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Currently, in the competitive job market, a well-designed salary structure is more than just a payroll tool, it is a strategic approach to attract, retain, and motivate top talent.
Companies that fail to offer competitive compensation risk losing their best employees to competitors, while overpaying can unnecessarily strain the budget. Designing a salary structure requires careful planning, research, and alignment with both organizational goals and market standards.
What is a Salary Structure?
A salary structure is a framework that defines how employees are compensated within an organization. It outlines pay ranges for different job levels, including base salary, allowances, bonuses, and benefits.
A well-structured salary framework ensures fairness, transparency, and consistency across the organization while reflecting both the value of the role and the employee’s experience and performance.
When Should You Design a Salary Structure?
You should design a salary structure as soon as you start your business and begin hiring employees. This ensures fair and consistent pay practices from day one.
Beyond that, salary structures should be reviewed regularly especially during company growth, restructuring, or when adding new roles to stay competitive and equitable. It is also crucial to revisit salary structures when market trends shift, such as changes in inflation, labor market conditions, or industry standards, which can affect competitive pay.
How to Design a Competitive Salary Structure
Designing a competitive salary structure requires a systematic approach that balances fairness, market competitiveness, and budget sustainability. Here’s a detailed step-by-step guide:
1. Conduct Job Analysis & Evaluation
Start by listing all roles within your organization and clearly defining the responsibilities, skills, and qualifications required for each position. Evaluate the relative importance and impact of each role on business objectives. Ranking positions based on factors such as complexity, accountability, and required expertise helps ensure internal equity and provides a foundation for assigning appropriate pay levels. This step ensures that compensation aligns with the value each role brings to the organization.
2. Research Market Rates
To remain competitive, it is critical to understand what similar roles are paying in your industry and region. Use tools such as salary surveys, industry reports, and competitor benchmarking to determine the market rate for each position.
This research allows you to offer salaries that are attractive enough to attract top talent while staying aligned with market standards. It also helps prevent overpaying or underpaying employees, which could affect retention and budgeting.
3. Determine Pay Grades & Ranges
Once you have evaluated roles and market rates, create pay grades or bands for different job levels. Pay grades standardize compensation across the organization while allowing flexibility for factors such as experience, performance, and tenure.
Clearly defined ranges ensure fairness, support career progression, and provide a transparent framework for salary negotiations and promotions.
4. Include Allowances, Benefits, and Bonuses
A competitive salary structure goes beyond base pay. Consider incorporating allowances such as transport, housing, or meal stipends, along with benefits like health insurance, retirement plans, or wellness programs. Performance bonuses, incentives, and flexible work options further enhance total compensation and motivate employees. Including these elements ensures your overall compensation package is attractive and supports employee satisfaction.
5. Align with Company Budget
While it’s important to offer competitive salaries, they must be sustainable. Ensure that total compensation fits within the company’s financial plans and long-term goals. This step involves balancing competitive pay with operational costs, forecasting future payroll expenses, and maintaining flexibility for growth, promotions, or unexpected adjustments. Budget alignment prevents financial strain while supporting a motivated workforce.
6. Document & Communicate the Structure
Once the salary framework is established, document it clearly and communicate it to employees. Transparency is key, employees should understand how pay is determined, how performance and experience influence progression, and what benefits and incentives they are entitled to. Clear communication fosters trust, reduces ambiguity, and strengthens employee engagement.
7. Review Regularly
Regular reviews ensure that compensation remains competitive, fair, and compliant with changing market conditions, labor laws, and internal policies. Review intervals may vary depending on company size and industry, but typically occur annually or during strategic planning cycles. Regular updates help retain talent, adapt to business growth, and maintain employee satisfaction.
Factors That Influence a Competitive Salary Structure?
Several critical factors must be considered when designing a salary structure that balances fairness, competitiveness, and financial sustainability:
1. Market Benchmarking
Before setting any salary levels, it’s essential to understand what competitors and the broader industry are offering. Market benchmarking involves researching industry standards, salary surveys, and compensation reports to determine competitive pay ranges for similar roles. This ensures your organization can attract and retain top talent while avoiding overpayment that could unnecessarily strain the budget. Benchmarking also helps identify gaps in your current pay structure and informs adjustments to remain market-relevant.
2. Job Evaluation
A clear understanding of each role is fundamental to a fair salary structure. Job evaluation involves defining the responsibilities, required skills, decision-making authority, and overall impact of a position within the organization. By objectively assessing the value of each role, businesses can assign appropriate pay grades and ranges, ensuring that employees are compensated according to the importance and complexity of their work. This process also helps maintain internal equity and reduces potential conflicts over pay discrepancies.
3. Company Budget
Even the most competitive salary structure must align with the organization’s financial realities. Designing pay levels without considering the budget can lead to overspending and long-term sustainability issues. It’s important to analyze the overall payroll cost, forecast future salary expenses, and ensure that the structure supports both employee satisfaction and the company’s strategic goals. A financially sustainable salary framework balances attracting talent with maintaining healthy profit margins.
4. Employee Experience & Performance
Compensation should reflect not only the role but also the employee’s experience and contribution. Incorporating pay progression allows organizations to reward tenure, skill development, and high performance. Performance-based pay or incremental increases tied to milestones motivate employees to excel and stay engaged, while also recognizing the value of loyalty and expertise. This approach strengthens retention and encourages continuous professional growth.
5.Regulatory Compliance
A salary structure must comply with all legal and regulatory requirements. This includes adhering to minimum wage laws, labor regulations, taxation rules, and industry-specific mandates. Non-compliance can result in fines, legal action, and reputational damage, which can indirectly affect a company’s financial stability. By integrating regulatory compliance into salary design, organizations ensure that their compensation practices are legally sound and ethically responsible.
Who Should Be Involved in Designing a Salary Structure?
Creating a competitive salary framework is not a task for a single department; it requires collaboration across multiple roles to ensure fairness, financial sustainability, and alignment with company strategy. Key stakeholders include:
1. HR Professionals
HR teams play a central role in designing the salary structure. They lead the research on market salary trends, evaluate job roles, and document the framework. HR also ensures that the structure is equitable, compliant with labor laws, and aligned with internal policies. They act as the bridge between employees and management, ensuring the framework supports both organizational goals and employee satisfaction.
2. Finance Team
The finance department ensures that the proposed salary structure fits within the company’s budget. They analyze the financial implications of different pay levels, allowances, bonuses, and benefits. Finance also models salary projections, helping the organization maintain sustainability while offering competitive compensation. Without their input, even the most attractive salary structure could strain resources or disrupt financial planning.
3. Department Heads and Managers
Managers and department heads provide crucial insights into the practical aspects of each role. They help evaluate the responsibilities, skills, and performance expectations associated with specific positions. By contributing this on-the-ground knowledge, they ensure that compensation is accurately linked to the value and complexity of the work being performed. Their input also helps tailor pay structures to the realities of different teams or departments.
4. Executive Leadership
The final approval and strategic alignment rest with the executive team. Leadership ensures that the salary structure supports broader company goals, such as talent retention, growth, and competitiveness in the market. They also weigh the long-term sustainability of compensation policies and make decisions that balance employee satisfaction with overall business priorities.
Why a Competitive Salary Structure Is Important?
- It attracts top talent in a competitive market.
- It helps in retaining high-performing employees.
- It ensures fairness and transparency, reducing internal conflicts.
- It creates alignment of employee performance with organizational goals.
- It also helps companies manage payroll efficiently and sustainably.
In conclusion, designing a competitive salary structure is both a strategic and practical task. By carefully analyzing roles, benchmarking market rates, incorporating benefits, and aligning with company budgets, organizations can create a framework that motivates employees, attracts talent, and supports long-term growth. Remember, a strong salary structure is not a one-time activity, it is an ongoing process that adapts to business growth, market shifts, and employee needs.
