A Functional Base Pay Structure Is Critical to Managing Labor Costs, an Organization's Single Largest Expense, Says HR Research Firm McLean & Company

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Jan 26, 2023, 15:08 ET

Balancing internal equity with market competitiveness to build an effective base pay structure allows organizations to achieve greater pay transparency and improved talent attraction and retention results.

TORONTO, Jan. 26, 2023 /PRNewswire/ - Compensation, specifically base pay, is usually the highest organizational cost and a significant factor in employee attraction and retention. In a competitive labor market, organizations must find a way to balance transparent, modern pay structures with organizational needs. In response, McLean & Company, the global research and advisory partner of HR professionals around the world, has released its industry resource titled Design a Base Pay Structure. The blueprint was created to assist HR leaders in developing a base pay structure that is internally and externally equitable by balancing the internal job worth hierarchy with external market competitiveness.

Developing a base pay structure requires buy-in and support from stakeholders. By involving stakeholders in the development process, they become shared owners and have the opportunity to better understand the benefits of designing and implementing a base pay structure. (CNW Group/Mclean & Company)

Designing base pay structures can be complex, requiring accurate data collection and a significant time investment from HR and management. At a time when employees are demanding increased organizational transparency, including around compensation, the process can be even more challenging given the sensitive and highly confidential nature of pay information.

"A credible base pay structure provides the foundation for increased pay transparency. However, the structure must also be flexible so it can accommodate and respond to the external environment," says Rachel Stewart, practice lead, HR Research & Advisory Services at McLean & Company. "Sometimes the process of designing a base pay structure can even inform the compensation philosophy. If what is seen throughout the process warrants a change in the philosophy, it's better to adjust than to hold on to an approach that is no longer strategic and serving employee and organizational needs."

While few organizations lack any structure for base pay at all, many do not have a consistently equitable and flexible approach in line with modernized, research-backed standards. Traditional base pay structures are often seen as antiquated and out-of-date by prospective employees and as bureaucratic red tape that hinders management's hiring abilities. Moving toward greater transparency and flexibility addresses both issues at the source.

McLean & Company's research suggests a hybrid approach to building base pay structures, providing organizations with the flexibility to attract and retain talent as well as sufficient guidelines to inform compensation decision making. The firm's resource will guide HR professionals and management through the four necessary steps to design a flexible base pay structure. The steps are intended to empower managers by involving them in the process, educating them on salary administration guidelines and benchmark market data, and moving toward greater pay transparency. The four steps are as follows:

Collect and analyze market data – The first step requires HR leaders and management to confirm the organization's target market positioning strategy; identify appropriate market comparators, data sources, and benchmark market matches; and determine the right cadence to gather market data to ensure the organization is staying up to date on market changes.
Create the base pay structure – Step two assists in determining the appropriate number of pay structures for the organization, establishing job grades and developing preliminary pay bands based on benchmark market data, and reviewing the fit with organizational base pay data. The base pay structure must then be finalized with stakeholders.
Determine salary administration guidelines – The next step in the process is to determine guidelines for compensation practices, such as setting new hire pay, promotional increases, and lateral transfers to ensure the base pay structure is applied consistently among compensation decision-makers.
Prepare to roll out the transparency strategy – Upon completion of the fourth and final step, HR leaders and management will have identified both the organization's current and desired pay transparency levels, developed a pay transparency strategy to bridge the gap between the two, and crafted a communication plan for the pay transparency strategy.

"It is important to remember that every organization has positives and negatives," explains Stewart. "Rather than sugar-coating, be honest about how and why compensation has been structured. Transparency in all things, including compensation, is a motivation and retention factor as it helps employees plan their long-term career at an organization."

To help HR and people leaders in their efforts in streamlining and implementing hybrid base pay structures that support talent attraction and retention, McLean & Company offers practical resources, like the Design a Base Pay Structure blueprint.

The firm also provides its members with various levels of support designed to meet organizations' unique HR needs, including DIY toolkits, guided implementations, workshops, and dedicated consulting. To access the full collection of research or to learn more about becoming a member, visit hr.mcleanco.com/services or connect via LinkedIn and Twitter.

About McLean & Company

Through data-driven insights and proven best-practice methodologies, McLean & Company offers comprehensive resources and full-service assessments, action plans, and training to position organizations to meet today's needs and prepare for the future.

McLean & Company is a division of Info-Tech Research Group.

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SOURCE McLean & Company