How Does HR Design a Remuneration System?

Remuneration is the system whose consequences become visible most quickly among those designed by the human resources function. While the effect of a job description or a development programme unfolds over time, the effect of a pay decision is felt within the same month. Our field observations indicate that in many organisations pay decisions rest not on a defined system but on past practice, individual negotiations and the personal judgement of managers. Although this appears to provide flexibility in the short term, over time it produces differences between employees performing the same work that cannot be explained, and it weakens the capacity of HR to justify its decisions. The design of a remuneration system is therefore a structural exercise before it is a budgeting exercise. This article examines the steps through which the system is established, which decisions fall within the responsibility of HR, and how the structure is made sustainable.

The Foundation of the Pay Structure: Job Evaluation

The starting point of a remuneration system is roles rather than individuals. The first step of the design is to determine the relative weight of every position through a common method. Job evaluation measures this weight; the point-factor method, the ranking method and the classification method are the approaches most commonly applied. Medium and large organisations tend to prefer the point-factor method, because the way in which the result is produced can be traced and a rationale can be presented in the event of an objection.

Sound job evaluation depends on current job descriptions prepared in a standard format. Where the description is unclear, the evaluation score becomes open to dispute. For this reason the job analysis and job description process should be completed beforehand, and the descriptions should be jointly approved by the postholder and the line manager.

Evaluation factors are determined according to the structure of the organisation. The level of knowledge and experience required, the depth of problem solving, the impact of decisions, the scale of resources managed, the intensity of external contact and working conditions are frequently used factors. Factor weightings are determined once and fixed by committee decision; applying different weightings to individual positions removes the comparability of the system. When the evaluation results are compiled as a score ranking, the internal hierarchy of the organisation becomes visible for the first time on a basis independent of pay. This table forms the reference point for every remaining step of the design.

Conducting the exercise through a committee makes the outcome easier to accept. The presence of managers from different functions alongside HR ensures that the content of positions is assessed accurately. Committee members should receive common training on the method before the exercise begins, and assessments should be reached through consensus during the sessions rather than individually. When records showing how the scores were formed are retained, subsequent objections are assessed against documentation rather than through debate.

Remuneration System: Establishing the Grade and Pay Band Structure

Job evaluation scores are not converted into individual salaries directly; they are first grouped into grades. Positions falling within a similar score range are gathered into the same grade, and a single pay band is defined for each grade. The number of grades is determined by the size of the organisation and the depth of its structure. An excessive number of grades complicates the administration of the system, while too few grades combine different levels of responsibility within the same band.

Each band has three reference points: a minimum, a midpoint and a maximum. The midpoint represents the target pay level for that grade. Band width is generally designed to span between twenty and forty per cent around the midpoint; bands are kept wider for grades where the period required to reach full proficiency is longer.

Position within the band is linked to competence and performance rather than to length of service. A newly appointed employee is positioned in the lower section of the band, an employee performing the role in its full scope in the middle section, and an employee contributing beyond the requirements of the grade in the upper section. Once this logic is defined, a pay increase ceases to be a matter of negotiation and becomes a rule of movement within the band. The grade structure is also directly connected to workforce norm and career mapping exercises; the use of common grade definitions across all three systems allows the organisation to be managed through a single structure.

Market Data and the Definition of Increase Rules

The band structure establishes internal equity, while market data determines external competitiveness. At this stage HR prepares a recommendation on the pay policy through which the organisation will position itself and submits it for the approval of senior management. The policy decision takes shape across three options: positioning below the market, at the market median or above the market. The decision may be applied uniformly across the organisation or differentiated for critical positions.

The scope of the data used in market comparison should also be clarified. Comparison with organisations that differ in sector, turnover, headcount and geographical location produces misleading results. Where salary survey data is used, the comparison should be based on job content rather than on job title.

For the system to become operational, increase rules must be defined in writing in advance. The matters that HR should clarify at this stage are as follows:

•      The indicator and budget framework within which the annual general increase will be determined

•      The coefficient through which performance outcomes will be reflected in the increase rate

•      The convergence rule to be applied to employees positioned in the lower section of the band

•      The approach to be followed for employees who have reached the band maximum

•      The minimum increase rate to be applied on promotion

•      How pay will be determined in lateral moves and role changes

•      The authority responsible for deciding upon exception requests

Setting these rules down in writing removes pay discussions from the sphere of individual judgement and provides HR with a framework that can be applied consistently across the organisation.

Level of Transparency and System Governance

How much of the system will be shared is a separate design decision. Some organisations announce only the existence of the system and its operating logic; others share the grade structure and band ranges with employees. Whichever level is chosen, managers must be briefed to a standard that enables them to explain the system correctly. Our field observations indicate that objections to pay systems most often arise not from the band itself but from an inability to explain how the decision was reached.

The scope of the system should not be confined to base pay alone. Benefits, bonus practices and any variable pay component are defined within the same structure. Otherwise differences emerge at the level of total earnings while the band structure appears to be preserved. Once it is recorded which benefits are provided as standard for each grade, the system becomes comparable at the level of total reward as well.

Sustainability requires regular maintenance. Band values are reviewed annually, while job evaluation is renewed when a new position is created or the content of an existing position changes. Without this maintenance the system loses its currency within a few years and exception decisions once again become standard practice.

On the governance side, the separation of roles is decisive. The selection of the methodology, the job evaluation exercise, band design and the drafting of the rule set fall within the responsibility of HR. Approval of the total pay budget and the positioning decision at policy level are taken jointly with senior management and the finance function. When this distinction is clearly defined, HR is positioned as the owner of the system and pay discussions are moved onto technical ground.

Establishing a remuneration system is a technical process extending from job evaluation to band design and from the drafting of the rule set to the definition of the governance structure, and it requires design according to the structure of each organisation. Within the scope of our human resources systems consultancy service, we provide organisations with methodological support in job evaluation, the design of grade and band structures, and setting pay policy down in writing.

With more than 35 years of corporate experience and more than 25 years of C-level leadership perspective, we deliver strategic and applicable solutions.

To design a remuneration system within your organisation, please contact us.