Max Pay, Hybrids, and Compression: Navigating 3 Tricky Scenarios

Seasoned HR pros know that there are times when compensation is anything but simple. However, there are ways to navigate these tricky waters. Here are three such scenarios, with tips for successfully addressing them from Barry L. Brown, SPHR, CCP.

Brown, who is a principal at Effective Resources, Inc., provided his insights during a recent webinar presented by BLR® and HR Hero®.

1. Employees at the Max Pay Range

Sometimes an employee will reach the maximum that they can earn in their job’s pay range, says Brown. Some possible causes of this problem include:

• Out-of-date pay ranges. Typically, official pay ranges should be updated every 2 years—3 at most. However, Brown recommends keeping your market research updated every year in order to have the best information on hand.
• Hiring too high in the range. Brown stresses to companies that they should hire the best people they can afford, not necessarily the best they can find! Consider establishing a “hiring range” before your applicant search—not less than the minimum of the pay range and (more importantly) not more than the lowest-paid competent performer.
• Poor pay practices. Some businesses are used to just granting everybody the same merit raise, even if they’re over midpoint. The solution is simple, says Brown—grant smaller merit increases beyond the midpoint.
• You’ve found a true superstar. Some great employees just rise through the pay range quickly because their performance merits it.

Do NOT feel obligated to “do something” in this situation, says Brown. If you’re up to date with market rates, an employee at max is probably already making 20% above market. A common mistake is creating a fictitious job (i.e., a meaningless new title). Instead, ask yourself if this employee’s skills and performance are really worth significantly more than market, says Brown.

Here are some of Brown’s suggestions to address max pay:

• Define and communicate what the max rate means—it’s simply the most the company is willing to pay for a given job.
• If you truly have superstars, promote them or create a job just for them. Yes, Brown warned against fictitious jobs, but this is JUST for the superstar, and the job is not merely created because he or she is at max—it will have real additional responsibilities. Communicate that this job is only for THAT individual … and the job will go away should the employee leave.
• Update the pay structure, if needed.
• Consider granting lump sum merits in lieu of changing the base rate.
• Consider providing more PTO instead of more money.

One key point, says Brown—let the market (and pay structure) catch up to the employees at max. Stick by your compensation philosophy, and don’t have kneejerk reactions.

Need to revisit your outdated comp policies? Start on Tuesday, March 10, 2015, with a new interactive webinar, The DIY Compensation Makeover: How to Primp, Plump & Prioritize Your Compensation-Based Initiatives. Learn More

2. Hybrid Positions

A hybrid position occurs when an employee is performing two or more distinct jobs (e.g., HR Manager and IT Director). It often happens when an unexpected vacancy occurs, and is not uncommon in small organizations.

Brown suggests using a “blended” rate for hybrids (or, if the situation is short-term, consider a one-time bonus instead). This is simply taking the market rate for each of the roles performed, determine partial rates based on the percentage of time spent in that role, and then add these into a total hybrid rate, like so:

The pros of this system are that it:

• Recognizes a fair rate for multiple roles.
• Provides a logical basis for salary changes as the market moves.
• Provides some defense in legal challenge.

However, the cons are:

• The system takes time to research and maintain.
• Roles may change without your knowledge.
• It’s often hard to estimate time in each role.

Don’t go crazy trying to itemize each role, says Brown. If a given role falls below 25% to 30% of a hybrid position’s time, consider it just “part of the job.” When using blended rates, ensure the manager(s) understands the process—and so does the employee.

Get your pay ranges on target! Join us March 10, 2015, for a new interactive webinar, The DIY Compensation Makeover: How to Primp, Plump & Prioritize Your Compensation-Based Initiatives. Earn 1.5 hours in HRCI Recertification Credit. Register Now

3. Pay Compression

Pay compression occurs when one employee is suddenly earning close to or more than another. It can happen as a result of:

• A new hire;
• A promotion; or
• A significant change in the minimum pay range due to company redesign, updates to an out-of-date pay structure, or new state or federal mandates.

There’s only one way to fix it, says Brown, and that is to put money on the table. To eliminate wage compression completely:

• When a vacancy occurs, immediately create a “hiring range” as described above: not less than the minimum pay range and not more than the lowest paid competent performer.
• Use the same philosophy for promotions and adjust pay of incumbents as needed.

Adjusting for pay compression may sound like it will take a lot of time and therefore money. Remind executives that fixing compression is less expensive than lawsuits from employees unhappy with compensation, says Brown.

In tomorrow’s Advisor, how to pay the “truly unique” employee, plus an introduction to the timely webinar, The DIY Compensation Makeover: How to Primp, Plump & Prioritize Your Compensation-Based Initiatives.