Design a Base Pay Structure Integrate your internal job worth hierarchy with the market to build a base pay structure that is defensible, competitive, flexible, and practical. McLean & Company is a research and advisory firm providing practical solutions to human resources challenges via executable research, tools and advice that have a clear and measurable impact on your business. © 1997-2017 McLean & Company. McLean & Company is a division of Info-Tech Research Group. SAMPLE Learn about becoming a member

EXECUTIVE SUMMARY Walk away from this blueprint with: SAMPLE Situation Compensation, specifically base pay, is usually the highest organizational cost and a significant factor in employee attraction and retention. While few organizations lack any structure for base pay at all, many do not have a proper, equitable, consistent, and flexible approach. Resolution Design a base pay structure that is internally and externally equitable by balancing the internal job worth hierarchy with external market competitiveness. Leverage McLean & Company’s hybrid structure that benefits from the advantages of the traditional and broadband approaches. Empower managers by involving them in matching benchmarked jobs with market data and educating them on salary administration guidelines. Aim to move toward greater pay transparency – at the very least, employees should be aware of the number of pay bands within the organization and minimum and maximum pay ranges for each pay band. Complication Traditional base pay structures are seen as bureaucratic red tape that hinders a manager’s hiring ability. Designing base pay structures can be complex, requiring accurate data collection and a time investment from HR and managers. Pay transparency is difficult given the sensitive (for employees) and highly confidential (for HR) nature of pay information. A flexible, data-driven base pay structure that provides HR with the foundation needed to obtain buy-in from stakeholders. A shift to shared ownership of the organization’s base pay structure. An assessment of current and desired state of pay transparency and a strategy to achieve the desired state. SAMPLE

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Use McLean & Company’s process to design a base pay structure SAMPLE

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Compensation satisfaction is correlated with employee engagement Recognizing the importance of structured base pay Why have a base pay structure? Gives a framework for estimating and managing labor costs. Increases potential for transparency and communication. Provides better compensation decision-making processes. Ability to handle changes in external environment. Managers have a sense of ownership over base pay. Increases talent attraction and retention capabilities. Numerically demonstrable career progression. Establishes defensibility for internal and external pay equity. Compensation satisfaction is correlated with employee engagement of new hires listed compensation as a top-three reason for accepting a job offer. 25% Compensation in importance of accepting a job offer (of 10 options). 4th Source: McLean & Company Engagement Program, 2015; N=27,248 “ People are more likely to underreport than to overreport the importance of pay as a motivational factor in most situations. Put another way, research suggests that pay is much more important in people’s actual choices and behaviors than it is in their self-reports of what motivates them. – Rynes, Gerhart, and Minette ” (McLean & Company New Hire Survey, 2016; N=4,280) SAMPLE

How the VUCA environment is demanding a changed approach to compensation Rapid & Drastic Labor Market Changes In 2014, around 35% of the average organization’s workforce was made up of contingent labor, and this is expected to grow to 45% by 2017 (HBR, 2015). Today, base pay must be able to respond quickly to major labor market shifts. Volatility V The nature, speed, volume, magnitude, and dynamics of change have increased, resulting in heightened response requirements. With organizations like Amazon, Google, and Apple operating in multiple and diverse industries, traditional industry boundaries are blurring. This makes the identification of market comparators for base pay increasingly difficult. Blurring Industry Boundaries Uncertainty U Not only do we not know the probabilities of different outcomes, we might not even know all of the possible outcomes. Jobs created in the US over the past two years are very different in nature from those that were lost following 2008 (Fortune). Adaptability of skills is key and job worth hierarchies need to reflect current job values for base pay to be effective. Changing Nature of Work Complexity C A system where the parts are interconnected in such a way that even with experience it may remain unpredictable. Ambiguity A A system or situation where cause and effect may be confused and it is hard to interpret what the conditions mean. Glassdoor has more than 30 million unique monthly users, with reviews on 540,000 organizations across 190 countries (Glassdoor, 2016). HR needs to get ahead of this by communicating the rationale behind a defensible base pay structure. Proliferation of Available Market Data McLean & Company insight Flexibility will need to be a key component of base pay structures to effectively respond to the VUCA environment. SAMPLE

The two primary approaches to base pay structures are no longer adequate A traditional structure has many grades and narrow salary ranges. The difference between the minimum and maximum is typically 20% to 40%, with ranges becoming broader as you move up the job grades. Characteristics include: Midpoint provides guidance. Aligned with organizations that have many levels. HR plays very big role in administration. More focused on internal value of jobs. Traditional A broadband structure combines the many job grades in a traditional structure into fewer, broader bands, with significantly wider salary ranges. The difference between minimum to maximum is typically 100% or more. Characteristics include: No midpoint. Focus on career development over promotions due to flatter organizational hierarchy. Reduction in administration. More market focused. Broadbanding Grade Pay Job Value Pay VS. “ The global economy and the millennial generation is changing the way we work – moving us from vertical and hierarchical to becoming more flat and collaborative as a collective. The old system of ‘climbing the corporate ladder’ is very much reflected in our current salary structures. We need to adapt our thinking about traditional salary structures to enable the rewards systems in the new world. – Kate Beckett, Senior Director of Total Rewards and HR Technology, Indigo ” SAMPLE

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