As organizations continue to evolve in today’s ever-changing business landscape, companies are faced with many different challenges when attracting, motivating and retaining their top talent. One such challenge that continues to be top of mind for employers today is how to determine the appropriate approach to designing and administering salary structures throughout their organization.
WorldatWork and Deloitte Consulting LLP recently conducted the “2018 Salary Structure Policies and Practices Survey” to find out which type of salary structures are most commonly used today and how their attributes and application vary by industry, organizational size and employee workforce segments.
The survey findings were organized into four topics: types of salary structures used by organizations and their characteristics, use of competitive positioning percentiles, frequency of salary structure adjustments and the tools used in salary structure design and administration, the results and implications of which are conveyed in this article. Comparisons from the “2012 Salary Structure Policies and Practices Survey” are provided to identify shifts in trends with common practices used by employers today.
Number of Salary Structures
The majority of participants surveyed (59%) highlighted that they have more than one salary structure in their organization, with 70% of those participants citing the use of five or more structures. Less than a quarter (24%) of organizations use only one salary structure, while 17% do not use a formal salary structure to administer pay.
Types of Salary Structures and Their Characteristics
Market-based structures have continued their popularity among survey participants (55%) and have long since replaced traditional structures (only 24% of participants) as the most prevalent type of salary structure. While popular in the past, the use of broadbands in organizations today has significantly decreased (5% in 2019 vs. 12% in 2012), suggesting the use of these structures is becoming more and more rare.
In contrast to administering pay through a formal salary structure, the pure market pricing approach was introduced in the survey this year (also referred to as “job-based pay ranges”), and surprisingly, about 18% of organizations indicated they use this approach to guide pay decisions. This appears to be more prevalent for executive-level jobs than lower job levels, although 11% of organizations reported using this approach exclusively.
Organizations may choose to use different types of structures to administer pay across different regions, workforce segments or various job levels. Although 82% of participants responded that the type of salary structure used does not vary throughout the organization, it is not uncommon for organizations to differentiate salary structures based on geographic region (33%) or job level (31%).
Although there are differences in prevalence by industry and organization size, the vast majority of surveyed organizations are using market-based structures. However, consulting, professional, scientific and technical services industries, as well as organizations with less than 100 employees, appear to be the heaviest users of traditional salary structures. (See Tables 1 and 2.)
There are several possible explanations for the rise of market-based structures and their seemingly universal application across different industries and organizational sizes. By design, market-based structures (typically with range spreads of 30% to 80% and midpoint progressions of 10% to 15%) approximate the middle half of the competitive market with minimums falling at or just below the 25th percentile of the market and maximums falling at or just above the 75th percentile. In fact, market-based structures are often described as being able to provide “the best of all worlds” — the flexibility to recognize differing market rates of pay based on performance, skill level or market conditions, but also a reasonable level of control over salary costs and internal equity. In today’s business environment, a balance of flexibility and control over salary administration is fundamental to an organization’s compensation strategy in order to maintain competitive salaries that attract and retain top talent in critical areas.
Additionally, pure market pricing is likely the result of the increasing abundance of market data which is available, through either traditional surveys or new methods such as crowdsourced data, both of which are being enabled by increasingly user-friendly technology to harvest and analyze the data.
Conversely, the decline of broadbands is likely a result of the desire of many organizations to have more targeted market data and salary ranges for specific jobs and the reality that many broadband programs decimated career ladders — or at least the perception of those ladders and career paths. This is evidenced by many organizations that have reverted to traditional or market-based salary structures after experimenting with broadbands, as well as redefining career ladders and paths to go along with the restored salary structures.
The Use of Global Salary Structures
A majority of organizations with employees outside of the U.S. indicated that they use one or more global salary structures (56%). Of these organizations, 73% use grades in their global structures, while far fewer organizations use both bands and grades (19%), and even fewer use broadbands alone (8%). (See Figures 1 and 2.)
Global organizations are seeing the advantages of consistency from a decrease in administrative/tracking costs to an increase in employee engagement and satisfaction as they gain internal equity across borders. Market-based structures and grades are typically easy to communicate to global audiences, including both employees and third-party organizations (unions/works councils). To align with market-pay levels, as well as employee expectations, the use of market-based grades with reasonable midpoint progressions can allow for natural career growth no matter the country. As the war for talent escalates internationally, the work of keeping market data up to date can pay for itself in international employee attraction, retention and engagement.
The Use of Competitive Positioning Percentiles
Most organizations surveyed (87%) continue to use base salary to link their salary structures to the competitive market and 96% of organizations reported tying their midpoints to the 50th percentile of the market. That is an upward trend from the 90% that was reported in 2012. (See Figure 3 and Table 3.)
Organizations are also continuing to use a consistent approach to competitive market positioning throughout their company (80% in both the 2019 and 2012 surveys). However, it is not uncommon to allow for variation, with job function/family (45%) and job level (29%) playing a role in determining the targeted competitive percentile.
Frequency of Salary Structure Adjustments
Organizations are continuing to adjust their salary ranges at a consistent frequency (82%), with 75% of organizations reporting adjustments to salary ranges are made on an annual basis. (See Figures 4 and 5.)
While most organizations reported that the frequency of salary structure adjustments is consistent across the organization, it is not uncommon for adjustments to be made based on job function/family (21%) and critical workforce segment (19%).
Tools Used in Salary Structure Design and Administration
The survey asked respondents about the types of tools they use to:
- Design structures (such as model new ranges, develop structures, calculate spreads and midpoint progressions);
- Administer pay within the salary ranges (for example, managing salary structures and making changes to existing structures);
- Record their salary range data; and
- Communicate salary ranges to internal customers (such as managers, recruiters and human resources business partners).
The most popular tool used for salary structure design and administration continues to be spreadsheet applications such as Microsoft Excel. In particular, 86% of survey respondents indicated they use spreadsheet applications for salary structure design and 67% use spreadsheets to administer pay. Other common options for designing salary structures were point solutions such as PayFactors and MarketPay (28%) or enterprise systems such as Workday and Oracle for administering pay (44%). (See Table 4.)
For salary structure record-keeping and communication, spreadsheet applications remained the most common tool used (64%). However, other prevalent tools for communicating salary ranges included email (38%) and enterprise systems (34%). (See Figure 6.)
In 2012, it appeared organizations were gravitating toward market-based structures and decreasing the use of broadbands. This trend has been supported by the 2019 survey results which show that market-based structures are still the most prevalent type of structures, and broadbands are indeed losing ground.
The differences in acceptance of the various salary structure types between industries and populations should not be ignored. Production and heavily unionized environments may still favor step or traditional structures, as they meet the needs of those populations. Utilities and oil and gas industry companies show heavy use of pure market pricing (or job-based ranges).
Internal equity is also an important consideration, and the authors encourage organizations to make that an active choice that is revisited every few years, especially as organizations continue to globalize and international locations gain more visibility into each other. Does the organization want to reward people equally across countries for delivering the same internal value? Or should an employee’s compensation be solely based on the marketplace in which the employee works? Within an increasingly competitive environment for talent, organizations may continue to look to market-based ranges or a pure market pricing approach to continue to balance their need for flexibility and control when considering their structure design or even when modifying other types of structures to fit this need. As organizations become more global in nature, it will likely be important to assess the appropriate salary structure design for a multinational organization. Also, as new technologies continue to emerge, there may be a shift toward more specialized or sophisticated approaches in the future, based on the growing ease of administering and tracking larger amounts of market data.
As the evolution of salary structures continues, will organizations regress into more restrictive traditional grades, driven by a need for cost control, or will they progress into a balance of control and discretion, which is held equally at global and local levels? Will pure market pricing continue to grow as the availability of market data increases? When facing the consistent challenges of attraction, retention and engagement, and as innovations and new technologies emerge, it is important to remember that necessity — along with creative rewards professionals and increasingly available data and technology — is often the mother of invention.
Cheryl G. Cybulski, CCP is a senior consultant in the compensation strategies practice at Deloitte Consulting LLP in Los Angeles.
Sheila C. Sever, CCP is a senior manager in the compensation strategies practice at Deloitte Consulting LLP in Houston.
Gregory A. Stoskopf, CCP is a managing director and the national compensation strategies practice leader at Deloitte Consulting LLP in New York.