With the new year upon us, now is a good time to sit down and evaluate your pay grades, and pay-for-performance systems. Base pay grades aren’t a “set and forget” kind of thing. Employee salaries are fluid and always evolving. To remain competitive, base pay grades must be reviewed and adjusted periodically to keep track with changing economies, business climates and employees.
This is especially true as new job creation continues; more and more employees are looking to change jobs. To keep our best performers, pay needs to be in alignment, and there must be room for growth.
Is There Room for Growth in Your Pay Grade Structure?
How can you ensure there is room for salary growth in your pay grades? Room for growth is a key aspect to making the pay grade system work and be fair to the employees. If there is not room to grow, employees may be more tempted to leave.
Here are some guidelines to help ensure there is room for growth over the long term:
- Salary ranges should intentionally overlap from one grade to another in pay-for-performance or merit compensation systems. This overlap “provides the flexibility needed to address the dynamic changes in the environment and the market.” Jennifer Daniels explained in a recent BLR webinar.
It also allows for the salary of an experienced incumbent in a lower-level position to be the same as or more than the salary of an inexperienced incumbent in a higher-level position. This is not only acceptable, but it also allows ample career opportunities (both in terms of pay growth and promotions). - Make sure your base pay system has ranges that are not too wide and not too narrow. Extremely wide ranges, also known as “broad bands,” can make it difficult for managers to accurately place employees within a salary range, since there is such a wide berth of possibility and often little direction on where employees should fall within the broad band.
On the other hand, ranges that are too narrow can limit salary growth for employees that stay in the same position for more than a year or two. Ranges that begin at about a 30-40 percent range spread (the difference between the minimum and maximum salary within the range), and increase to 60-70 percent for upper management, provide enough spread for overlap from level to level, but also enough room to grow for employees as they increase their skills and performance.
Where Should an Employee be Placed within the Pay Range?
Even if you have appropriate pay grades in place, you still need to know where to place individual employees within the pay range for that grade. This can be determined in several ways, one of which is using a quartile system:
- First Quartile (from the minimum up to halfway to the midpoint of the range): The first quartile of the range is usually intended for individuals who are new to the grade, are in a learning situation, and/or do not have substantial experience in the new position.
- Second Quartile: The second quartile of the range is intended for employees who have gained experience and skill and who are becoming more proficient in the position for which they were hired. They generally meet expectations in their positions.
- Third Quartile: The third quartile is typically reserved for experienced employees who frequently exceed expectations.
- Fourth Quartile: The fourth quartile of the range is normally reserved for individuals who are consistently exceptional performers and who have extensive experience.
“Keep in mind that employees in the third and fourth quartiles will be above the targeted market point (the midpoint of the range), whether that midpoint is tied to the 50th percentile [in the market] or not.” Daniels noted. “Placement within range is based more on the individual incumbent, whereas which range they’re in should be based on the position.” Employee placement within the range will be based on experience and performance.
For more information on analyzing your pay grades and pay-for-performance systems, order the webinar recording of “Pay Grade Update: Retain Top Talent and Stay Market Competitive in 2013.” To register for a future webinar, visit http://catalog.blr.com/audio.
Jennifer Daniels is a Senior Consultant with Keating Advisors. She has experience in all aspects of total rewards strategy design and human resources projects implementation consulting. She has a proven track record in project management, conducting detailed compensation analysis, and developing pay-for-performance strategy.