individual ratios can vary according to how long the individual has worked in a job, previous work experience, scarcity of skills and job performance, depending on the criteria that the organisation uses for pay progression. A younger group of employees with a shorter service record will tend to have a lower compa-ratio than a mature, long-service workforce, which will tend towards 100. Justification of compa-ratios Organisations must be able to justify their current compa-ratio at individual, team and organisation- wide level. Overall, the ratio (like other parts of the remuneration strategy) should be aligned with the overall goals and objectives of the organisation. Range penetration Another method to use for tracking an organisation’s remuneration system is to view an employee’s pay in relation to the total pay range. This is termed range penetration. Range penetration is calculated using an incumbent’s salary and the minimum and maximum values in the salary range. Copyright © 2019. Knowledge Resources. All rights reserved. Formula for calculating range penetration The formula for calculating range penetration is as follows: Range penetration = (Incumbent salary – Range minimum) (Range maximum – Range minimum) Example: (R85 000–R66 800) = 54,3% (R100 300–R66 800) 102 Bussin, Mark. Remuneration Handbook : Fourth Updated Edition, Knowledge Resources, 2019. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/nmmu/detail.action?docID=5987178. Created from nmmu on 2023-08-02 16:37:22.  Chapter 6: Pay structures Why use range penetration? Range penetration is popular because it is not reliant on the midpoint, a single number. Instead, range penetration refers to how far into a range a particular individual’s salary has penetrated. Midpoint progression Midpoint progressions are the percentage difference between pay grade midpoints. Generally speaking, the larger the midpoint progression, the fewer the number of grades within a pay structure. By contrast, the smaller the midpoint progression, the larger the number of pay grades within the pay structure. When progressions are not constant The pay structure of an organisation does not have to have constant percentage progressions, and it is unlikely to happen if midpoints are tracked to market at each grade/level. When this occurs, promotional increases may be uneven and sometimes difficult to administer. If the percentage difference between midpoints is: Too high, this could result in costly promotional increases. Relatively low, the result could be salary compression problems between supervisory and subordinate posts, and difficulty in matching promotions with the appropriate compensatory rewards. An alternative may be to reference market data only at the top and bottom of your scale, and to create an exponential progression across the levels between the two anchor points. Note that the risk here is to test that your pay structure may look robust from a midpoint progression point of view, but may lose track to the market which may not mirror the same progression. Regression analysis This approach helps to align market rates more closely with organisation policy. Regression analysis works best when job evaluation points are used to develop pay structures. 6.7.3 Pay grade overlaps Copyright © 2019. Knowledge Resources. All rights reserved. It is normal for the minimum and maximum values of a grade to fall into the adjourning range. The width of the range and the midpoint differentials determine the amount of overlap between adjourning grades. Grade overlap is significant when midpoint differentials are small and range spreads are large, but they are small when range widths are small and midpoint differentials are large. Applications of pay-for-performance When using a pay-for-performance system, grade overlap allows high performers in lower pay ranges with a longer time within a grade to be paid more than a relatively new (or lower) performer in a higher pay range. In other words, overlaps enable career progression. 103 Bussin, Mark. Remuneration Handbook : Fourth Updated Edition, Knowledge Resources, 2019. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/nmmu/detail.action?docID=5987178. Created from nmmu on 2023-08-02 16:37:22.  The Remuneration Handbook for Africa Too much overlap Despite the benefits, too much overlap limits the difference between midpoints, which then limits the earning potential of the staff and may cause compression problems between supervisor and staff pay. Formula for calculating overlap The formula for calculating overlap is: (Maximum of lower grade – minimum of higher grade) x 100 Minimum of higher grade A typical overlap is 10 per cent to 30 per cent. 6.7.4 Pay slopes Pay slopes are often viewed as the steepness or angle of the pay curve. The percentage difference between the pay for one grade and another provides a useful tool for measuring and comparing pay slopes. On the assumption that there is an equal increase in responsibility between each grade in an organisation, the “ideal” pay slope should have an equal percentage increase in salary between each grade and the next. This is referred to as a straight pay slope. Straight pay slopes are typical in environments where there is an equal supply of skills vertically across the organisation. Where there is a shortage of skills the slope is often steeper at the more senior levels reflecting higher pay levels due to the scarcity and vice versa. It is more likely that the pay slope will be exponential, rather than a straight slope. Why is a straight slope ideal? A straight pay slope is regarded as ideal because: It provides consistent motivation and reward for promotion to a higher grade. The pay-slope percentage can be set as an organisation policy, giving a foundation for Copyright © 2019. Knowledge Resources. All rights reserved. remuneration proposals. A straight pay slope is easier to administer and explain. Reasons that the “ideal” is often not practical It is sometimes impossible or impractical to implement a straight pay slope in an organisation for the following reasons: Organisations without a straight pay slope may have to pay exorbitant costs to straighten the slope. There may not be an equal increase in responsibility between all grades. There is pressure on the minimum wage from unions. 104 Bussin, Mark. Remuneration Handbook : Fourth Updated Edition, Knowledge Resources, 2019. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/nmmu/detail.action?docID=5987178. Created from nmmu on 2023-08-02 16:37:22.  Chapter 6: Pay structures Negotiated pay scales reflect a compromise between union and management, not a theoretical ideal. A straight pay curve often conflicts with market trends. Thus, as indicated, it is unlikely that a market-related pay structure would have a straight slope. 6.8 Different pay structures: applications It is not essential for organisations to have only one pay structure for their staff. Since the pay structure must match their overall business strategy and market forces, management may choose to fit the various systems chosen to the specific needs of a business segment. To illustrate the dynamic of adjusting the pay structure to a specific need, it is useful to examine the difference between the structure adopted for clerical/blue-collar jobs versus technical and professional jobs. Different supply and demand forces in the labour market govern each group, which will result in different pay structures being seen for different groups of jobs. Having said this, as far as possible, organisations attempt to keep this process simple, and a unified pay structure that suits the entire organisation is a preferred approach rather than many pay structures to manage and explain. 6.9 Pay progression policy guidelines Moving through the job grades is relatively well understood. Most know that as the job gets more complex, the job grade will increase. Employees often ask how they can move up the pay scale for their job grade. This is called pay progression, and an organisation would typically define this as part of their remuneration strategy. Where an organisation has a robust performance management system, pay scale progression should be based on individual performance and other criteria as set out in the pay progression policy. Pay progression is a process by which employees get higher levels of pay through primarily individual performance. Pay progression is also affected by pay grades, span of each pay grade and levels of hierarchy within the structure. Pay scale progression will link directly into performance Copyright © 2019. Knowledge Resources. All rights reserved. management. Pay scale placement Pay scale placement addresses the following issues: Where to place a new employee on the pay scale. Where to place an employee who has been promoted. Where should employees with differing skills be placed. Set out below are some guidelines that organisations use to determine the basis by which employees may move through the pay scale range. 105 Bussin, Mark. Remuneration Handbook : Fourth Updated Edition, Knowledge Resources, 2019. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/nmmu/detail.action?docID=5987178. Created from nmmu on 2023-08-02 16:37:22.  The Remuneration Handbook for Africa Employees are placed, based on their performance, at the relevant scale level as follows: Between lower guide and mid-point of pay scale – The employee meets some of the job requirements but requires further development. Some evidence exists of the employee’s past performance. Further training and experience is required to fully meet the job requirements. Mid-point of pay scale – The employee fully meets the job requirements. Evidence exists that the employee’s performance meets the requirements of the job. Above mid-point to upper guide of pay scale – The employee exceeds the job requirements. The employee’s performance/experience/track record exceeds the requirements set. Tangible evidence exists of the employee’s past performance achievements. New appointments On appointment to a new position/promotion/upgrade an employee may be appointed as follows: Between minimum and lower guide of pay scale – The newly appointed employee meets some of the job requirements but requires further development. Some evidence exists of the newly appointed employee’s performance from their CV and past references. Further training and experience is required to become fully competent. Mid-point of pay scale – The newly appointed employee fully meets the job requirements based on their CV and past references. Above mid-point of pay scale – The newly appointed employee exceeds the job requirements. Evidence of the newly appointed employee’s past performance/experience/track record exceeds the requirements set. Tangible evidence exists of the employee’s past achievements. Figure 6.4 gives another example of the movement through pay scales. Recruitment level (Minimum) Recruitment level for entry into a job. Minimum entry qualification and