Benefits and Compensation

Implementing Pay Grades and Ranges: Common Pay Structure Issues

You also may find yourself facing employees who don’t fit into the standard pay grades for one reason or another or who have maxed out at their existing pay grade. You may even have an employee who is pointing to online salary information and claiming she’s not getting paid enough, which is a position HR professionals are finding themselves in quite often, especially as the economy improves and employees are starting to look around to see what else is out there. How do you implement a fair pay structure without complicating your payroll process?

In a BLR webinar titled “Pay Grades that Work: How to Retain Top Talent and Stop Compensation Complaints,” David Wudyka outlined some guidance on setting up pay grades and also noted some of the most common issues employers face with these types of pay programs.

Issues and Questions When Implementing Pay Grades

Any time you implement a new program, there will be some questions you’ll ask to ensure you’re implementing it effectively. Implementing a new pay structure with pay grades is no exception. Here are some of the common issues and questions that employers face when implementing such a system.

  • Should we have narrow or broad pay ranges? Wudyka advised “what you really should have in any case is to have accurate pay ranges, whether they’re traditional or broadbanded ranges.” You do this by accurately pegging your data to pay survey data in the marketplace.
  • What happens when a pay rate is out of range (below minimum or above maximum)? In a functioning pay structure, both case are pay policy violations. Additionally, the below minimum pay is likely an Equal Pay Act violation because your pay ranges are a policy statement of your company. If you are in this situation, move people as quickly as you can – no later than the end of the current budget year or calendar year – into the grade level so you can’t be accused of violating the Equal Pay Act. Allowing some individuals to be above the pay grade maximum can also be a violation because it could be shown that others were not allowed to be paid above the maximum. To remedy this, you can freeze the base pay rates until the range catches up. However, there may be exceptions, such as key contributors, but be sure to update the structure soon.
  • How often should we update our pay ranges? Preferably every year, and no later than two years. If you wait, your pay structure is lagging the marketplace. After that point, ranges need to be re-calibrated by re-assessing market rates, which is best done by a professional.
  • Can we update our own pay ranges? Wudyka advised: “if you’re updating your ranges every year, then you can simply adjust your pay structure by a fixed percentage, and that’s pretty easy to do . . . use that fixed percentage and apply it to the midpoints of your ranges first, and then expand outwards to create your minimums and maximums.” The percentage movement is based on the market movement; use pay survey data as a guide to spreads, or use your average merit budget as a guide.
  • Can we adjust just one pay range? Actually, no, as this defeats the purpose of a pay structure. It prompts more complicated pay structure adjustments later, and it will appear to be favoritism.
  • Pay compression occurs when pay rates approach others “uncomfortably.” This is an issue, for example, when the pay spread between two individuals becomes too narrow, such as between a supervisor and subordinate. You have several options to solve this situation. For example, you may need to revisit and rebuild your grade structure (if you’re experiencing “structural compression” where your grades are too close together). You could also make “equity adjustments,” which are done rarely to alleviate compression problems. Another solution is to make sure your ranges are pegged to the market. Finally, you may simply need to improve your pay administration to eliminate pay compression problems.
  • Low budgets can also cause issues with pay ranges and the advancement of employees. You do have options, however. In these days of small budgets, use them fully. For example, in a 3 percent budget year, increases should range from 0 to 6 percent. Be sure to use pay planning to boost low paid, high performers in your company. You can also use lower percentage increases for individuals who are already above the midpoint, when doing so allows the absolute dollar increase to be greater.

For more on Pay Grades, see How To Effectively Manage Base Compensation with Pay Grades.

David Wudyka, managing principal and founder of Westminster Associates, manages and oversees all company operations, including the design, development, and implementation of all client HR programs. His specialties include human resource analytics, audits of HR operations, employee retention strategies, and group incentive plans.