In our never-ending quest to keep human resource and compensation managers informed and educated about compensation best practices, here is our second part in our two-part series on Building Salary Ranges for Beginners. Enjoy!
Let’s get down to business – developing salary ranges
Once you have your salary market data, you can proceed with developing salary ranges. A pay range is the upper and lower bounds of compensation, which include a range minimum, midpoint, and maximum. The range midpoint should align to the market data for the job in that range. The range minimum and maximum should be set equidistant from that midpoint.
For more detailed information on building a pay structure, see our blog post Determining Salary Range Widths by Profession, or request a free demo of our software and partner with a PayScale CCP, who can help with the design of your pay ranges.
Implementing Pay Ranges
So you’ve gathered market data and developed ranges based on the results. Now what? Before you roll-out any compensation changes, it’s a good idea to compare your employees’ current pay against the proposed salary ranges. Doing so will highlight any large discrepancies that may need more attention – market data that is well above or below incumbent pay could indicate a need to reevaluate your job benchmark. In addition, analyzing your new ranges against internal pay will reveal whether you have any employees who fall below the minimum of the range (green-circled) or above the maximum of the range (red-circled).
If you find you have employees paid outside of their range then you will need to think through how you plan to address these situations before implementing the ranges.
• Strategies for Green-Circled Employees: Depending on the number of employees below range, you may want to consider raising their base pay to at least the range minimum, provided they’re performing well in their job. If the cost is too great to provide at-once sweeping increases, consider providing tiered increases over the next few budget cycles to bring those employees in range. When budgeting, make sure you allocate a bit more for the employees below range.
• Strategies for Red-Circled Employees: If you find you have a number of employees falling above their range maximum, consider what might be causing the overpayment. Do you have a very tenured workforce? Have employees received a standard 3% raise year-over-year regardless of performance? These situations can often lead to a significant amount of overpayment, which can make implementing your pay ranges challenging.
One commonly used strategy is to freeze base pay for red-circled employees and offer performance-based bonuses. Taking that approach will continue to incentivize your top performers in this group and potentially weed out any employees who are just “dialing it in.” If freezing base pay is too controversial, especially when rolling out a new pay structure, another option is to budget for smaller increases for employees high in range. Limiting raises at the top will free up money to be spent on employees below the range (if any).
Preparation is key when rolling out a compensation plan, especially if you need executive approval to move forward. If you are not able to explain how you plan to address your outliers, your leadership team may be hesitant to employ the ranges you created. Worse, it could sour their perception of the benefit of a compensation plan, which will make implementing ranges at any point a challenge.
Support for the New Salary Plan
You’ve worked hard to get to here – you’ve conducted a market study, built pay ranges, and developed an implementation strategy. As hinted at above, without executive approval, all that work may be for nothing if the leadership team doesn’t support the endeavor. Set yourself up for success by communicating with executives from the start of the project – provide periodic updates and analysis that will help them link pay ranges to achieving business objectives. Explain how salary ranges ensure pay is market competitive, which can help reduce turnover and improve recruitment efforts.
In addition, as you get ready to roll-out your new pay structure, consider how transparent you plan to be regarding your pay ranges. Workforce demographics are shifting and newer generations expect an explanation on why they’re paid what they’re paid.
Push your company to consider sharing more with employees about the compensation plan. PayScale studies show that doing so can help foster employee confidence in the leadership team and improve employee engagement/satisfaction. Also, consider what information or training your managers may need in order to champion pay ranges to their employees. The more managers advocate for the compensation plan, the higher likelihood it will succeed.
What do you think?
We’d love to hear about your experience with building salary ranges at your organization, and any challenges you face. Please post your thoughts and questions here!