How to Establish Salary Ranges

How to control payroll costs and pay fairly v2

HR leaders and CFOs don’t always work together but when your company starts to establish pay ranges, it’s important that they do.

Keeping pay ranges accurate and updated is one of the most important drivers of recruiting and retention, so if you haven’t assessed how you’re paying your employees in a while, now’s the time to start.

How to Establish Pay

By using salary ranges, you can more easily control your payroll costs, as well as ensure that you’re paying your employees equally and fairly. Here’s how to do it:

1. Figure out if you want to lead, lag, or match

You can either lead, lag or match the market when it comes to compensation. When you’re a market leader, top talent will view your company as a popular one (but, don’t forget, you need the culture to support the salary to become an employer of choice.) If you decide you just want to match the market, you’ll simply pay the same as your competitors. If you’re lagging, it’s probably not intentional. At least it shouldn’t be. Being a laggard in your industry is usually discovered when you’re conducting an exercise like this with your finance team.

2. Review your job descriptions

Analyze every job description to determine whether they’re accurate. This can be a tedious process, but it’s important to work with managers and employees to find out what their day-to-day is really like. An efficient way to do this is to conduct online surveys and ask the employees to define all aspects of their jobs. Then you can build official descriptions based on similar roles within the company.

3. Group like jobs together

Once you have updated job descriptions, you should assign similar jobs to larger buckets. For example, most organizations have administrative, finance, IT, marketing, sales, and executive functions.

4. Rank your jobs

Evaluate each job and rank them by relative worth and responsibility level. You’ll find three basic types of job classification:

  • Ranking – The ranking method categorizes job roles based on the overall value and complexity within your organization.
  • Points – The points method is more complex and uses a pre-determined scale (e.g., 1-10) of the importance of key job elements. Each element might have sub-elements. “Experience,” for instance, could include years worked in the field, education and training. Jobs are then scored based on the total number of points, from highest to lowest, and pay ranges are assigned accordingly.
  • Classification – This system categorizes comparable job content and value. Category examples can include executive, managerial, skilled and semi-skilled labor. This method works well for larger organizations and puts jobs of the same class into similar compensation packages.

5. Conduct Market Research

Use a compa-ratio to determine which employees are being paid below or above the average for their pay range. Market research helps ensure that salaries paid to employees are comparable to similar positions in the marketplace. The U.S. Bureau of Labor Statistics is a great place to start your research. Remember, it’s important to make sure that you’re comparing apples to apples when you’re in this phase. The tasks, functions and level of responsibility should closely match. Whenever possible, gather data from multiple sources to ensure you’re getting the best salary picture.

6. Create Pay Grades

You can either use your job evaluation data to group positions within each job family into grades or you can use the market data that you gathered and group positions by similar salary survey data. Note the salary highs and lows and determine if you want to meet the market (the midpoint salaries) or lead the market, in which case you’ll start your salaries above the 50th percentile.

Next, group positions with similar market salaries together and classify them as the same pay grade. A small business might have only three or four pay grades. Large enterprises can have dozens.

7. Create Salary Ranges

For each pay grade, you’ll need to determine a minimum, a midpoint, and a maximum pay range. There are no hard and fast rules for creating these. A traditional salary range is commonly 30-40%. If you use the midpoint salary as your base, to get the maximum salary multiply it by 1.15 for the 30% range (1.2 for 40%). The minimum is the midpoint multiplied by .85 (.8 for 40%).

8. Make Adjustments for Existing Employees

When you compare the salaries of your current employees to the salary ranges your established, it’s inevitable that you’ll discover that some people are paid more or less than their salary ranges dictate. If an employee’s pay is above the top of his salary range you can handle it a few different ways: - When it’s time for raises, provide a bonus instead. That way, you’re not raising the base salary even higher. - Consider promoting the employee up to the next pay grade. - Make the employee ineligible for future increases, or lower the base pay. While you can do this, we don’t recommend that you do because it can have a negative impact on morale and engagement.

When you have the opposite problem and some employees aren’t even at the bottom of their salary ranges, you have the option to increase their pay to at least the minimum.

9. Monitor and Update

Your work isn’t done yet! Salaries always fluctuate, so it’s important to ensure you continue to monitor the market. This doesn’t mean you have to conduct market surveys every year, but if there are significant economic changes, it likely will be worth an evaluation. Again, the Bureau of Labor Statistics is a good go-to that will help you stay ahead of the curve.

Looking for more suggestions on how to better manage employee hours and labor expenses across your organization? Visit the HR Center of Excellence Labor Costs Hub.

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