Designing Base Pay Structure

Top management of organizations set the guidelines for designing base pay. Broadly speaking, the
guidelines may be summarized as under:
i. Minimum and maximum levels of pay (taking into consideration ability and willingness to
pay, concern for profitability, government regulations, union influence and market pressures).
ii.General relationships among levels of pay (between senior management and operating
management, operatives and supervisors, etc.)
iii. Whether the pay structure should lead the market, lag the market or lead-lag the market.
iv. Division of the total compensation (what portion goes into base pay, what portion into
benefits, what portion into merit pay and what portion into pay-for-performance)
Base pay is designed in sync with the broad view of top management using the following steps:
Step I: Deciding the Number of Pay Structures
Companies often establish more than one pay structure, depending on market rates and the
companys job structure. Broadly, pay structures are divided into two categories: a. supervisory and
b. workers. Even in these two categories there are a number of sub-categories. For example, under
supervisory category, there will be different pay structure for low, middle and top management.
Further, different pay rates will be offered to full-time, part-time, casual and on call workers. At
times, geographical location is also considered as a factor and pay structures are built around the
same.
Step II: Determining a Market Pay Line
The market pay line is representative of typical market pay rates relative to a companys job
structure. Pay levels that correspond with the market pay line are market-competitive pay rates. Pay
rates that fall along the market pay line represent competitive pay rates based on the companys
selection of a relevant labor market, and these rates promote internal consistency because they
increase with the value of jobs.
Step III: Defining Pay Grades
Pay grades group jobs for pay policy application. HR professionals typically group jobs into pay
grades based on similar compensable factors and value. Job groupings are ultimately influenced by
such other factors as managements philosophy, organizational structures, etc. Further, job
evaluation points also help defining pay grades.
Step IV: Calculating Pay Ranges for Each Pay Grade
Pay ranges build upon pay grades. Pay grades represent the horizontal dimension of pay structures.
Pay ranges represent the vertical dimension/pay rates. Pay ranges include mid-point, minimum and
maximum pay rates. The minimum and maximum values denote the acceptable lower and upper
bounds of pay for the jobs within particular pay grades.
HR professionals involved in compensation design establish the mid-points first, followed by
minimum and maximum values. The mid-point pay value is the halfway mark between the range
minimum and maximum rates. Mid-points generally match values along the market pay line,
representing the competitive market rate determined by the analysis of compensation survey data.
Thus, the mid-point may reflect the market average or median.
A company sets the mid-point for its pay ranges according to its competitive pay policy. If the
company wants to lead the market with respect to pay offerings (market-lead policy), it sets the
mid-point of the range higher than the average for similar jobs at other companies. Companies
wanting to pay according to the market norms (market-match policy), set mid-points equal to the

market average. Companies wanting to lag the market (market-lag policy), set the mid-points below
the market average.
Step V: Evaluating Results
HR professionals involved in compensation design finally test the pay structure in terms of
companys internal values for jobs and the market values of the same job. If discrepancies are
evident, then companys internal values are reviewed. In case valuation a particular job exceeds the
markets valuation of the same jobs, then top management has to call on whether higher than market
pay rates would undermine attainment of competitive advantage. If a company undervalues jobs
relative to the market, managers must consider whether these discrepancies will limit the companys
ability to recruit and retain highly talented individuals.
Process of designing base pay structure as explained above is indicative. Actual designing of
compensation may have a little variation in the process based on company-specific requirements,
training of the compensation professionals, and influence of trade unions.