How to Set Typical Salary Ranges for Your Organization
In our business here at PayScale, we work with a lot companies who have reached the point where it’s time to establish a formal compensation program. They come to us with lots of questions about how this is done and where they should start in determining typical salary ranges. So, how do you know if it’s time to create formal salary ranges at your organization?
When To Establish Formal Salary Ranges
Usually you realize you need to set formal salary ranges when one of these scenarios comes along:
Scenarios Where Formal Salary Ranges Are Needed
- An employee comes to you with a ransom job offer from down the street.
- A hiring manager insists on paying a new hire $10,000 above the salary market rate because “they must have this individual.”
- You have a gut feeling that the company does not have equity among your employees when it comes to compensation.
In every one of these scenarios, the need for a formal salary range is clear. Typical salary ranges are created from anchoring a midpoint to salary market data. The salary market data that you choose should reflect your compensation philosophy which will include among other things: your industry, geography and company size. Your salary market data should also be based on your company’s philosophy towards cash compensation. Do you want to lag the salary market, lead the salary market or meet the salary market?
Getting Market Data on Salary Ranges
Once you have established your company’s compensation philosophy, then it’s time to select a source for your salary market data. There are generally three sources of this information:
Sources of Salary Market Data
- Published, Traditional Surveys – These come from the government, associations or consulting firms and offer a broad perspective, though they may not be entirely up-to-date or match your organization’s structure, location or size.
- Internet Surveys – Since the advent of Web 2.0, there are now online resources that offer self-reported salary data from employees. These sources are very timely, easy-to-use and inexpensive options for comparison. PayScale is an example of this sort of online tool.
- Custom Surveys – Several firms are available who can custom design a survey just for your business. These types of surveys are often very accurate and very expensive.
Ideally, you’ll want to have at least two sources to work from to guarantee the accuracy of your results.
Once you have salary market data to use, you can create formal salary ranges. In a future blog post, we’ll describe the process of determining salary range widths. For purposes of this post, we’ll finish by talking about some important analysis that should be done once you have established your formal salary ranges.
Applying Your Formal Salary Ranges
Once you have created formal salary ranges, you want to make sure that you compare your employees’ or incumbents’ pay against the typical salary range. Most importantly, you will want to determine if you have any employees who fall below the minimum of the salary range (called green-circling) or over the maximum of the salary range (called red-circling). If you do have this situation, you’ll want to include an implementation plan for how to deal with the employees that fall outside of your typical salary range.
It may be necessary and advisable to bring any employee below the minimum of the salary range up to the range minimum, unless there are justifiable, business reasons why the person is below the minimum. Second, you may want to consider implementing a red-circle policy for freezing the salaries of those individuals who are over the top of the typical salary range, until the salary market catches up with them. Being prepared to deal with these implementation issues will be crucial in getting buy-in to create formal salary ranges. Without addressing these compensation issues, your business leaders may feel uncomfortable with moving forward.
Getting Whole Company Support of Formal Salary Ranges
Once you have a formal salary range system developed, you can ensure success by getting the proper buy-in from business leaders, and communicating effectively with employees about the reasons for creating the compensation system. Buy-in and communication will always be key when undertaking a project of this nature.
Good luck in your efforts to create a formal salary range system.
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Director of Customer Service and Education at PayScale.com