The purpose of compensation is to help create a willingness among qualified persons to join the organization and to perform the tasks required by the organization. A pay scale can help you run your business, recruit, retain and motivate your employees within your budget. You may offer commission or bonuses, but a formal base pay system provides a means of rewarding individuals for their contributions to the success of your firm, while ensuring your organization received a fair return. There are five steps allocated to setting up a base pay system, which is essentially creating wages or salaries.
1. Define the Positions
Develop job descriptions for each position in your business. You may be able to write these descriptions yourself or supplement by gathering descriptions from current employees.
Job descriptions usually include:
- Job title
- Reporting relationship
- Specifications
- Primary responsibility
- Job requirements (education, training, etc.)
2. Evaluate and Rank the Positions
A simple-ranking evaluation is an easy ranking method for firms with 100 or fewer employees. In this type of system jobs are compared and then ranked in accordance to difficulty and responsibility.
After you have ranked the positions, group jobs that are similar in scope into the same pay grade and arrange each pay grade into pay level from highest to lowest.
For example, a junior sales person will earn less than their senior counterparts who may have slightly more responsibility or expectations. The positions are within the same pay level, but have different grades. If the senior sales person moves into a management position, he or she will probably move up a pay level. The number of pay levels you will need will depend on the total number of positions within your organization. A company with less than 100 jobs will usually only need 2 to 12 pay levels.
3. Price the Job
To effectively put a monetary value to your jobs, you can look at what your competitors or others in your market are paying, or ask SK Startup Institute to assist you with sources of information on wage and salary rates.
When studying pay rates, compare job descriptions, not just job titles. Different organizations will always define jobs differently. A janitor in one organization could be called a custodial engineer in another.
Typically, the minimum rate in a level is 85 percent of the midpoint rate, and the maximum rate is 115 percent of the midpoint. A new employee can increase his or her earnings by 35 percent without a job change, thus having performance incentives even if he or she is not promoted. Overlap between ranges provides more cost effective career progression within the organization.
Once you calculate your minimum, mid-range, maximum, and put it into a graph, it will resemble the following example:
| Pay Level | Minimum | Midpoint | Maximum |
| 1 | $490 | $575 | $660 |
| 2 | $530 | $625 | $720 |
| 3 | $580 | $685 | $785 |
| 4 | $615 | $725 | $835 |
| 5 | $690 | $815 | $935 |
| (And so on) |
4. Install the Plan
Now that you have a general plan, consider how the plan will be administered. Before the start date, make sure you communicate your compensation plan thoroughly in order to get understanding and acceptance from your employees. You may want to first have an in-person conversation, and follow up with an official letter or memo indicating how the system affects their pay. Explain how your pay scale works and what sources you used to determine the figures.
Once the initial plan has been accepted, consider how you will increase pay for each individual:
- Merit increases: to recognize performance and contribution
- Promotion increases: for employees assigned to different jobs in higher pay levels
- Progression to minimum: for employees who are below the minimum or hiring rate for the pay level and need to be brought up to scale.
- Probationary increases: for newer employees who have attained the necessary skills and experience to function effectively
- Tenure increases: for time with the company
- General or cost of living increase: to account for inflation, competitiveness and other economic factors
You might use several, all, or combinations of the various increase methods.
5. Maintain the Plan
Your company will experience internal and external factors that will contribute to the feasibility and attractiveness of your plan. Review the grades and levels at least once a year and inform your employees if a change is made.
During your annual review, ask yourself if the plan is working for you. Are you getting the kind of employees you want? Are they performing well? What’s the turnover rate? Do employees seem to care about the business? The most important question is if / how the plan helps you to achieve the objectives of your business.
