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How Do Organizations set PAY Levels?

Updated on September 14, 2012
This man has requested an upgrade of his position. He should have read this hub first
This man has requested an upgrade of his position. He should have read this hub first


How do you know if your Salary is too Low?

Every one wants a higher salary or thinks their salary is not high enough. But how would one know that their salary is set too low and should be increased? How do organizations set salary levels for the different positions it employs? Why do accountants, for instance, usually make more than office assistants but less than lawyers, at least at the entry level?

Different organizations determine the pay levels of each position in different ways. If the organization has union jobs, their wages are determined through negotiation and, upon agreement, become specified in a contract. For nonunion jobs private organizations may pay as much as they can afford or as little as they can get away with. In larger organizations and particularly in public service organizations like federal, state and local governments, there will be a uniform classification system in which each position is placed in a specific grade with a specific number of steps, usually to a maximum of ten in number. But even if there is a uniform classification system, how do organizations determine which grade to assign to each position?

Before answering that question, a little insight into how salaries are set in most organizations for all positions. You should understand that you are not paid according to your qualifications-your level of education or the extent of your job experience. You are paid according to the position you occupy. Your qualifications are important for getting selected for the position. If, while serving in the position, you get a graduate degree or a more specialized skill, those additional credentials would not entitle you to a higher salary in that same position, unless the nature of the job changed to require those additional qualifications. They might enable you to successfully compete for a position of higher salary.

Ok. So we do not determine our salary level. It is determined by the position for which we are selected. But we still have the original question. What is the big dirty secret behind how the organization determines which grade or salary it will offer for each position? Well, it is not secret and not at all dirty. The principle that most organizations use, or at least consider, is the principle of what I call, “the equities”. There are two types of equities:

1. External equity: This is essentially the local market for compensation for specific positions, or the average starting salary for the same or similar positions in similar organizations in the same locale. When employers consider external equity they make certain that they compare their salaries with the average for specific positions in the local area only. The average starting salary for an accountant in New York City will be significantly higher than that of a small town in Iowa because of the difference in the cost of living.

Employers look at external equity as an important consideration in determining their salaries because to attract and keep the kind of talent they need, they will have to offer competitive salaries, especially for important or hard-to-fill positions.

In the final analysis it will be the depth of the organization’s pockets that will determine if the organization can match the market salaries or not. Large corporate organizations not only match market salaries but often exceed them, while small organizations may find it impossible to match market salaries and stay in business.

2. Internal equity: This has to do with how every position compares in value to the organization to all other positions in the organization. The more responsible or valuable a position is to an organization the more the organization pays for the position in salary. This is why the CEO of an organization is paid more than the vice presidents and why supervisors are paid more than the people who report to them. If organizations paid the same or less to supervisors than their subordinates, you can imagine the difficulty the organization would have in attracting people to take the supervisor’s job.

Organizations that have a uniform classification system with every position assigned to a specific grade or salary range will have had a classification expert either from the human resources department or one from the outside but hired by human resources to evaluate each position to determine its proper classification and salary level. These experts will assign a specific number of points to each of the factors of the evaluation, based upon their observation of how the position functions and by questioning the employee occupying the position and the supervisor. These factors of evaluation often include the following:

· The required knowledge or skill or education to successfully do the job

· The extent of independence the job has, as opposed to being closely supervised

· The impact or importance of the functions of the job

· The kind of contacts required of the job-just with co-workers or also with the public and with high officials in other departments

· The complexity or level of difficulty of the required functions of the job

Periodically-every five to seven years-organizations will conduct an update of their classification system. This usually entails reevaluating a certain number of jobs in each grade to see if there have been organizational changes that have impacted the nature and requirements of the jobs. This also entails conducting a survey of organizations of similar size and nature in the local area to see if the external equity of certain jobs needs to be updated.

So, what to do if you feel you are underpaid?

First, it is not enough to THINK your position is underpaid; you must have convincing evidence that your position deserves high pay. You may have evidence that similar organizations in the local area are paying more for jobs that do more or less the same thing you are required to do. That would attack to problem from the external equity angle. The problem is that most organizations would not find your word convincing enough. They would be more convinced by the evidence of a survey they would conduct themselves. The problem here is that no organization is going to spend the time and money to survey the salary market for just one position and, especially today, no organization is willing to spend the money to survey the market for all positions, with the probable result that it will have to increase salaries.

Yet, there is a more convincing way to get the organization to reevaluate your position for reclassification, more money and even a different title. Use the angle of internal equity. Request that human resources reevaluate your position because it is not the same as when you were hired. It has changed, because of reorganization, job consolidation, merger or increased technology, to require you to do different things than before, additional things than before, more complex and accountable and responsible things than before. This would be much more credible because jobs are changing all over the place because of the economy, increasing and unexpected competition from the internet and increasing technology. Many jobs are being eliminated. But some of the remaining ones are given higher responsibilities to compensate for the lost ones. Yet, many of the remaining jobs keep the same title and pay.

If your job is one that has changed so that you are required to do different and more responsible things, then move to get the organization to reclassify and probably re-title your job. But be warned about one thing. If your supervisor, as many supervisors will do, has delegated to you part of his responsibilities for the purposes of your training and development or just to make his job easier, that, alone, will not be considered justification for upgrading your position because those delegated responsibilities will be considered temporary and insufficient justification for upgrading your job.

When it comes to the comparison of your job and that of your supervisor, the best of all worlds is when organizational changes has required that your supervisor take on higher responsibilities and, therefore, some of his old responsibilities has been passed on to you. Your supervisor would fully endorse your request for an upgrade because it would mean an automatic upgrade for him.


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