Benefits and Compensation

Q&A on Setting Pay Rates and Ranges

Setting formal pay ranges is one way organizations create fair pay structures that also motivate employees. These types of structures can provide a basis for employees to move between levels, and can create internal consistency in how employees are paid. That said, they can also come with plenty of questions when you’re just getting started. For example, what should be the difference between pay range midpoints? What are the pros and cons of adopting job families?

During a recent BLR webinar, we had Teri Morning on hand to answer participant questions. Read on for these answers and more.

Pay Ranges and Midpoints

Q. What if the pay range midpoints you’ve got are too close? What do you recommend as a difference between pay range midpoints?

A.Usually if you have the pay ranges too close, it’s because you tried to make too many different jobs. So, I’d go back and look and see if these different jobs really are different. If they really are different and you’re using different numbers, the numbers are going to reflect it. With too small of difference, the system won’t work.

Look at possibly further differentiating the levels. If the jobs are truly different, they should be compensated at completely different amounts. Oftentimes this also happens if organizations want to give employees status. This results in too many job titles (unique for every person in some cases) and thus everyone had their own pay grade.

Another option is to broadband. Often, managers love it and HR hates it. Having a wider band within the same pay range allows managers to differentiate pay for different people in the same position. It gives managers more autonomy and lets you reward top performers. However, there’s also the risk of rewarding due to pressure or favoritism or other inappropriate reasons. It still needs oversight.

Q. What are the pros and cons of adopting job families?

A.It’s similar to broad-banding. It lets you put all similar-situated individuals into the same group, and pay the lowest level the minimum amount within that band, and the highest performer gets the maximum. But everyone is in the same family. It gives a lot of latitude to pay top performers more and create an expectation of performance. But you have to train the managers on the whole idea behind it.

Setting Pay Rates

Q. We have an old pay grade system that I’ve inherited as the new HR manager. I’m trying to upgrade. I can’t assume that it was created correctly. However, since this is what I have to start with, how do I integrate new jobs into it? Should I take existing salaries and insert new ones into the levels? What risks am I running?

A.You might want to see if there’s any interest in starting over with a new system. You could also see if there is a consultant or someone within your organization to discuss this with. Once you start changing pay, you can create real havoc. I would suggest considering these things, but start with the basics. What is the job worth (internally and externally)? They don’t have to be slotted into the existing system if it doesn’t fit. You could do that, but you don’t have to. See what the appetite is for change.

Q. If an HR consultant works for a company with 25 employees, but serves other external clients with 1,000 employees, should the consultant be paid based on the employer size or the client size?

A.In the banking industry, it’s called asset size. You’ll generally get paid a little bit more at a bigger company.

In general, there are many reasons behind compensation decisions. You might see that larger companies have a compensation person who buys those surveys and knows how to crunch those numbers. Maybe the job wasn’t ranked right, or maybe the competitor pays more for being a larger company or maybe they base their pay ranges on something that keeps them even across the board. Or maybe they want to be the pay leader. Any or all of those things can lead to questionable pay differences.

But really, what you really have to look at is what the job does, not what the job title is. It all starts with internal equity. Sometimes titles are inflated. Comparison data can also be misleading because you don’t know the sample size, the location (even same state varies widely), nor the age of the data.

When you talk about money, money is just as a reward system. It has nothing to do with the value of the people involved. That’s the way you ought to approach it. Consider all the factors that should contribute to the price. The reality is that if you have a rational system, then the people who really do deserve the money (who are underpaid and/or overperforming) will get the money.

For more information on creating appropriate pay structures, order the webinar recording of “Pay Grades and Job Value: How to Correctly Assemble All the Pieces of the Compensation Puzzle.” To register for a future webinar, visit http://store.blr.com/events/webinars.

Teri Morning, MBA, MS, SPHR, SPHR-CA, is the president of her own HR consulting firm. She has over 15 years human resource and training experience in a variety of professional fields, including retail, distribution, architectural, engineering, consulting, manufacturing (union), public sector and both profit and non-profit company structures.