How much should employees be paid? It’s one of the most important decisions an organization has to make.
The answer is critical to an organization’s success. The pay package has to be enticing enough to attract top-quality employees in a competitive market, motivate them to perform and keep them growing rather than moving on to greener pastures.
But you also have to make sure you’re not sweetening the pot too much, given that labour is typically the most costly line item for most employers. So how do you strike the right balance? Structure is the key.
Rather than administer a unique salary range for each job, almost every mid- and large-sized organization groups jobs into some sort of grade structure, and administers common salary ranges for all jobs of the same grade. Hundreds of distinct jobs can be combined into a more manageable number of perhaps 10 to 12 common salary ranges.
The most common method of grouping jobs is to use an evaluation approach that measures work on the basis of skill, effort, responsibility, working conditions and other factors. One Hay Group method, for example, gives point values for various components of each distinct job, and the points can be used to group jobs into appropriate salary ranges.
Point spans that vary by less than 15 per cent from the bottom to the top of a structure are typically referred to as narrow grades. Point spans that vary by 15 per cent to 25 per cent are standard grades and those that vary by 25 per cent to 45 per cent are broad bands. Standard grades are the most common structure for grouping jobs.
No matter which salary grade you prefer, there are advantages to having some kind of structure as opposed to no structure at all:
•Administering a few salary ranges is much easier than managing hundreds of job-specific salary ranges.
•A structured approach to internal equity allows an organization to explain how and why it rates and ranks all of its jobs.
•An adequate number of jobs within each grade allows an employer to properly establish comparable levels of pay in the marketplace.
•The points used to measure job content can also be used to conduct pay equity assessments, which are required in many Canadian jurisdictions.
•The points and structure outcomes can identify disparities and provide career development insights.
The ideal salary structure for any given organization is influenced by two primary factors: the typical trade-off between the flexibility of career mobility (easiest with broad bands, hardest with narrow grades); and overall salary costs (highest with broad bands, lowest with narrow grades).
No matter what your salary grade preference is, there are three basic steps to establish a structure:
Prepare proper documentation: Jobs need to be properly documented so all stakeholders are aware of the relevant content factors for each job. Proper job documents have significant benefits to employees and employers that go well beyond supporting the salary grading structure.
Evaluate all jobs: A process to convert the content of each job into point values is required. Once all jobs have point scores, they can be structured into the grade structure of your choice.
Establish grade structure: Select the structure — narrow grades, standard grades or broad bands — that is most appropriate to the organization. Different structures can be tested using relatively simple electronic support tools until the model is found that best fits the expectations of various stakeholders, as well as the structure and work culture of the organization.
How to price the grade structure
Once the jobs that fall within each grade are known, a salary range can be established for each grade. This process is based in part on compiling research on pay levels for comparable jobs in comparative organizations in the marketplace, and determining how competitive with these levels the organization wants to be with its own pay standards.
Market-pricing experts can assist with this data-driven phase to ensure you are paying enough to attract, retain and motivate personnel — but not overspending.
One way to begin is by selecting the jobs, or job content points, that best reflect the inventory of jobs in each grade. Those jobs or job points can be priced to the market using a variety of database sources. The market pricing decisions include:
•Which sector should form the comparator group? Who are the competitors for talent?
•How aggressive should pay standards be set relative to the comparator market? How competitive are current pay values to those of the market? What would the cost be to change the pay standards?
•How wide should salary ranges be set? What is the capability to recognize and reward inferior or superior performance in order to differentiate incumbent pay?
•What are the pay principles of the decision-makers, including senior executives, parent ownership and boards of directors?
It’s important to remember there are multiple ways to customize each of the above phases to reflect your own circumstances. Practitioners should ensure all of the elements of their total reward package align with the business realities of their own organization.
Karl Aboud is director of the reward consulting practice at Hay Group in Toronto. He can be reached at (416) 815-6410 or email@example.com.