Starting pay decisions are the most important decisions an organization will make regarding employee compensation. Though many organizations ‘pay for performance’ by providing higher raises to their employees who achieve higher performance ratings, it will often take years to remedy a significant difference in starting pay via performance-based raises. Organizations that allow negotiation or use prior compensation to determine starting pay often run into this issue. For instance, imagine two employees come into an organization in the same role and one has a starting salary of $50,000 while the other negotiates to start at $60,000. If the employee starting at $50,000 is earning 5% yearly raises for being a top performer while the other employee earns 3% raises for being an average performer, it will take 10 years for the high performing employee to catch the average performer. This speaks to the importance of making objective and equitable starting pay decisions. So, what steps should an organization take to achieve that goal?
The first step when determining starting pay should be defining the organizational compensation philosophy. What does the organization want to value? Do they want to provide additional pay for job-related education or certifications? How will raises be determined, and what will the difference between a high performer and a low performer be? Are there certain jobs that are imperative to the organization’s success and/or difficult to replace wherein the organization wants to pay as a Market Leader (above the market median)? An organization should address questions like these in defining their compensation philosophy so that uniform decisions are made across the board. If individual managers have the discretion to make these sorts of decisions on their own, that will frequently lead to ‘wobble’—an inconsistent application of compensation practices that results in uneven employee pay.
Once the compensation philosophy has been defined, there are a number of tools that an employer should utilize to begin building out the structure. The first is Job Analysis, which allows an organization to define and understand a set of jobs. Making compensation decisions without having properly defined each role through Job Analysis may lead to a mismatch between pay and responsibilities down the line. After job analysis is complete, an organization can go a couple of different ways to build the compensation structure. The most common way is to do a Market Study in which jobs are matched to common titles in the marketplace. This allows an organization to see where different percentiles of pay land for each role (e.g., the 50th percentile would be the median pay for a position) and allows the organization to establish where it wants to be relative to market based on the compensation philosophy. Many companies combine Market Study work with a Job Evaluation methodology, which ranks the jobs in terms of comparable worth to the organization. This exercise can help in reducing any bias in market data (i.e., female- and minority-dominated roles may be paid less in the marketplace). The organization can then build a grading structure and slot each job into a grade based on the results of the Market Study & Job Evaluation process.
Building the compensation structure is the first step in creating fair starting pay decisions, but the work isn’t complete after the structure is created. It is important to continually update the grades based on cost-of-living adjustments that occur year-over-year, and periodically re-study each job to remain abreast of market changes. Additionally, more mature organizations that already have a compensation structure should conduct a pay equity study to evaluate whether the things that should predict pay actually do, and whether there are any demographic-based differences in pay. A pay equity study can also provide organizations with an algorithm that helps employers determine a starting pay range based on the relevant job-related characteristics. This process of defining a philosophy, building a structure, and evaluating the integrity of that structure will ensure that employers make the best possible starting pay decisions.