What is it about?

Compensation decisions (and what employees make) are among the most important HR variables that can have significant impact on employee attitudes and behavior, and ultimately on organizational success. The challenge for decision makers is to allocate limited compensation budgets in such a way that drives organization success, while tackling the twin goals of equity and competitiveness. This paper develops a decision support model that was motivated by this practical challenge. The model provides an explicit, structured and principled approach to develop a grade-based salary structure that best achieves the twin goals of internal equity and market competitiveness.

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Why is it important?

In developing a salary structure, there is always a degree of tension between market competitiveness and internal equity considerations, and, as Armstrong (2007:97) succinctly put it, organizations may need to “sacrifice their ideals (if they have them) of internal equity to the realism of the marketplace." Bloom’s (1999: 168) related observation that given limited compensation resources, the distribution of pay within an organization is “inherently a zero-sum matter” is also a good reminder to the nature of the challenge that compensation analysts and decision makers have to grapple with routinely. This may be nowhere clearer than in the design of salary structure, where the trade-off between internal equity and market competitiveness is a fundamental concern and a hotbed of academic and practitioner debates. The decision support model presented in this paper provides an explicit, structured and principled approach to develop a grade-based salary structure that best achieves the twin goals of internal equity and market competitiveness.

Perspectives

This article clearly suggests that designing a good compensation structure requires careful consideration of competing goals. Given the importance of compensation as a major human resource management practice, practitioners and decision makers will benefit a great deal by using more systematic approaches to tackle key compensation design decisions, as illustrated by this article. I would like to note that researchers interested in the field can find the paper a good place to start in doing further research to build more comprehensive models that can address more complex compensation design issues. Lastly, even if I chose to develop and implement the model using a specialized optimization program, for an organization with moderate size grade structure it’s easy to build and solve the model using Excel’s Solver add-in.

Mr Biniyam A Kassa
Deloitte Consulting

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This page is a summary of: A Decision Support Model for Salary Structure Design, Compensation & Benefits Review, March 2020, SAGE Publications, DOI: 10.1177/0886368720905696.
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