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Setting Up a Pay System
Canada Business Service Centres - CBSCs
Last Verified: 2004-05-28

Document No. 4046
Summary

Pay administration is a management tool that enables you to control
personnel cost, increase employee morale, and reduce work force turnover. A
formal pay system provides a means of rewarding individuals for their
contributions to the success of your firm, while making sure that your
organization receives a fair return on its investment in employee pay.
This publication provides time-tested concepts for determining competitive
pay levels and for maintaining fair pay relationships among the jobs
comprising a small company.


Who Needs a Pay Administration Plan?

Pay administration may just be a fancy term for something you are already
doing but haven't bothered to name. Or, perhaps your organization has not
been paying employees according to any system, but waiting until unrest
shows up to make pay adjustments - using payroll dollars to put out fires
so to speak.


A formal pay plan, one that lets employees know where they stand and where
they can go as far as take home dollars are concerned, won't solve all your
employee relation problems. It will, however, remove one of those areas of
doubt and rumour that may keep your work force anxious and unhappy - and
less loyal and more mobile than you'd like them to be. What's in it for
you? Let's face it, in business - particularly small business - it's good
people who can make the difference between go and no go. Many people like a
mystery, but not when it's about how their pay is set. Employees under a
pay plan they know and understand can see that it's equitable (fair) and
equable (uniform) - that pay isn't set by whim. They know what to expect
and what they can hope to shoot for. In the long run such a plan can help
you:
. recruit employees;
. keep employees;
. motivate employees;
. it can help build a solid foundation for a successful business.

Developing and Installing the Plan

A formal pay plan doesn't have to cost you a lot of time and money. Formal
doesn't mean complex. In fact, the more elaborate the plan is, the more
difficult it is to put into practice, communicate, and carry out.


The foremost concern in setting up a formal pay administration plan is to
get the acceptance, understanding, and support of your management and
supervisory employees. A well-defined, thoroughly-discussed, and properly-
understood plan is a prerequisite for success.


The steps in setting up a pay plan are:
. define the jobs;
. evaluate the jobs;
. price the jobs;
. install the plan;
. communicate the plan to employees;
. appraise employee performance under the plan.

Defining the Jobs

Unless you know each job's specifications and requirements, you can't
compare them for pay purposes. It's no surprise, therefore, that the
initial step in installing a formal plan is preparing a job description for
each position.


You may be able to write these descriptions yourself, since in many small
businesses the owner-manager at one time or another has worked at just
about every job. However, the best and easiest way to put together such job
information is simply to ask employees to describe their jobs. Supervisors
should be asked to review these descriptions.


Your best bet here is to prepare a simple form to be filled out by the
employee (or someone interviewing the employee). This is the time to begin
explaining to employees what you are doing. They need to know that their
help is needed to develop the pay plan - that you are not trying to find
out how well they are doing their jobs - just what they do. The form should
contain the following categories:
. job title;
. reporting relationship;
. specifications;
. primary function (What is the main responsibility of the job?).

Main Duties - (List main duties in order of importance and estimate the
percentage of time spent on each.)


Other Duties - (List of duties not performed on a regular basis.)


Job Requirements
. formal education or training required;
. experience or background required;
. technical/administrative complexity;
. responsibility for dollar results;
. responsibility for supervision;
. unusual working conditions.

It will probably take some time to prepare job descriptions from the
information you get from your employees, but what you learn may have other
uses besides comparing jobs for pay purposes. For one thing, you may
discover that some employees are not doing what you thought they were, or
what they were hired to do. You may find you want to make some changes in
their work routines. The information may also be useful for:
. hiring, training and developing employees;
. realigning duties in the organization;
. comparing job data for salary surveys;
. assuring compliance with various employment practice and pay rate
laws;
. evaluating job performance based on assigned duties.

Evaluating the Jobs

Nobody knows a scientific, precise way of deciding exactly how much a
particular job is worth to a company. Human judgment is the only way to put
a dollar value on work. A good job evaluation method for firms with 100 or
fewer employees is simple-ranking. It's a guess, too, but a pretty well
controlled guess.


Under the simple-ranking system, job descriptions are compared against each
other. They are ranked according to difficulty and responsibility. Using
your judgment, you end up with an array of jobs that show the relative
value of each position to the company.


After you have ranked the job descriptions by value to the firm, the next
step is to group jobs that are similar in scope and responsibility into the
same pay grade. Then you arrange these groups in a series of pay levels
from the highest to lowest. The number of pay levels depends on the total
number of jobs and types of work in your organization, but for a company
with 100 or fewer jobs, 10 or 12 pay levels is usually about right.


Pricing the Jobs

So far in establishing a pay system, you've had to look only inside the
company itself. To put a dollar value on each of your pay levels, you
should look outside at the going rates for similar work in your area. Since
you have ranked and grouped jobs in pay levels, you won't have to survey
each job. Survey those in each level that are easiest to describe and are
most common in local industry. Do try, however, to survey those jobs that
have more than one level, for example, junior and senior typists.


A survey of who's paying how much for what in your locality is the best way
of finding out how much you ought to pay for each of your jobs. You
probably have neither the time nor the money to spend on making such a
survey yourself. That shouldn't be a problem; you should be able to get all
the data you need from sources such as your local chamber of commerce,
major firms located in your area, or from such national sources as Human
Resources Development Canada. If you belong to a trade association, you may
be able to get its help to find out what the going rate is for one or more
jobs in each pay level.


In studying pay in your area and applying what you learn to your own jobs,
make sure you compare job descriptions, not just job titles. Job titles can
be misleading; there can be great differences between what one organization
and another call their jobs. One firm's janitor may be somebody else's
environmental control engineer. After you are satisfied that you are
comparing apples and apples, you can compute an average rate (the averages
in the publications are purely arbitrary) for each job and enter it on a
worksheet as follows:
|Pay Level |Position |Average Rate |
|1 |Clerk-Typist |$574 |
|2 |Stenographer |$635 |
|3 |Payroll Clerk |$687 |
|4 |Secretary |$723 |
|5 |Accounting Clerk |$741 |
|6 |Computer Operator |$815 |
|[pic] |[pic] |(and so on) |

You may need to adjust the average rates somewhat to keep a sufficient
difference between pay levels to separate them. The going rates you find
for each pay level can then become the midpoints of your pay level ranges.
(You can, of course, set your company's ability to pay, the length of your
work week, and the type and value of your company's benefit programs.)


Typically, the minimum rate in a level is 85 percent of the midpoint rate,
and the maximum rate is 115 percent of the midpoint. With the arrangement,
a new employee can increase his or her earnings by 35 percent without a job
change, thus having performance incentives even if he or she is not
promoted.


You now have a pay range for each position in your organization. It will
resemble the following example:

|Pay Range |Minimum |Midpoint |Maximum |
|1 |$490 |$575 |$660 |
|2 |$530 |$625 |$720 |
|3 |$580 |$685 |$785 |
|4 |$615 |$725 |$835 |
|5 |$690 |$815 |$935 |
|[pic] |[pic] |[pic] |(and so on)|

Such a pay range will enable you to tell where your employees' pay and pay
potential stand in relation to the market rates for their kinds of work. It
should show you at a glance where you need to make changes to achieve rates
that are fair within your organization and pay that's competitive with
similar businesses in your community.


In general, with a planned pay structure you should be able to tie
individual rates of pay to job performance and contribution to company
goals. It should also provide enough flexibility to handle special
situations.


Installing the Plan

At this point you have the general plan, but you don't of course, pay in
general. You must pay each employee individually. You must now consider how
the plan will be administered to provide for individual pay increases.


In administering the pay increase feature of the plan, you can use several
approaches:
. merit increases, granted to recognize performance and contribution;
. promotion increases for employees assigned to different jobs in higher
pay levels;
. progression to minimum for employees who are below the minimum or
hiring rate for the pay level;
. probationary increases of newer employees who have attained the
necessary skills and experience to function effectively;
. tenure increases for time with the company;
. general increases, granted employees to maintain real earnings as
economic factors require and to keep pay competitive.

These approaches are the most common, but there are many variations. Most
annual increases are made for cost of living, tenure, or employment market
reasons. Obviously, you might use several, all, or combinations of the
various increase methods.


You may find that a form for documenting salary increases and recording the
reasons for them can be quite useful. You will probably find that records
such as these are useful references for pay administration purposes.


Telling Employees about the Plan

After you have set your pay administration plan into place, you have to
consider how to tell employees about it. If setting up a good program is
number one in importance, a close number two is explaining that plan to
employees.


How to tell them is your decision. Some of the more successful methods
include personal letters to each employee and meetings to explain the plan
and answer questions.


However you tell employees, you must clearly, honestly, and openly explain
the way the plan works. This is a prime opportunity for you to build
goodwill and good relations with your employees. Be sure your supervisors
understand and can explain the plan to their people. Explaining the plan to
new employees is also essential, and it's a good idea to review the plan
periodically with all employees.


Employee Performance Appraisal

The majority of employees in the Canadian labour force are under merit
increase pay system, though most of their pay increases result from other
factors. This approach involves periodic review and appraisal of how well
employees perform their assigned duties. An effective employee appraisal
plan:
. achieves better two-way communications between the manager and the
employee;
. relates pay to work performance and results;
. provides a standardized approach to evaluating performance;
. helps employees see how they can improve by helping them understand
job responsibilities and expectations;
. sets targets for employees to aim towards.

Such a performance review helps not only the employee whose work is being
appraised, but also helps the manager doing the appraising to gain insight
into the organization. An open exchange between employee and manager can
show the manager where improvements in equipment, procedures, or other
factors might improve employee performance. Try to foster a climate in
which employees can discuss progress and problems informally at any time
throughout the year.


Again, to get the best results it's a good idea to use a form for
appraisal. A typical form includes such job performance factors as:
. results achieved;
. quality of performance;
. volume of work;
. effectiveness in working with others in firm;
. effectiveness in dealing with customers, suppliers, etc;
. initiative;
. job knowledge;
. dependability.

You can design your own form, using examples you can find in books on
personnel administration, if necessary. Your forms should be tailored to
the jobs and should follow from your job analyses.


How Can the Plan Help You?

The best pay plan in the world for employees won't be of any use if it
doesn't help your business. What's in it for you?


Again, the answer is getting, keeping and encouraging good employees. Your
pay plan will help you:
. Recruit - The pay ranges will provide competitive hiring rates for
attracting high calibre employees.
. Retain - The performance appraisal plan and pay increase feature will
encourage performance plus growth and development within your
organization.
. Motivate - The pay plan will provide something to shoot for to keep
employees interested in and enthusiastic about their present
assignments and also provide the incentive to seek greater opportunity
within your company.

Having capable employees who are interested and enthusiastic will help you
win the battle for business survival and growth.


Updating the Plan

To keep your pay administration plan in tune with the times, you should
review it at least annually. Make adjustments where necessary and don't
forget to retrain supervisory personnel. This isn't the kind of plan that
can be set up and then forgotten.


During your annual review, ask yourself if the plan is working for you.
That's the most important question. Are you getting the kind of employees
you want or are you just making do? What's the turnover rate? Do employees
seem to care about the business? In the last analysis, it's not how elegant
the plan is or how beautiful the forms and administration. What matters is
how the plan helps you to achieve the objectives of your business.



Source: U.S. Small Business Administration

Prepared by:

Saskatchewan Industry and Resources, Business and Co-operative Services