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How Your Pay Structure Can Make or Break Your Culture

The last time you took a look at your company’s reviews online, did you notice any entries where someone put down “pay” as a “con” of working at your company? How many alumni have mentioned that they would not recommend your company because of pay? 

Whether you have a pay perception issue you want to fix, or simply want to maintain high employee satisfaction around pay, we bet there are at least a couple of things you can do to help your employees feel better about their pay.

PayScale research found that only one in five employees feel like they’re fairly paid. When we asked employees about their organization’s pay process, just 24 percent of employees said that their company’s pay processes are transparent. Employers (HR and comp pros) don’t feel much better either; just 30 percent of employers said that their company has transparent pay processes.

How do you build trust with employees and managers around compensation?

With the advent of HR technology, one of the easiest ways to do so is to stop using the traditional pay structure with broad-based ranges and, instead, implement job-based ranges (one range for each position).

Shortcomings of a Grade-Based Pay Structure

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Photo by Ramin Khatibi on Unsplash

The grade-based compensation structure has been around for a long time. It involves setting up multiple levels and fairly broad ranges for each level. Each position is slotted into a certain level based on the scope of the role, level of authority, skills required to perform the role and tenure.

In the last few years, many PayScale customers have told us that they’ve moved away from this pay structure, because it created a host of cultural issues and unnecessary roadblocks on their path towards greater pay transparency.

According to customers, a grade-based pay structure created “grade envy,” confusion among managers and employees about the market value of their positions and unnecessary tension between HR and hiring managers around whether a job is priced “right.” HR and hiring managers had to engage in multiple, back-and-forth conversations before they could reach agreement on the price / range / grade for a role, which slowed down the hiring process and internal transfers.  

Ultimately, these organizations decided to implement job-based ranges because they felt it was time to reveal all of the details on compensation — to bring managers into the pay process and make sure that every employee understands how they’re paid and why they’re paid the way they are.  

AEG: Pay Grades Created “Grade Envy”

American Enterprise Group, Inc. (AEG), has seven insurance company subsidiaries under the American Republic®, Great Western® and Medico® brands. These companies distribute Medicare supplement, dental, hospital indemnity, short-term care, critical illness, pre-need and final expense insurance products through various distribution channels and are licensed in 49 states plus the District of Columbia. American Enterprise is based in Des Moines, IA and employs approximately 500 people in their Des Moines, Iowa; Omaha, Nebraska; and Ogden, Utah, offices.

Dana_king_AEGAccording to Dana King, HR Business Partner at AEG, the company decided to ditch grade-based pay ranges because she was tired of having repetitive conversations with hiring managers about why a position is in grade X instead of grade Y.  

Dana finally realized that using pay grades contributed to “grade envy.” In this structure, dozens of different jobs were assigned to the same pay grade, even though there are often significant differences between these jobs. Employees who heard the explanation, “Your job is assigned to grade X because of factors A, B and C” weren’t satisfied with the answers they got. Employees would ask HR, “How do I move up”?

At the end of the day, what Dana and the executives want most is to make sure that every person was truly paid competitively for all the skills and talents they bring to the organization.

When AEG switched to job-based ranges, it became easier for HR to go to the hiring manager and explain how they priced a position. Now, Dana is able to say, “The market data for this job is X, Y, Z,” rather than just saying it’s assigned to Grade X. This saves both parties from coming back and having a conversation around why a job is assigned to Grade X, when the market data is saying it should be somewhere else.

PayScale: “Job-Based Ranges Help Us Communicate the Context Around Pay Decisions”

Brian Webber is PayScale’s in-house compensation expert. According to Brian, the biggest reason why PayScale uses job-based ranges is because it empowers the company to clearly communicate pay decisions to employees:

Here at PayScale, employees want a lot of information about how pay decisions are made. They crave context, to know things like the range for their role, where they are in the range and why, how they can move up in the range, and how is the market is trending for their role. For us, job-based ranges allow for more context than pay grades.

At PayScale, we have decided it’s important to give employees all this information about their pay. We think it’s best for both employees and the business if our employees are able to have transparent, fact-based conversations about pay and/or career development with their manager whenever they think it’s merited.

Job-Based Ranges Are Now Available In MarketPay and Insight Lab

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 these products, 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? Request a demo.

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