The compensation structure gives the organization an idea of the cost of any position within the organization. Therefore, allowing the organization to budget, monitor and control the cost of compensation.

Through the use of compensation structure, the organization can also ensure that employees are paid fairly throughout the entire organization; employees are rewarded according to the value of their job; and, ensure the competitiveness of the organization in attracting and retaining employees.

What is a Compensation Structure?

A compensation structure determines how much an organization can and willing to pay an employee. It includes the creation of job grades; the establishment of compensation range for every job within the organization; and, the allocation of compensation budget to different compensation and benefits components.

An organization needs to consider the following factors when establishing a compensation structure:

Market Rate

Organizations in the same industry often compete for employees with similar competencies. Therefore, organizations need to understand the market value of the job. If the organization offers much lower than the market value, then it is likely that the organization will not be able to attract qualified candidates. However, if the organization offers much higher than the market value, the organization may not be able to sustain the cost of compensation in the long term.

Some organizations conduct research or find information online to determine the market rate of a particular job in a specific location. Other organizations may engage HR consultancy firms or vendors to assist them in establishing their compensation and benefits program.

Job Grade

Organizations can establish a number of job grades depending on the size of the organization, diversity of the job or other relevant factors. Different jobs may be grouped into the same job grade due to similar levels of difficulty of the job and, the supply and demand of the job market. However, not every job function will start at the lowest grade or be able to reach the highest grade. For instance, an entry-level lawyer may start at a higher job grade than an entry-level human resources officer in the same organization.

Compensation Range

Developing compensation ranges allow the organization to pay employees according to the value of the job. The organization can set up compensation ranges in accordance to how it determines the value of the job. Employees of similar job value are grouped together and paid within the same range. The maximum and minimum levels are to account for variations in employees’ experience and skill levels.

Compensation ranges usually correspond to the job grades within the organization. And if the organization operates in different geographic location, there may also be different compensation structure for different locations.

Components of Compensation and Benefits

After the establishment of the compensation range, the organization needs to understand the breakdown of the employee’s compensation. For instance, 80% of the compensation will form the basic salary, 10% will form the variable salary component while the rest of the 10% will be used in employee’s benefits. The breakdown may be different for different job grades or compensation ranges.

Click here to find out the different types of compensation and benefits.

Budget

The compensation structure should reflect the compensation strategy and fall within the allocated budget. The organization should be able to find its balance between the manpower plan, budget and compensation structure to attain sustainability.

Or when put in a formula, the compensation structure (compensation cost per employee) x the manpower (total number of employees) = less than the budget (what the organization can afford) to be sustainable.