What is Broadbanding in Compensation?
Broadbanding is the term applied to having extremely wide salary bands, much more encompassing than with traditional salary structures. Whereas a typical salary band has a 40 percent difference in pay between its minimum and maximum, broadbanding would typically have a 100 percent difference. Most of the time, creating enormously large bands is done as a measure to support a restructuring. It combines and consolidates the number of levels or job grades. This article will discuss the advantages of broadbanding in an overall compensation strategy, as well as the disadvantages.
The Advantages of Broadbanding
Sometimes an organization has become too hierarchical for the strategic direction of the company; finding it has become too slow to react, taking too much time to get information from the top down and even less effective at getting messages from the lower rungs up to the ears of senior management. Broadbanding reduces the number of levels or layers within a company. This is the best face-saving way for an organization to collapse salary ranges and supporting de-layering. This flattens an organizational structure and reduces the hierarchy.
Facilitates Internal Movement
Whether we like it or not, some great person-to-job matches just do not happen because of the way a job has been classified or positioned with an assigned salary band. If that new position is not a lateral or at a higher rung, most rational people will not seriously consider a transfer that results in a demotion. That is just not a positive step for their career development. With broadbanding, more internal movement is facilitated, because the probability increases that one’s current job and alternate position are within the same enormous range of pay. This makes pay take a back seat and puts forward other attributes of a position, encouraging internal mobility and potentially more developmental assignments.
Puts Added Trust in Managment
With broadbanding, managers have great latitude to pay what they want to an employee. This absolutely can reduce the push-pull between the hiring manager and the human resources organization. Now the issue of pay shifts to the control of the hiring manager and the challenge of “Does one have enough money in the current budget?” or not. The perception of HR as a regulating gate keeper to preserve the salary structure diminishes. Managers are entrusted with greater autonomy.
The Disadvantages of Broadbanding
No Awareness of External Market Rates
Traditional salary structures, when done right, give current information to your management team about what market rates are. With broadbanding, if a manager wants to pay at the market midpoint, they are left baffled and guessing. There is no midpoint in a broad band. That also means the compa-ratio tool can not be used.
May Lead to Inequities
Broadbanding’s flexibility and trust in management may or may not be warranted. In a broadbanding system, it is relatively easy to have two people with the same responsibilities have earnings that are thousands and thousands of dollars apart. Broadbanding weakens the linkage between salary growth and skill development for the next higher-level, since it is so far off as to not be a motivator. Do you want supervisors and their direct reports in the same pay band? That can easily happen with broadbanding.
It only takes a few reckless managers rewarding a few individuals inappropriately to have an entire pay system called into question. Whether your pay system is fair or not fair is not quite as important as if it is perceived as fair. If your pay system is perceived as not fair, you could see an increase in EEOC complaints. Did you know the Department of Labor added 700 additional auditors after the passage of the Lilly Ledbetter Equal Pay Act in 2009? People don’t call and ask for an audit when they believe their conditions are fair.
Lack of Cost Controls
It certainly may call into question why have salary bands at all if they are so wide. You need to evaluate if your other cost control training and measures are strong enough to hand over this much authority and autonomy to your managers. Moving to broadbanding may require thinking through other incentives that had previously been tied to salary grades, such as bonuses or stock.
In my opinion the absolute worst thing about broadbanding is the severe reduction in opportunities for promotions. Fewer salary bands lead to fewer opportunities to climb to the next band; meaning fewer promotions to celebrate with family and friends. Think seriously before you minimize this great motivational tool. If you are committed to moving to broadbanding, yet this is of concern to you, keep an eye on your turnover rates and conduct exit interviews to monitor the pulse of why your talent is moving to your competitors.
It is your call whether broadbanding is a tool for use in your organization or not. Broadbanding is a very effective tool to reduce salary grades or job classifications, but it definitely has its drawbacks.
Beverly Dance, MBA, SPHR-CA, CCP, CEBS
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