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Human Resource professionals spend a great deal of time and effort developing suitable compensation structures that fill the requirements for their organization as well as meet the expectations of employees. However getting pay ranges nailed down can prove to be a real migraine, especially for larger organizations. Key questions that need to be asked during the development process include: How many grades are necessary? How wide should pay ranges be? And most importantly, how can I ensure that my ranges are aligned with the market? Once you have got all of that figured out, then the only question left is; where should you place your employees in each range?
Find the Starting Point
Regardless of what industry you work in, there are some general considerations that need to be taken into account prior to making any final decisions about where each employee belongs. For your entry-level positions you should determine whether you will have employees start with salaries above or below the 50th percentile. Also, make a decision about whether all new employees enter with the same salary for a position or if you will adjust starting offers on a case by case basis. And, what will determine if an employee moves up a range? Will you base promotions off of performance, the mastery of new skills? Or simply time spent with your company? Furthermore, how does movement within a pay range relate to the compensation philosophy and organizational values of your company? In addition to this, keep in mind bonuses and commission based pay. Some employees may have a lower base pay but earn more money based off their performance.
Working through these key factors when designing or revising a compensation plan is critical for many organizations that are seeking to create clearly defined pay ranges. For some companies, pay ranges may be plainly laid out, but there is still a blatant need for employee movement between ranges to be more regulated. Your company may prefer to create general guidelines that dictate how your employees will enter, move through, max out, and move up pay ranges. Alternatively, you may prefer to be specific and narrow your ranges down to a final percentage point. For example: employees receiving a promotion to a higher pay range will be entitled to an increase to the mid- point of the new range or a 12% salary increase, whichever is greater. Another strategy is to place a cap on the increase in pay an employee can be eligible for when they are in a certain pay range. This method saves you from overpaying employees while giving them incentive to work toward earning a salary at the top of their pay range. If you do opt to put a cap on pay, it may make sense to allow for additional earning potential for your top performing employees. Whatever method you choose, it is most important to be consistent with your employees.
The 50th Percentile Rule
To wrap things up, your organization should always shoot for paying employees at least at the 50th percentile of the market. When you establish a solid structure, and design your pay ranges around that target number, you can anticipate that your employees will easily slide into each range based on the criteria that you have laid out. Even if some employees may fall high or low in a pay range due to their work history, performance, skill-set, or time with your company, you will still be keeping your comp ranges within the 50th percentile of the market. If you find that the vast majority of your employees belong at one end or the other within a range and very few falls in the middle, then it is a likely indicator that you need to develop new training methods or examine the demands of the job. Another point to mention here is that if you are seeing a huge split between employees within a pay range then, you may need to consider creating multiple levels for the same job. It is not always easy creating salary ranges for employees, but doing so gives leaders and employees a clear cut way of marking starting salaries and advancement landmarks.