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How to Avoid Overpaying (or Underpaying) Employees

Topics: Comp Strategy

For a long time, pay grades were the most common pay structure for midsize and large organizations (those with 500+ employees). But the times are changing; many of our customers have told us they’ve moved away from this pay structure because it’s not the best way to ensure they have the right pay for every position.

Because compensation is the largest expense for many organizations, it’s important that compensation teams maximize their investment. In order to do so, they need a level of precision in setting pay that ensures they are not overpaying staff or underpaying staff. Overpaying staff leads to wastes; on the other hand, underpaying staff poses risks like the loss of key talent, lower morale and reduced productivity.

Yet, the traditional grade-based compensation structure leaves organizations exposed to the risks of overpaying and underpaying employees.  

Grade Based Pay Structure: “We’re Creating False Ranges”

In the past few years, many organizations have moved away from a grade based pay structure (where each range is very broad) for this very reason.

Dana_king_AEGDana King, HR Business Partner at American Enterprise Group Inc. (AEG), told PayScale that her organization moved away from pay grades in order to ensure they are paying everyone competitively.  

“For years, I would have repetitive conversations with my leaders about why a job was placed in grade x, or grade y, why a job should be moved to a higher pay grade. After years of those types of conversations, I realized it doesn’t make sense to have broad ranges where each grade contains 50 odd jobs that have different market values. What we were doing was creating false ranges; these were keeping everyone from being able to understand the true competitive nature for a specific job in a specific location.”

Organizations like AEG have decided to use job-based or position-based ranges so that they can better understand the market value for each position and be more precise with their compensation spend. Essentially, each position would be evaluated on its own and would have an independently determined range. These ranges would be narrower in width than the ranges established in a grade-based structure.

New Data Sources Make Job Based Ranges Possible

In the past, implementing job-based ranges was very difficult because it required a level of sophistication to understand how these ranges are identified, a lot of data, and it carried an administrative burden.

Many organizations used a grade structure precisely because they didn’t have market data to be able to price all of their positions. In the absence of data, it made sense to use the grade to rationalize pay for a position. But data isn’t a problem anymore. Here at PayScale, we invest  ongoing effort into collecting data, cleaning data, validating data, curating data and making it natively available in our compensation platform, so that our customers can get pay right for each position.

PayScale offers three types of data out of the box in our platform – crowd-sourced, company-sourced, and Mercer – so that customers can increase their match rate and benchmark more positions. By using multiple sources of data, you can cover a wide range of locations and a whole spectrum of jobs.

Salary_data_sources

In fact, we found that the typical organization that uses just employer-submitted surveys can match around 50 percent of their positions to the market. But when organizations use crowd-sourced data and company-sourced data along with traditional employer-submitted surveys, they can match 75 percent of their positions to market data. Here at PayScale, we’re able to match 92 percent of all of our internal positions to market data. 

Technology eliminates the administrative burden of job-based ranges

Many organizations have told us that they want to implement ranges for individual positions, but it would take too much work. At this time, we’ve released features into our compensation platform that eliminate the administrative burden associated with job-based ranges. This feature gives comp teams the ability to set up job-specific pay ranges for either 1) a selected set of jobs or 2) for all positions. You can select a set of your jobs (e.g. one job family or job function) and assign them to a specific job-based range model. Then, you can quickly validate your model and the values that come with a range.

Job-based ranges is now available in MarketPay, and is coming soon to Insight Lab.

To learn more about how it works, sign up for a personalized demo. 

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