How to Build Pay Grades and Set Salary Ranges
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In today’s changing workforce, having a clearly defined career path is becoming critical for attracting and retaining top talent. Setting pay ranges and grades can give you a competitive advantage in an ever-changing market by enabling clear job progression as well as competitive pay. So how can you set your pay ranges just right? In this webinar we show you how to build ranges from a market-centered midpoint, and how to use market data to update or create market-based pay ranges. You’ll learn how to: Build pay structures from the ground up Choose benchmark positions and slot non-benchmark positions into your pay structure Adjust and align your structure for special internal considerations Create a strategy for dealing with “hot” jobs that fall outside of internal ranges
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How to Build Pay Grades and Set Salary Ranges
- 1. Presentation and certification info will be sent following this webinar.
- 2. www.payscale.com 14,000 Positions 3000 Customers 11 Countries 250 Compensable Factors 41 Million Salary Profiles
- 3. www.payscale.com Agenda Why have a Pay Structure Building Structure • Step 1: Identify pay schedules • Step 2: Determine pay grades • Step 3: Develop ranges • Step 4: Assign grades to positions & adjust for internal equity Using Pay Ranges Deviating from the Structure Immediate Actions www.payscale.com
- 4. Why have pay structure • Clarifies the market and internal value for each job, and provides a way to manage employee pay effectively • Quantifies compensation costs & enables budget decisions • Validates compensation strategy & aligns to business goals • Provides a tool to talk with employees about development • Ensures pay equity • Determines pay for non-benchmark jobs • Allows ease of administration www.payscale.com
- 5. Why not? • Small number of jobs • Quick-moving jobs • Typical organization • Just the facts! www.payscale.com
- 6. Requirements • Develop compensation philosophy & strategy • Know your jobs • Conduct market analysis • Know organizational priorities www.payscale.com
- 7. • Pay Schedules • Pay Grades • Pay Ranges Pay Structure Elements www.payscale.com
- 8. Building Structure Step 1: Identify Pay Schedules www.payscale.com
- 9. Identify Pay Schedules Ensures competitive pay to local market and internal alignment Consider Organizational Complexity • Industries and/or Lines of Business • Job Functions • Locations www.payscale.com
- 10. 6 Different Pay Schedules: o Home Schedule– 3 labor markets, within 2.5% of HQ o Schedule A, Minus 15% Schedule – 4 labor markets o Schedule B, Minus 10% Schedule – 7 labor markets o Schedule C, Minus 5% Schedule – 4 labor markets o Schedule D, Plus 5% Schedule – open o Schedule E, Plus 10% Schedule – 1 labor market For example…
- 11. Building Structure Step 2: Determine Pay Grades www.payscale.com
- 12. Determine Pay Grades Number of pay grades varies in response to: • Size of the organization • Distance between the highest and lowest level job • How differentiated the jobs are (i.e. levels) • The pay increase and promotion policy of the organization Determine the definition or label for each grade www.payscale.com
- 13. Building Structure Step 3: Develop Ranges www.payscale.com
- 14. Midpoint Differential. =(MidB-MidA)/MidA Range Spread. =(Max-Min)/Min Min relative to Mid. =Mid/(1+(Range Spread/2)) Max relative to Min. =Min*(1+Range Spread) Develop Ranges www.payscale.com
- 15. Considerations Range spread at base vs top of structure Overlap between pay ranges www.payscale.com
- 16. Building Structure Step 4: Assign grades to positions and adjust for internal alignment www.payscale.com
- 17. Align positions to structure by matching market value with closest range midpoint Assign Grades to Positions www.payscale.com
- 18. Adjust for Internal Alignment •Positions with similar level of responsibility and value to the organization •Where market data is between two grades, use internal equity to tip www.payscale.com
- 19. Example
- 20. How do you use pay ranges? • Understand employee placement in range • Develop guidelines or policies • Develop processes • Train your managers www.payscale.com
- 21. Understanding Range Penetration (RP) RP = (EE Pay – Range Min) / (Range Max - Range Min) • Indicator of how employee is positioned in the range • Use RP in policies to get specific www.payscale.com
- 22. Employee Placement in Range Range MidpointMinimum Maximum $20,000 $32,000 $26,000 Range Midpoint:Range Minimum: Range Maximum: Lower limit of a pay range/band. Pay for new or less experienced employees should be closer to minimum. The midpoint identifies the proficiency point. Market based ranges have a midpoint that aligns with the target percentile in the market. The upper limit of a pay range/band. Pay for more tenured employees or star performers should be approaching this number. www.payscale.com
- 23. Employee Placement in Range Range MidpointMinimum Maximum $20,000 $32,000 $26,000 Green-Circled Employees Red-Circled Employees Employees that are paid below the minimum of the pay range. Employees that are paid above the maximum of the pay range. www.payscale.com
- 24. Comparing Employee Pay to Ranges Range MidpointMinimum Maximum $20,000 $32,000 $26,000 50% Penetration 33% 66% 100%0% Range Penetration: A percentage that shows an employee’s position in the range. The percentage shows a relative comparison to the minimum of the range. = (Employee Pay – Min) / (Max – Min) Range Penetration = 0% Employee’s pay is at the minimum Range Penetration = 50% Employee’s pay is at the midpoint Range Penetration =100% Employee’s pay is at the maximum www.payscale.com
- 26. Why? • Paying above and below ranges • For hot jobs • For differentials or temporary responsibilities www.payscale.com
- 27. How? • Pay to market, +/- by experience or performance • Set the range, but adjust ranges quarterly (up and down) • Pay a market premium over the existing range within structure • Pay a differential on top of the base pay - can easily be removed if the conditions change www.payscale.com
- 28. Immediate Actions Gather information about your jobs Talk with managers and executives Obtain accurate market data for your positions Identify unique organizational situations Determine organization capacity for building structure www.payscale.com
- 29. PayScale Delivers Where Other Compensation Providers Fall Short PayScale leads the world in compensation knowledge with the freshest and most detailed data from over 40 million salary profiles. More than 3000 organizations use PayScale’s software and intelligence to get the greatest return on their talent. Smart businesses use PayScale Insight to recruit, retain and motivate their people. Visit our blog: www.payscale.com/compensation-today Join our Group on LinkedIn: Compensation Today: HR Best Practices Jennifer Ferris, CCP Sr. Compensation Professional Paige Hanley, CCP Sr. Compensation Professional www.payscale.com
Editor's Notes
- Hedge Manage polls Type all the stuffs in “create” Then it’ll be there when you want it… Launch Show/Share Hide Quiz for the end: What are your biggest challenges in developing a pay structure? We lack a compensation philosophy or strategy We lack market data for our jobs I’m still unclear about the purpose of a structure I need help building a pay structure Something else
- Hedge Creator of the largest database of individual compensation profiles in the world, PayScale, Inc. provides an immediate and precise snapshot of current market salaries to employees and employers through its online tools and software. PayScale’s products are powered by innovative search and query algorithms that dynamically acquire, analyze and aggregate compensation information for millions of individuals in real time. Publisher of the quarterly PayScale IndexTM, PayScale's subscription software products for employers include PayScale MarketRateTM and PayScale InsightTM. Among PayScale's 2,500 corporate customers are organizations small and large across industries including Mozilla, Tully’s Coffee, Clemson University and the United States Postal Service.
- Jen Let’s take a look at our agenda. First we’ll discuss when and why a structure might be useful, and then we’ll talk about some cases where maybe you don’t need one. Following that, we’ll focus quite a bit of our time on the four steps needed to Build Structure Step 1: Identify pay schedules (PAIGE) Step 2: Determine pay grades (JEN) Step 3: Develop ranges (PAIGE) Step 4: Assign grades to positions & adjust for internal equity (JEN) Then, we’ll provide some guidance around using Pay Ranges (PAIGE) We’ll talk about some cases when you might need to deviate from the structure, and how to go about that (JEN). And finally, we’ll give you some Immediate Actions for moving forward. (PAIGE)
- PAIGE Differentiate between org structure and pay structure. An org structure might be something like entry-level, individual contributor, managerial level, executive level vs. a pay structure – often this will align with an org structure, but it is more differentiated and articulated – more specific and detailed. Clarifies market competitiveness and insures equal weight between this and internal alignment of jobs. Managing pay is effective and efficient. Pushes organizations to quantify pay, thus enabling better budgeting decisions Is determined based on a compensation strategy that aligns with organization goals – therefore ensuring this is validated over time Gives execs and managers confidence and tools to talk with employees about pay and their career opportunities within the organization Ensures pay equity Provides a structure for pay to help align non-benchmark jobs Non-benchmark jobs being jobs that are not as common in the general marketplace In the end, allows for compensation to be much easier to administer and manage ongoing NEXT, I’ll turn it over to Jen to talk through what you’ll need to get started with building a pay structure.
- Paige -small org – has to do with number of jobs. If your structure has one job per grade, probably unnecessary, and isn’t adding to simplicity -high # of jobs moving quickly – software developers for example. If your org is primarily SDs, maybe you just want ranges for that job, or maybe you are okay with just looking at the market. Or, if you are a consulting org – 80% of your workforce is different levels of consultants, maybe you don’t need to include those jobs in your structure, or maybe you don’t need one at all. -market data for most jobs – maybe that will do it for you. If you are a very typical org where your positions mirror exactly benchmark positions in the market (we don’t hear this a lot!!), you might not need a structure – the point of a structure is to help fit in jobs that aren’t necessarily typical -facts – ex: engineering org for example, or scientists, they don’t always want or buy into ranges because they want to see the actual market data – the scientific proof – about pay. Ranges take into account art and science – they don’t want anything subjective! Market data only please!
- Jen So what are some requirements for building a pay structure? First – a compensation Philosophy & Strategy Philosophy – this is a high-level view on the aims of the organization with regards to compensation The Strategy is how you operationalize your philosophy – your strategy digs in a little further and puts some definition around those high level goals of your philosophy. For example, You’ll want to define your talent market or markets; Determine your level of competitiveness within those markets; and Address what it is that you want to reward as an organization Another foundational element needed before building a pay structure is knowledge around your jobs. If you are building a market-based structure (which we of course recommend), you’ll need to know some information about each of your positions in order to benchmark them appropriately in the market. And to that point – a market analysis is the final requirement for building a market-based pay structure. This analysis is needed to determine the value of your jobs in your various talent markets. Org priorities – are you trying to grow, do more with less, what are your key functions that really drive the org forward. Ultimately you should be creating a structure that drives your organizational objectives.
- Jen So let’s talk for a minute about some of the elements of a pay structure. My purpose isn’t to go too much into depth on this slide, as we’ll dig into each of these pieces further in a moment. The first thing we want to touch on are pay schedules. What are pay schedules? Pay Schedules are Sets of Pay Grades, typically grouped by things like geography or industry, that are used to preserve competitive pay to both the market and internal alignment. They reflect the cost of labor in their respective market. Next we have pay grades. A Pay Grade Is a label for a group of jobs with similar relative internal worth. And, A pay grade is associated with a pay range. Pay Ranges A lower and upper limit associated with a pay grade. Generally has a minimum, midpoint, and maximum. Paige will talk a little more later about how to use pay ranges more in depth.
- PAIGE The first step to take in building a pay structure is to identify if you need pay schedules and how many may be necessary
- What are pay schedules and why might you need them? As a reminder, a pay schedule is a set of grades and ranges grouped by things like geography or industry – they are used to ensure competitive pay to local market and internal alignment. Main things to consider to determine whether or not schedules are appropriate for your organization: Industries or lines of business: Retail & Social Services Sales Engineers vs Admin Faculty vs. staff Job Functions Some jobs just go on their own structure – consultant, software developer, engineers Locations Seattle vs. Dallas, TX Example: one client had office positions and labor positions paid similarly. They wanted to be relatively transparent with their pay structure – ie let EEs know their grade. They didn’t think the Office workers would like to know they were in the same pay grade as the labor workers, so they developed one schedule for the office and one for the labor folks, using the same set of pay ranges.
- Paige This shows a sample of pay schedules set based on geographic differences in pay. Illustrates the streamlining of the structure, as it groups 19 different markets into 6 pay schedules based on similar paying geographies. So that summarizes the first step in the process - how to identify pay schedules. NEXT, Jen will talk through the 2nd step – determining pay grades
- Jen The next step in our process is to determine the appropriate number of pay grades for your organization. One thing to note as we’re talking about this; there are no fixed rules that apply to every organization. There is not a “right” way or a “wrong” way to determine your pay grades. The way you choose to organize your structure is very dependent upon the individual needs of your organization.
- The first thing you’ll want to do is figure out how many grades makes sense to have for your organization. The number of pay grades varies in response to things like: The size of the organization; The vertical distance between the highest and lowest-level job in your organization; How finely the organization defines jobs and differentiates between them (i.e. levels); and The pay increase and promotion policies of the organization. The next thing you’ll want to do is determine the definition of each grade. Do you want to use numbers? Do you want to use letters? Do you want numbers for your salaried structure and letters for your hourly structure? Where do you want to start your numbering? Maybe you want to have your lowest grade start at 11, and move up from there. I once worked with an organization that did not want to use the letter “F” in their structure, because of the connotation associated. So, we ended up starting their structure at G to avoid it altogether. Once you have these questions answered, you’ll want to move forward to developing ranges, which Paige will cover next.
- PAIGE The third step is where you begin seeing some of the end results. This is the fun part! – pay ranges for the grades and pay schedules you’ve determined
- Paige to talk through these items: This is the technical part – we’ve included all the formulas here. But – if you are using our system it will do the math for you. PAIGE – DO SOME OF THESE CALCULATIONS BEFORE THE CALL SO YOU CAN SPEAK TO WHAT THE MID DIFF IS (FOR EXAMPLE) IN THIS STRUCTURE Midpoint Differential. ~15% for this example Distance between midpoints =(MidB-MidA)/MidA Range Spread. Starts at ~30% goes to ~44% for this example Distance between bottom and top of range =(Max-Min)/Min Typical range spreads are 30% to 60% Min relative to Mid. =Mid/(1+(Range Spread/2)) Max relative to Min. =Min*(1+Range Spread)
- Paige Difference at the base vs top of structure. (expanding range spreads) Bigger range spread at the top, narrower at the base. Time to proficiency. Differentiation of skill sets. Manager input. Overlap between pay ranges. Long tenure/high performing employees can earn higher wages. Provides more cost effective career progression within the org. Jen will now tie in how your jobs get assigned into these pay grades and ranges.
- Jen So, we’ve identified pay schedules as needed, determined pay grades, developed our ranges, and now - the final step in the process is assigning grades to your positions and adjusting for internal alignment.
- So how do we determine which grade a position is assigned to? First, look at the market data at your target in the market. Is your target for this role the 50th percentile? Look at that data point. Is your target the 80th percentile? Then look at that data point. Next, find a midpoint in your structure that most closely aligns with that data point. In this example, our market data at target is $35,442. Therefore, the closest midpoint is the midpoint of grade 1 at $34,000. Once you’ve done this for each of your positions, arrange your data to be sorted by the grade assignment, and then move onto the next step of adjusting for internal alignment.
- So, you’ve graded your positions based solely on market data, but what if the market data shows a different value than the value the position holds in your organization? Or, what if the market data is right in the middle of two midpoints? Well, now we get to look at internal alignment. In the example shown, the target market data for our Technical Support Rep is $37,669. This falls between the midpoints of grade 1 and grade 2. So, to determine where to slot the position, review the positions that have been slotted into a grade 1, and then review the positions that have been slotted into a grade 2. From there, determine which group of jobs the technical support rep belongs in based on its similarity in level of responsibility and value to the organization with both groups.
- So when you’re done it would look something like this – each position is assigned to a grade and a corresponding range. Now I’m going to turn it back over to Paige to give us a little bit more information on how to use the pay ranges that we now have for each job.
- PAIGE Determine Employee Placement in Range. Org needs set range midpoint and width; employee knowledge, skills, abilities, experience, etc determine position in range Min = New Hire. Midpoint = Proficient & meeting performance expectations. Above midpoint = Takes into account tenure, performance, education – whatever org values most. Develop Guidelines or Policies. Develop guidelines or policies about: Where new employees enter ranges. How current employees move within ranges. What happens when an employee is promoted? How much discretion do managers have? Get specific, where it makes sense. Develop Processes The tactical piece after policies/guidelines are created Ex: manager who thinks job is in the wrong grade – here is the process to follow to re-evaluate the position Train your managers
- PAIGE – fix image? This is one of the main comparison points that you and your managers should know or have some handle on. Great way to assess how far into the range any individual employee is, as well as a good measure per department, location, or for the overall organization. Typically 50% on average is the target, knowing that some EES are new in their roles and others are high tenured and/or top performers Policies can be used to specify how to work with pay ranges and where to place employees. For example – rates that hiring mangers have approval for may be from 0-33% range penetration, up to 50% RP with HR approval, and anything over 50% requires exec approval.
- PAIGE Centered around the midpoint or point of proficiency, are the min and max. As noted earlier, the min is the for EES with less experience who may be very new in the role and of low proficiency Midpoint = point of proficiency Max – high tenure or top performers may be near or at the max
- Outlier may exist and should be addressed in your comp policy. “green circled” = below “red circled” = above
- As defined earlier, this shows an example of RP Now that you’ve seen the process for developing a pay structure and how to begin using your ranges, we can talk through some of your immediate action items
- Jen While you might have a structure for your whole org, what are some of the circumstances where you might deviate from it.
- You might choose to intentionally pay below the structure or above the structure – when might that make sense? Below structure Training or in-ramp period – pay below min as a training rate … Interns Above structure: Some people or jobs that are vital to org, will pay whatever it takes Hot jobs Sometimes you need to be more nimble. The structure can lock you in a little bit. For jobs that are moving quickly in the market, you don’t necessarily want to be locked in – we’ll talk about how to handle this on the next slide. Differentials/temp Person who is covering for someone/job while they are out. Ex: Maternity leave – redistributing the workload for a bit, you don’t want to necessarily change the grade of the job, but maybe give them a kicker of some kind.
- If you’ve determined that you don’t want to set a range for a job, you can look at the market data (at your target) and then adjust the pay rate by a person’s experience or performance When we are intentionally deviating from the structure, there may be some cases where we want to be especially nimble. In these cases, instead of waiting to adjust a range annually, maybe we look at adjusting it quarterly to stay up-to-date For hot jobs, if you don’t want to continually evaluate and move your range, you can instead pay a market premium to the incumbents on top of their pay to compensate them instead An example of when you might pay a differential on top of base pay would be if an employee is temporary moved to night shift for example, maybe you pay the EE a differential of $2 on top of their hourly rate while they are on night shift, and then that diff would drop off when they are back on day shift. You want to make this especially clear to your employees, and a way to do this is for the diff to show up as a separate line item on their paycheck. Another example – asking an EE to temporarily work in a hazardous environment. This often warrants a differential on top of base pay as well.
- Paige Gather info about jobs: What are the key skills, experience, and education required? What are the top 3 responsibilities? Talk with managers Where are you recruiting (or losing) your talent? Begin to explain the usefulness of pay ranges