Salary ranges. The phrase alone is like nails on a chalkboard for most human resources professionals.
When we think of salary ranges, we envision an unnecessary administrative burden, we imagine wasting our time on a useless project for management, and we think of…math (cue thunder and lightning).
So why bother with salary ranges in the first place?
According to a recent Compensation Planning Survey, nearly 70% of participants have formal salary ranges. If that many companies use salary ranges, they must have some utility, right?
The truth is, pain in the butt or not, salary ranges are one of your best tools as an HR professional to accomplish one of your most important job duties:
Control Labor Costs
Let’s start by thinking about salary ranges from the perspective of external competitiveness.
By creating salary ranges for every job in your company, you determine each job’s value. A salary range explicitly states the ceiling (range maximum) and floor (range minimum) for each position.
Internally, salary ranges provide an opportunity to recognize varied levels of employee performance or experience. How does it do that? By allowing your company to pay employees at different points in the range. For example, high performers may be paid in the upper third of the range, lower or less experienced performers may be paid in the lower third.
That’s why salary ranges are important. How do you actually create a salary range?
By following a 4-step process:
1. Develop Grades
Start by grouping together jobs with similar internal or external worth. An internal job evaluation tool, such as a point factor system, is one way to determine a job’s worth. However, most organizations use external market pricing to establish each job’s marketplace value. I recommend using an external market pricing system where you assign each job a grade based on your market analysis.
2. Set the Minimum, Midpoint, and Maximum
Determine each job’s midpoint based on your organization’s pay policy (to match, lead, or lag the market) and by conducting a competitive market analysis for a group of jobs in each grade.
Once you compile and average the market rates, you can establish the midpoint of each grade. The midpoint will give you an approximation of what your competition pays on average (in other words, the job’s external value).
Range spreads (which is the range maximum divided by minimum) will vary based on the level of the job. Jobs with greater decision making, and with less promotion possibility, tend to have wider ranges.
3. Set Range Overlap
Midpoint differentials and range spreads control the amount of overlap between salary ranges. A low degree of overlap and small midpoint differentials equates to small differences in the value of jobs and smaller promotional increases. As jobs become more challenging and move further up the hierarchy, your ranges should be spread wider and the midpoint differentials should be greater.
As a rule of thumb, midpoint differentials tend to start at about 7.5% and gradually increase to as much as 15%.
4. Connect Your Salary Structure to Your Performance Management System
To reinforce the fact that your company pays for performance, most salary ranges will be split based on the number of performance ratings.
For example, if your organization has 4 ratings, your ranges will be broken into quartiles. If you have 5 ratings you’d split into quintiles.
This type of compensation program design allows you to use other tools such as merit or promotion matrices to assist your efforts in controlling labor cost and encouraging pay for performance.
Should I Use Unified or Multiple Pay Structures?
Once you develop your salary ranges using that 4-step process, you have to decide if you want to use unified or multiple pay structures.
If your goal is to keep administration to a minimum and implement the least number of salary ranges, consider one unified salary structure for the entire organization.
However, if your organization has a compensation philosophy that values functions or disciplines differently, (such as engineering or information technology) then you may need to implement separate pay structures for those groups.
Another X-factor to consider: having employees in the same role in different geographic labor markets may require you to implement multiple pay structures.
Does Broadbanding Really Work?
Broadbanding reduces the number of salary ranges, for example to 4 or 5 “bands.” At first glance, you seem to be simplifying your administration when you implement broadbanding techniques, with wider ranges and fewer job grades.
In my experience, broadbanding doesn’t actually reduce administration or simplify communication to managers and employees. To control labor cost in a broadbanded structure, you may have to market price every job, and create a pay zone around each, to prevent salaries from creeping up through the wide band.
That’s a lot of work to avoid a little administration work.
Secret Salary Ranges
It’s a controversial topic:
Should you communicate your salary ranges to managers and employees?
If you value open communication, are confident in your analysis, and can defend the competitiveness of your salary ranges, then consider training managers in the proper use of pay structures and communicating salary ranges to employees.
Your Work Isn’t Over Yet…
Once you’ve established your salary ranges, it’s important to maintain them annually. According to our survey, 80% of participants review their salary ranges on a yearly basis.
Review may mean analyzing salary structure trend data and moving ranges accordingly, or performing a comprehensive market analysis to determine more accurately how to adjust ranges.
Whichever process you choose, remember: salary ranges are a key tool in administering your compensation program. Keeping them up-to-date and competitive is critical to your business.
Note: If you enjoyed this article, check out my new bestselling HR book Pay Matters: The Art and Science of Employee Compensation available now on Amazon.
© 2020 David Weaver. All rights reserved.