How To Structure Pay For Employees

You might be surprised to learn that choosing how much you are going to pay a new employee is not as simple as you may think. Some firms decide the pay according to what other companies are offering for the same position. Although there is nothing wrong with this approach, you should not follow it if you want your business to grow.


Steps to Follow

Before you ask the applicant how much they want or expect to be paid, you have to first evaluate the value of the vacant position. Calculate how much the job is worth to your firm before giving it to the new employee. While evaluating the positions, establish the minimum and maximum pay for that job. You can decide to pay at market rate, lead or lag rate. When you pay at the market rate, you are using what others pay as the average salary for that position. Lead means setting the average a little higher while lag keeps the midpoint slightly lower than the market rate.

Once you have set the maximum and minimum pay levels, it’s time for you to categorise the pay grades. Decide which positions qualify for the highest pay, those that deserve mid-level compensation, and positions that get the lowest pay. The pay grade is determined by the size of the firm. For a small firm that has a managing director, department managers, and assistants, it can be said to have 3 payment grades. On the other hand, a large firm that has a Vice President or COO under the managing director, and assistant managers can be said to have 5 payment grades.

The next step is to set a range for each pay grade. Just like you decided that you are going to have a maximum and minimum salary amount for all employees, you have to set caps for the different pay grades. For example, what is the maximum amount that your company willing to pay the CEO? What about the minimum, will it be more than the highest paid department manager or the same? Such are questions that you need to answer as you create the range for different pay grades.

After you’ve determined the range for the pay grades, the next step is to create a chart showing the different grade levels, and the maximum, minimum, and average pay for each level. The chart shall be used as a point of reference point when deciding how much a new employee should get.


Other Compensation

Your payment structure should also contain alternative compensation plans. You may have heard about them, but what is indirect compensation? It is whereby the employee is given incentives for their excellent performance on a task. The term indirect refers to benefits that may not necessarily be monetary. However, they have monetary value, for example, a company car, health insurance, vouchers, and many more.

The final step in creating a pay structure for new employees is to review and change. Due to the adverse effects of inflation, you have to know how often you will change the pay grade amounts. Some firms revise and change the maximum and minimum amounts after 1 year. Others wait for 5 years to make the necessary changes. As you make the changes, you ought to consider local laws and regulations.



The recruitment of new talent is crucial to the survival and prosperity of any organisation. For that reason, you have to create a compensation structure that can convince them to stay and not go to the competitor. As you do so, remember that compensation is more than the salary amount, consider the non-financial benefits since some people are motivated by these aspects.


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About the author

Craig Middleton has worked in health, real estate, and HR businesses for most of his professional career. He graduated at UC Berkeley with a bachelor’s degree in Marketing.


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