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Is Your Compensation Plan Agile Enough?

Topics: Comp Strategy

Many forces are coming together to accelerate the pace of change in the workplace. For one, employers have lost their power. We’re now in an employee’s market where organizations fight tooth and nail to get top talent. Thanks to the rise of salary information sites, employees know how much they’re worth in the market and they’re not afraid to demand a fair wage.

Meanwhile, the makeup of the workforce is shifting; by 2025, Millennials will make up 75 percent of the global workforce (Catalyst). This generation has a different set of preferences about how they engage with their employers vs. previous generations, and will inevitably reshape what’s important in corporate culture. Additionally, technology has made it easy for workers to work from anywhere and for organizations to hire talent globally and on-demand.

Due to all these factors, it’s now more important than ever for organizations to adapt an agile compensation strategy that keeps up with the pace of change. Is your compensation plan more like an ocean liner or a speed boat?  

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RMS Queen Mary, pictured during her service days, is now a floating museum in Long Beach, California – and one of the last surviving Atlantic liners. Source: Wikipedia 

What does an agile compensation strategy look like?

An agile compensation system has the following characteristics:

  1. It allows you to quickly react to market shifts (competitive forces) by minimizing dependencies and the number of approvals required.   
  2. It gives you the ability to dial up or dial down comp spend as business needs change (e.g. when you need to address high attrition in your sales department).
  3. It allows you to continually meet the needs and preferences of your workforce as the makeup of your employee population shifts over time.  

Rigid Structures: The Enemy of Agile

While traditional grade-based structures have long been the expected norm for administering base pay, many organizations are now recognizing the limitations and complications these create.

A grade-based pay structure works like this: typically, a committee within HR decides on a certain number of grades or levels to cover all jobs (e.g. 10, 20, 24) and then slots each job into a grade. The pay grade is generally defined by the level of responsibilities performed within the position, the amount of relevant experience required for the role, the authority exercised by the position, and the proficiency level of the employee in the role. For example, the CEO may be placed at level 14, a VP of Product is at level 12 and entry-level engineers (individual contributors) are level 4.

Pay grades could make pay administration less burdensome, when you have hundreds or thousands of positions to manage. Plus, pay grades can be a useful structure to rationalize pay when you can’t find market data to price a job. When this happens, you can use your best judgment to slot a job into a grade and use that grade to rationale the pay for the position.

Yet, at a time when the market is highly volatile, and the composition of the workforce is shifting quickly, using a grade-based structure can be limiting. Pay grades essentially add layers upon layers to the decision-making process. In an age where workers have many employment choices, pay grades can keep you from moving fast enough in order to win or retain top talent. Here are some examples of how pay grades can slow you down:  

1. Fast-moving, competitive jobs

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How much time are you spending pricing ad-hoc positions? What about debating with managers on how much to pay for a position? Is it more time than you want to spend?

Many of our customers have told us they spend way too much time putting out compensation fires. A common one is when a hiring manager comes to the compensation team and says that a position is priced way too low and that their employees are leaving because of pay.

This scenario seems to be happening more and more often. The reason is because the market is moving so quickly for in-demand, (often) technical positions. In fact, it’s not uncommon for us to see the market moving up by 10 or 15 percentage points in just six months for roles like software engineers or data scientists.

You might find yourself in a situation where the market has moved $20,000 for a position in just six or nine months. If you’re using pay grades, and you need to adjust someone’s pay by a significant amount, you’ll either need to 1) move someone to a higher pay grade, or 2) adjust your salary structure and re-do all of your ranges.

If you choose option one, you might run into problems where employees think the decision is unfair. For example, if you move individual-contributor engineers to the same grade as your Director of Finance, what will the Director of Finance think about this?

If you wait to adjust your salary structure, you probably have to wait until your next annual pay increase cycle to do so. Depending on how competitive a position is, waiting to make this change might mean losing top talent.

2. Brand-New Positions

Let’s say that you need to hire 10 new data engineers to staff your new e-commerce operation, and these are positions you’ve never had before. How do you determine what pay grade they belong in?

Of course, you can use a logical approach to find an appropriate pay grade for the position and then set a range (e.g. find other roles in the company that has a similar scope, and/or skills requirement, take the average pay of those roles). But the question is, will you feel confident that the pay is competitive?

3. Internal Movement

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Research shows that lack of sufficient development and growth opportunities is a major reason people quit their jobs. These days, many workers don’t have the desire to “move up the ladder” in a linear fashion. Younger workers put a high priority on learning and development; they prefer to move around in different roles and departments so that they can acquire new skills and gain broad exposure.

Let’s say that you use a grade-based structure. What happens if an employee is really excited about a new position, but switching to the new role would mean being in a lower pay grade? Would this discourage the employee from making the move because it feels like a demotion? Alternately, would you move that lower-level position into a higher pay grade to encourage the employee take the new role? If you did that, would it be a one time thing or would you make this a permanent move?  

You can skirt these this issue altogether when you use job-based ranges. When you price each position individually, it’s easy for employees to understand that the salary of the role is based on the market demand for the role. Then, they can make their own choices as to what makes sense for their career without worrying about the optics (e.g. whether a position is more “junior” or “senior” vs. another one).

How (and Why) PayScale Uses Job-Based Ranges

PayScale has about 450 employees in dozens of different states in the U.S. According to Brian Webber, PayScale’s in-house compensation expert, PayScale has used job-based ranges for years:

“It’s much easier to make competitive job offers and change pay with job-based ranges vs. pay grades. We’re headquartered in Seattle where we face a number of major competitors for tech talent (e.g. Amazon, Google, Microsoft), and the competition for technical roles is fierce. For these roles, it’s especially important that we’re very confident in our data, and in our ranges, so that we can make competitive offers. Job-based ranges allow us to understand the true market dynamics for every position, and quickly adjust pay to stay competitive with the market when the market moves. This helps us ensure we can hire the right talent and retain them.

Additionally, using job-based ranges help ensure that managers and employees have a good understanding of how we make pay decisions. We want employees to understand that their pay is informed by the market for their specific role, which considers the relevant skills and experiences needed for that role.”  

Job-Based Ranges Now Available in Insight Lab and Market Pay

At this point, creating ranges for each position no longer has to pose an administrative burden for compensation teams. Job-Based Ranges are now available to customers in both Insight Lab and MarketPay. In our platform, It is easy to select a set of your jobs (e.g. one job family or job function) and assign them to a specific job-based range model. This will allow you to validate your model and the values that come with a range. If it makes sense, you can create salary ranges for specific jobs — hot jobs or highly volatile jobs — and continue to use your existing grade structure for more common jobs.

Want to learn more about this feature? Watch this demo video, or get a personalized demo


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