How is my Salary or Pay Rate Determined?

Every organization must have goals. If the business goals and objectives are clearly defined at the top of your organization, then you know that these have to be accomplished for the company to succeed. Fortunately, this can only be done by people like you. Hence, organizations need to determine how they can break down their primary goals into smaller ones that can be tackled through activities or tasks. Top management determines how work is to be organized, and they develop organizational structures to execute the necessary activities to achieve their goals.

In most corporations and companies, work and tasks are organized first by function and then by position. Thus, compensation structures are tied to the organizational structure and its inner hierarchy. This means that companies place a relative value to any position according to the role it plays within the organizational structure. Every organization tries to develop its organizational structure according to its business strategy. Once the company is clear on what business objectives it wants to achieve, it divides work into different tasks that work together to achieve these goals.

Unfortunately, many organizations don’t take the appropriate time or resources to review and readjust its organizational structure with its changing business objectives. This is the reason why they often turn toward reengineering, or constant adjustment of company positions that leads to firings. These kinds of changes can affect your position, so knowing how they work can help you anticipate adjustments and survive a downsizing if it should occur.

Once the overarching task is divided into positions, the objective is to determine an internal place within the overall structure. This is the way jobs are born. It is critical to understand your job content, and how it contributes to your department or functional area. The sum of all work performed by you, your colleagues and everybody else in the organization is supposed to contribute to achieving those broader organizational goals.

Once a job is defined it is measured against other jobs in the organization and it is given a rank or value. At the same time, Human Resources departments attempt to benchmark their organization’s jobs with similar jobs in other companies. This is done through specialized Salary Surveys (you can find salary data for similar positions at sites like Salary.com).

When your company has clearly defined your job and researched market pay data, they can put a price tag on your position within the organizational chart. They don’t put a price tag on people, they put them on jobs. Understanding this concept is very important. When most people complain about their pay, they start the discussion by talking about what they do and what skills they bring to the company. Then the conversation becomes based on subjective judgment and not on hard specific data. This is the most commonly made mistake. When having conversation about your pay, remember to break down the information in terms of what your job is worth, separate from what skills you as a human bring to the job.

Organizations assign “prices” to jobs through a Salary Structure or Salary Ranges. These are tables with salary ranges assigned to different “Levels” or “Grades” in the organization. A Salary Structure is the result of mixing market data from Salary Surveys with the internal hierarchy or rank of the different jobs in the organization pyramid.

Salary structures give an organization flexibility in administering the pay of many employees at the same time. Within the “grade” your company assigns your job, there is a broad range in which to place you. Where you are placed depends on many factors. Some are external factors such as your peers, expense budget, your boss, the supply of talent in your area, etc.

The last ingredient in the equation to determine your pay is you. The knowledge, experience, education, skills you have are assessed when they determine where in the range you should be placed. Once you have been placed within a range, then your performance and merits will move your pay within the range of your level. If you are promoted, most likely you will move to the next level in the salary structure and your pay will move up accordingly. Our article on Performance Management provides insight into the performance appraisal process, which will help you to raise your personal bar, and consequently, your pay.