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Financial rewards - structuring the package

Author: Jim Riley  Last updated: Sunday 23 September, 2012

Structuring the Pay Package

With so many methods of pay available, how should a business decide to structure the pay package it offers to employees, and what rate of pay should it use?

Start with the “Market Rate”

The starting point is usually to find out what the “market rate” is. Paying the market rate involves careful job evaluation (it helps to know what is being compared to what!).

Factors that help determine the market rate for a job include:

• Whether the skills that are required are widely available
• The overall level of unemployment in the employment “catchment area”
• Whether the job requires specialised (or even highly specialised) skills

There are several ways in which a business can obtain data on market rates:

• Local employment agencies
• Job centres
• Job adverts in national newspapers of specialist publications (e.g. professional journals)
• Commission (or contribute towards) a specific salary survey in the industry

More or Less?

The next question is – should the business pay MORE or LESS than the market rate? Factors to consider here include:

• Does the business need above-average employees (e.g. salesmen with an industry reputation for being strong performers)
• Does the business need trained employees or is it prepared to invest in training beginners?
• Are the skills wanted by the business needed urgently (in which case – the business would probably want to pay more)
• Do factors affecting the mobility of labour need to be addressed – e.g. are there transport problems that need to be solved (e.g. pay for a rail season ticket) or relocation allowances to be offered to encourage new employees to move home?

Structure

The third important question is how to structure the remuneration package.

• Should employees be paid on the basis of time spent working (e.g. time-rates) or the amount they produce (e.g. piece rates) or some other measure of performance?

• Should the remuneration package be a combination of approaches (e.g. some basic pay per month + a commission-related incentive)?

• What kind of remuneration package is used by competitors - this may provide a useful guide as to how to structure the package (and it may also influence what employees expect)

In deciding the answers to these questions, a business should try to construct a pay structure that is simple (to help employees understand it), logical and fair.

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