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Setting up a pay system

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Pay administration is an important part of managing a business. When you have a formal pay administration system in place, it helps control personnel costs, increase employee morale, and reduce workforce turnover.


A pay plan helps you manage your employees and run your business. It can help you:

  • Recruit
    Pay ranges provide competitive hiring rates that can attract new employees.
  • Retain
    Performance plans and pay increases can improve employee performance and career development within your business.
  • Motivate
    Pay plans provide incentives for employees to seek new opportunities or advancement within the company.

A formal pay administration process will also help you ensure that employment related government taxes and deductions are collected.


Developing a formal pay plan doesn't have to cost you a lot of time and money.  One of the most important things to consider when setting up your pay administration plan is to get the acceptance, understanding, and support of your managers and supervisors.

The basic steps to setting up a pay plan are:

  1. Defining the Positions
  2. Evaluating the Jobs
  3. Pricing the Jobs
  4. Implementing the Plan
  5. Telling Employees About the Plan
  6. Employee Performance Appraisals


The first step to installing a formal plan is to prepare a job description for each position. You may be able to write these descriptions yourself, but you can also ask employees to describe their jobs and review those descriptions.

Job descriptions usually include:

  • job title
  • reporting relationships
  • specifications
  • job responsibilities
  • job requirements (formal education or training, experience and background, unusual working conditions)

Once completed, the job descriptions can also be used for:

  • hiring and training employees
  • realigning duties in the organization
  • complying with various employment practice and pay rate laws
  • evaluating job performance based on assigned duties


A good evaluation method for businesses with 100 or fewer employees is a basic ranking system. When using this type of system, job descriptions are compared against each other and ranked according to difficulty and responsibility.

After you rank the job descriptions, the next step is to group jobs that are similar in scope and responsibility into the same pay grade. After sorting the job types, you can 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. A company with less than 100 jobs will usually only need 10 or 12 pay levels.


Pay Rates

To put a dollar value on each of your pay levels, you can look at the current rates for similar work in your area. You can get the data you need from sources such as your local chamber of commerce, major businesses located in your area, or from government organizations. If you belong to a trade association, they may also be able to provide you with standard pay levels for different jobs in your industry. Remember, you are required to pay your employees at least the minimum wage established for the province.

When you are studying pay rates in your area, make sure you compare job descriptions, not just job titles. Job titles can be misleading and there are usually differences between how one organization and another will define similar jobs.

Once you have a sample of local pay rates, you can calculate an average rate for each job and enter it on a worksheet.

For example:

Pay Level


Average Rate








Payroll Clerk






Accounting Clerk



Computer Operator



Pay Ranges

Based on the average pay rate, you can establish a midpoint rate and develop a pay range. 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 this kind of arrangement, new employees can increase their earnings by 35 percent without a job change, and are provided performance incentives even if they have not been promoted.

Once you have a pay range for each position in your organization, your final product will resemble the following example:

Pay Range
























This kind of pay range will enable you to tell where your employees' pay and pay potential stand in relation to the market rate. It can also show you at a glance where you need to make changes to achieve fair and competitive rates for your staff.

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


Once you have a general plan, you will want to consider how it will be administered to provide for individual pay increases. 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
  • a progressive scale of wages for employees who are below the minimum hiring rate/pay level
  • probationary increases of newer employees who have attained the necessary skills and experience
  • tenure increases for time with the company
  • general increases, granted to maintain real earnings as economic factors require and to keep pay competitive

Most annual increases are made for cost of living, tenure, or employment market reasons. You might use several, all, or a combination of the various increase methods in your business.

A form for documenting salary increases and recording the reasons for them can also be useful, and records like these are important for pay administration purposes.


After you implement your pay administration plan, you should consider how you will tell employees about it. Setting up a good program is your first priority, but clearly and honestly communicating that plan to your employees is also important.

Make sure that any supervisors working for your business understand the plan and can explain it to staff.

It is also a good idea to periodically review the plan with all employees.


The final element of a pay administration plan is performance appraisals. The majority of employees in Canada are under merit increase pay systems, which require 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
  • links the employee’s pay to their job performance
  • provides a standardized approach to evaluating performance
  • helps employees understand job responsibilities and expectations
  • sets targets for employees to work towards

Performance reviews help the employee whose work is being appraised, but they also help the manager gain insight into the business. An open exchange between employee and manager can show the manager where improvements are needed in equipment, procedures, training or other factors that might affect employee performance.

When you are designing an appraisal system, it is a good idea to develop a formal process.  A typical evaluation for job performance includes factors like:

  • results achieved
  • quality of performance
  • volume of work
  • effectiveness in working with others
  • effectiveness in dealing with customers, suppliers, etc.
  • initiative
  • job knowledge
  • dependability

You can design your own form for performance evaluations using examples from books on personnel administration, but ensure that the forms that you design match the job you are reviewing.


Review your pay plan annually, and ask yourself: are you getting the kind of employees you want? What are your turnover rates? Do employees seem to care about the business? By keeping your plan up to date, you can make adjustments where necessary and help your business succeed. 

(Source: Canada Business Ontario)