Psst… check out this post about other considerations when managing employee pay using pay ranges.
Options For Handling Outliers
You’ve just finished benchmarking all your jobs. You’ve established some ranges for your positions. Maybe you even have a structure, with grades, to which you’ve assigned each position. You’re ahead of the game, with most of your work is behind you, right? Well, yes and no. Inevitably some employees will fall below your range, and some may fall above. Now it’s time to manage employee pay based on the ranges you’ve developed.
Employees Within Range
The best scenario is that your employees fall within range. When this happens, you still have a number of choices to make, but they tend to be among good options. Ideally, in a work culture that increasingly favors pay-for-performance options, your ongoing compensation management will account for both the market value of jobs and employee performance. What else does your company want to reward with its not-limitless compensation budget?
Employees Below the Range
When your employees fall below the range, or are what we call “green circled,” you have a number of options for managing their pay. Generally, green-circle employees are a challenge to manage because they have a high budgetary impact.
Option 1: Outlier Minimization – Bring all employees who are not at minimum to the minimum of the pay range. No discretion is given to managers. Choose this method when your organization has a strong commitment to correcting outliers in your compensation plan. In the long term, employees will get raises when the market shifts.
Option 2: Market-based Pay – Allocate increases based solely on where employees are in their range (which is alignment with the market). For example if you are farther behind the market you may get a 6% increase, but if you are above the market rate you get a 2% increase. Little discretion is given to managers. Select this method when your organization has a strong commitment to compensating staff based on the going market rate for their positions. In the long term, employees will get raises when the market shifts.
Option 3: Market & Performance-based Pay – Allocate increases based on both employees’ placement within the range and performance. For example, a star performer who is lower in the range may get an 8% increase, while a star performer who is high in the range may get a 6% increase. Pick this method if your organization has both a commitment to paying relative to the market and also to rewarding top performers. In the long term, high performers have higher salaries and moderate performers’ salaries will shift as the market shifts.
Employees Above the Range
Employees whose pay falls above the range, or what we call “red-circled,” present their own set of challenges for the organization. Often, managing red-circled employees requires setting very clear expectations and having the hard conversations with employees. Again, you have a number of options for managing red-circle pay.
Option A: Do Nothing – Continue to give increases to employees, even if they fall over the top of the pay range. This method is best in situations where it is acceptable for outliers to fall above the range, and if the risk that they will leave the organization outweighs the cost.
Option B: Set Increases by Position in Range – Continue to allocate increases to outliers falling above the range, but give a smaller percentage than to those in or below the range. This is similar to option 2 above. This approach has less risk of turnover of red outliers than the following options.
Option C: Freeze Base Pay and Offer Performance-based Bonuses – Discontinue base-pay increases for red outliers, until the market catches up. Offer clear incentives for a lump-sum performance-based bonus to be delivered at appropriate intervals. Reward only the top performers among the red outliers. This method is for organizations which have a commitment to paying relative to the market and to rewarding top performers. This option carries some risk of turnover among red outliers, especially among underperformers – which may be ok.
Option D: Freeze Base Pay – Discontinue base pay increases for red outliers until the market catches up. This more restrictive version of Option C brings a moderate to high risk of turnover among red outliers – including the top performers.
Option E: Decrease Base Pay – Decrease base pay for red outliers to the maximum of the range. Increases will happen only when the market moves. This option is for organizations with a strong commitment to internal equity and market-based pay. This option entails a very high risk of turnover among red outliers, especially top performers. As such, this is the option that isn’t really an option.
Whichever implementation option you select for your organization, remember that it is essential to apply it fairly and consistently across the organization. It would be unfortunate to do all this work only to open yourself up to litigation in the 11th hour. Make a policy decision and stick to it.
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