I just read an article that said it’s important to give raises to good new employees soon after hiring or you’ll lose them. Sure, that may be a good idea in theory, but if I do that, the new people will make more than the workers who have been around for much longer. And that’s not going to be a secret for too long around here. I’m afraid I’ll then lose the experienced personnel. I know my management won’t go for bumping up everyone’s compensation, so what do I do? — Sunny K., HR Manager in Fresno
This is a great example of why you shouldn’t believe everything you read! In my view, the most important aspect of managing salaries is making sure they are set in such a way as to meet some key criteria. Salaries should be:
- competitive in the market
- internally equitable
- legal (not illegally discriminatory)
- cost-effective
- linked to performance, if possible
The focus should be on the employees’ actual salaries, not only on salary increases. By giving raises without considering whether current pay levels are correct in the first place, you risk perpetuating existing inequities that could have legal consequences and harm employee morale. You might even introduce new pay inequities. Even worse, by attempting to retain new hires by quickly giving them raises, you may sabotage your efforts to keep the rest of your employees happy—and with the company.
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Developing a Structure
Usually, employers develop a salary structure within which jobs are classified into grades based on a combination of labor market survey data and internal job comparisons. Jobs—not people—are evaluated systematically using both external and internal indicators to determine which grade is the best fit. The classification system allows employers to compare different jobs across the organization as to the experience required and their value to the organization. The grades also function as labels for salary ranges.
Pay ranges can be set so your organization pays at the market rate or at some other level. For example, you could pay 10 percent over the market rate if you choose to be a company that pays above-average wages.
Using the Framework
Once the jobs’ pay grades are established, individual pay decisions can be made consistently and fairly both when hiring and when making salary adjustments for existing employees. When you have and use this framework, you can ensure that your salaries meet the criteria noted above. Keep in mind that the salary structure should be maintained over time to reflect labor market inflation, changes in job responsibilities and/or reporting relationships, and new jobs.
The job value (which is the range midpoint) associated with a job classification is used by many employers as the rate at which they pay their fully performing employees. When hiring new workers, employers may pay starting salaries of approximately 90 percent of the job value, a rate that may also apply to employees who need to improve their performance. Conversely, top performers are often paid at a specified level, which can range from 105 to 120 percent of job value, depending on the performance rating or scoring system the organization uses.
It is important to note that salary adjustments do not necessarily need to be made annually. Many compensation managers prefer having the flexibility to adjust employees’ salaries whenever there is a significant change in job classification or a promotion or to recognize substantial performance improvements. For example, an employee hired at 90 percent of job value may be moved to 100 percent when he or she demonstrates full competence, whether it’s after three months, six months, or a year.
By following the classification structure described above, the employer can pay salaries that are linked to both job value and performance at all times.
Shari Dunn is managing principal of CompAnalysis, a compensation and performance management consulting firm in Oakland.