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How to Choose the Right Pay Structure for Your Business





When it comes to employee pay structures, the right approach isn’t always obvious. Your workforce’s unique needs, industry standards and trends in the evolving talent market can influence which strategy works best.


Even seemingly small differences between companies can drastically change the nature of their pay structures. For example, you could find a different model for employees who:


  • compete for sales

  • expect an industry standard

  • work in a state with strict hour and wage laws

  • thrive with performance-based compensation


Finding the optimal pay structure might seem daunting, but it’s also undeniably worth it. Let’s explore the different factors that influence pay structures, along with considerations to help you dial in on what your people truly need.


What factors affect pay structures?


From federal compliance requirements to your organization’s finite resources, there’s no shortage of variables that can affect pay. Keep the following factors in mind as you build, refine and experiment with your employees’ pay structure.


Laws and regulations


Taxes, rules and more can change from state to state (and even city to city). HR pros and leadership need to keep laws top of mind for the sake of their business’s compliance — and workforce satisfaction.


At the same time, you don’t have to overcompensate your pay structure for something that doesn’t exist yet. For example, if a pay transparency requirement hasn’t affected your state, you don’t need to arbitrarily pick from neighboring jurisdictions and try to apply their rules to your operations. However, if employees in your industry expect greater visibility into company salaries, it may be appropriate to build your pay structure with the practice in mind.

Bare minimum, you should identify the regulations your business must follow and build from there. After you establish that base, then you’ll have the opportunity to account for emerging compliance trends.


Labor market


Every organization must adapt to the needs of its available talent pool. And with fierce competition, employers should consider pay from every possible angle, including:


  • frequency

  • hourly wages

  • annual salaries

  • average raises

  • bonuses and commission


In some cases, it may be best to exceed the industry standard for the sake of brand recognition. However, if your company is already known as a leader in its field, you might have a bit of leeway for going above and beyond.


Before landing on a specific pay structure, ask your HR team questions like:


  • How tight is the labor market for specific skills and qualifications?

  • How much do other companies pay for similar roles?

  • Can we target recruits from other markets with transferable skills?

  • What are the non-monetary benefits that applicants expect?

  • What’s the typical turnover rate for employees in these openings?


Economic factors


It may seem obvious that the economy would have some influence on pay structures. What isn’t always clear is how.


For example, if an industry is experiencing — or even anticipating — an economic downturn, you may need to design your pay structure to protect and conserve your organization’s assets. Conversely, an industry’s surge may present a chance to create a more aggressive pay structure to support employee:


  • loyalty

  • engagement

  • productivity

  • performance

  • development

 

Auto dealerships are a prime example. These companies have to keep a close eye on inflation rates, as they can influence loan rates, vehicle value and a consumer’s overall buying power. In turn, these factors impact core salaries and the ceiling for commission.


Similarly, certain employers were eligible for the Employee Retention Credit (ERC) for hanging onto staff through the COVID-19 pandemic. The ERC and similar initiatives like the Paycheck Protection Program made it possible for companies to keep more employees despite economic challenges.


Regardless of the exact circumstances, environmental factors need to be a constant consideration for any worthwhile pay structure.


Job requirements, evaluations and performance


In addition to completing essential job functions, your pay structure may also shift depending on how employees exceed goals and grow in their positions. While this will clearly influence pay, you may still need to establish how regularly you conduct compensation and performance reviews.


In some cases, it may make more sense to award certain employees a bonus every month for standout sales or service. If you already have strong base pay for certain positions, however, it could be better to tether raises to a quarterly or annual evaluation.


Organizational strategy


Does your business expect significant growth or change in the coming years? Or maybe your company is on the verge of acquiring a competitor. Based on these organizational factors, who your company needs at a specific time can fluctuate.


And your pay structure should shift, too, especially if you need to hire:


  • highly skilled or highly educated talent

  • individuals with ample leadership experience

  • fresh talent trained in a new or emerging field

  • specialists with heavily sought-after certifications

  • and more


Whatever your specific needs are, your pay structure must have the flexibility to account for them.


How do employers choose the right pay structure?


Once you understand the factors that influence compensation, you can focus on the specifics of a pay structure. Remember, no pay structure should be set in stone. Likewise, if you don’t see the results you need after a certain amount of time, always leave the option to pivot on the table. Let’s get started.


Industry and types of workers


As you lay out your pay structure, you need to identify your:


  • industry standards

  • employees’ expectations

  • compliance requirements


In some areas, the best pay structure may already be obvious by a norm established by similar businesses. For example, companies that employ blue-collar workers may benefit from strict hourly wages with limited types of varied compensation. This could include:


  • shift differentials to incentivize wider schedule coverage

  • safety bonuses to help maintain protocol and avoid accidents

  • favorable holiday pay


That said, you might find breaking what’s expected could give your company a competitive edge. Maybe you’ll set a precedent for greater time-off accruals or award employees for seeking certifications above the minimum requirements for their role. How you tweak a preestablished formula is entirely dependent on what your unique workforce needs.


Business size and revenue


While you should be intentional and ultimately supportive with your pay structure, your company’s size may influence how upper leadership views payroll and its budget. After all, your organization’s size and revenue could impact:


  • available resources

  • brand recognition

  • your ability to exceed standards

  • and more


Take a small startup, for example. If revenue is sparse or nonexistent, the company may need to offer relatively small salaries offset by lucrative equity packages. Larger businesses, conversely, may offer certain talent exceptionally high salaries and favorable benefits with the sole purpose of keeping them away from competitors.


Regardless of where your company falls on that spectrum, it’s never a bad idea to invest in learning and development to boost retention and create the leaders your operations will eventually need.


Business location


Where your company is located may be just as important as what it does when it comes to the right pay structure. Consider these common scenarios:


  • A restaurant open only for breakfast and lunch may not need shift differential due to standardized, consistent schedules.

  • A manufacturer in a heavily rural industry may need to offer commuter benefits to account for its employees’ long travel times and gas prices.

  • A clothing store in a college town may want to offer bonuses during the back-to-school season to incentivize more sales and better customer care.


Plus, your pay structure needs to adhere to only local, state and federal laws. This applies to anywhere your business operates — not just your headquarters or primary place of operations.


Company visions and values


Everything a company does communicates something to employees. When designing a pay structure, employers should consider how they want to be seen by their employees, stakeholders and the world at large.


For example, a new organization that hires many entry-level workers could offer education stipends and tuition reimbursement to get ahead of the demand for more qualified employees down the road. If the company is primarily driven by sales, it may instead lean on small salaries with substantial commission potential to retain top performers and attract more competitive talent.


Your pay structure should also reflect company values. For example:


  • A company with a strong family environment may offer generous parental leave.

  • A veterinarian’s office may offer pet insurance, adoption leave and pet bereavement to reinforce its focus on animal well-being.

  • A private music academy may use bonuses or extra PTO to incentivize its faculty to audition for high-profile acts and orchestras.

Remember, how you treat employees mirrors how you treat everyone your organization interacts with. Make certain your pay structures embody those values.


Can employers change their pay structures?


No pay structure should be static. Employers should be prepared to shift their compensation as the market demands it. But don’t throw employees for a loop in doing so. Carefully communicate and fully explain any changes you make and consider surveying your people to learn what they expect from their pay. In fact, asking employees for their perspective could help you get ahead of possible frustration and even attrition.

How does the right tech simplify pay structures?


Regardless of the pay structure your company uses, it needs to rely on an HR and payroll software provider that accounts for it. Take ADP or ADP Run, for example. Its easy-to-use, single software simplifies:


  • salaries

  • hourly wages

  • commission

  • bonus pay

  • fringe benefits

  • PTO

  • any other possible employee earnings

 

Their employee payroll experience makes it easy for your people to understand their pay structure, too. The tech works by automatically finding errors, then guiding employees to resolve those issues before payroll submission. This allows employees to easily understand their pay and verify it’s right, freeing HR to focus on higher-reaching strategies.


Explore our resources to learn more about employee compensation, engagement, retention, and other key HR topics.

 

DISCLAIMER: The information provided herein does not constitute the provision of legal advice, tax advice, accounting services or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional legal, tax, accounting or other professional advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation and for your particular state(s) of operation.

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