Once an organization reaches a certain size in employee population it is typical practice for the Human Resources department to replace the ad hoc compensation/reward process with a more structured program. Part of that program development, a key element in fact, is the establishment of a base salary (pay) structure. Here you will have an ascending hierarchy of grade designations (your position is a grade "x," mine is a grade "y", etc.), coupled with ranges that indicate a minimum-to-maximum value (pay) for each grade.
While distinctions in design can vary amongst organizations the central point of having a uniform structure is very much commonplace in both for-profit and non-profit organizations.
You probably see the "but" coming, don't you?
Startups and Small Businesses
Just the other day one of my clients, a young and fast-growing high-tech company, explained to me that they didn't use grades or salary ranges. They didn't have a pay structure. They felt that they didn't have the time to develop a standardized reward program. "We're moving too fast," the CHRO told me, and "We don't have the time, people or money to focus on an HR project."
That's a common response for start-ups and small businesses. The feeling is that there aren't yet enough employees to start building an HR infrastructure. Today, everyone knows everyone else's first name and the company Christmas Party could be held at a restaurant. Also, business leaders are too engaged in more important endeavors: getting the business off the ground, developing products and services, and setting up mechanisms to sell their offerings.
Therefore, these first-generation employees are usually paid on the basis of:
- Whatever the individual employee could negotiate.
- Whatever the company felt it would take to get chosen candidates to join, or
- Fixed rates were set for everyone in a particular job.
Little thought is given to pay relationships (equity) or even the short term (?) impact on payroll expense. The focus is lock set on creating a business, of getting the ball rolling. Even job titles become an afterthought, with resultant title inflation slowly infecting the organization, and no one has a job description.
I get that. That is the reality of getting a business off the ground. HR takes a back seat.
But an afterthought of employee pay cannot and should not last.
Paying the Piper
Eventually these poor compensation practices will start to cause real pain within the organization, like how too much sugar inevitably causes tooth cavities in children. Payroll gets out of hand (too high), inequity amidst the staff starts to cause employee relations issues and managers begin to see valued employees becoming disgruntled and heading for the exit.
By the time management starts to realize that they have a problem, not only have those problems grown serious and disruptive, but the pay practices that no one cared about earlier have now become ingrained into the small company's culture. Now it's not going to be so easy to change course. Now management risks angering some employees even as they try to steer the ship away from the reefs. Some of those employees could be valued contributors.
Time and again clients have asked me to help them develop their first compensation structures, to assist them as they struggle to work through numerous employee-related challenges and deal with a bloated payroll. Aside from the mechanics involved in setting up a new pay structure (competitive market pricing, job evaluation, salary range width, midpoint differentials and assigning jobs to grades) overcoming past practices and precedents, dealing with the employees themselves, becomes a real challenge. A painful challenge.
For example:
- Disconnecting inappropriate job titles is sometimes easier said than done. While employee egos and self-identification may have been blown out of proportion, the decision to make someone take a step back is difficult.
- Dealing with outliers who either pop out the top of a salary range or fail to meet the minimum level. When faced with a competitive pay structure to replace the current ad hoc and laissez faire practices, suddenly some employees will be found to be overpaid, while others underpaid.
- Facing the cost implications of the above. Raising someone to the minimum value of a pay range is an easy decision, but what if there are many employees so affected? And if an employee has been with you for awhile, raising them to the minimum can still be perceived as a residual slap in the face (still not being paid a fair rate).
- Setting grade assignments that reconcile a job evaluation system, competitive market pricing results and internal equity. Think of a juggling act where everyone is a potential critic.
So, do yourself a favor. Pay attention to germinating pay issues even as the business passes through its stage 1 and stage 2 development. Then, when it is time to standardize and structure your reward programs you will find the road ahead all the smoother for your efforts.
Chuck Csizmar CCP is the founder and Principal of CMC Compensation Group, providing global compensation consulting services to a wide variety of industries and non-profit organizations. He is also associated with several HR Consulting firms as a contributing consultant. Chuck is a broad-based subject matter expert with a specialty in international and expatriate compensation. He lives in Central Florida (near The Mouse) and enjoys growing fruit and managing (?) a clowder of cats.
Creative Commons image "3D," by Mad Group
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