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At Astronology we cover all angles of a situation. We've run issues on comp related topics like green circle rates (people paid below the minimum of the pay range) and red circle rates (people paid above the maximum of the pay range), as part of our Compensation 101 series. Today’s article examines why organizations should make the effort to set pay ranges in the first place and what value these ranges add to an organization.

The term “pay range” is not one that is easily explained. Indiana University Human Resource Services defines salary range as: “The range of salaries, from lowest to highest, that is assigned to each grade level.” While this definition is elementary at best, it begins to direct us towards the goal of figuring out the how of the pay range question, but not really the why. And even the term pay range brings up many more terms such as: traditional salary structures, broadbanding, market-based ranges, and step-salary structures.

According to an article by Susan M. Heathfield published by Microsoft, the purpose of a pay structure is to “organize and demonstrate your organization’s compensation philosophy and to reflect and support the advancement of your company culture. An effective pay structure also allows you to attract and retain the people who can help achieve your business goals.”

Heathfield continues: “Your organization's pay structure is a visible demonstration of your compensation philosophy and strategy. Developed logically and communicated effectively, your organization's pay structure is a tool that employees can view and understand. This is important because a recent study by WorldatWork shows that understanding a company's compensation strategy influences employees' satisfaction with their compensation.”

Yet, according to Resources for Humans, many companies use an old, rigid, pay scale that dates back to World War II and does nothing to define a company’s philosophy or strategy…except make them seem rigid, old, and out of date. About 60% of large corporations still use this system today according to the article. Developing one’s own pay system may be difficult, but submitting to a boxed-in, generic system could be detrimental to a Human Resources department.

Heathfield determines that there are three challenges in developing a pay structure. You should determine the following:

1. The appropriate data for establishing the relative value of a particular job to your organization.
2. The appropriate pay range for a job with the stated value to your organization.
3. The value of each job position within the allotted pay range.

Once you have developed a pay structure, another ongoing challenge is determining your organization's annual compensation budget. Set correctly, pay ranges can help you determine if you’re paying employees too much. But if pay ranges are inflexible, too narrow, or too broad, these ranges can wreak havoc with turnover and morale. Where should you aim? How should you interpret data? And what rules should be in place to create an adaptive, dynamic system?

Probably the most famous United States pay range system of them all has an even different name than most systems: the General Schedule. According to Wikipedia, the General Schedule (or GS) is intended to “keep Federal salaries equitable among various occupations” — also known as “equal pay for equal work.” The GS System was enacted into law by the Classification Act of 1949 (based on a similar act from 1923) and covers the “majority of white collar personnel in the civil service of the United States Government.” The United States Office of Personnel Management has taken that guideline further in recent years to include all government workers. Prior to January 1994, your pay in the GS scale for a given grade and step was the same regardless of where you worked. But in January 1994 a locality pay system was introduced (as part of the Federal Employees Pay Comparability Act of 1990 or FEPCA) which provides an additional amount for each grade varying by region within the continental United States.

Both Republican and Democratic administrations have complained about the methodology used to compute locality adjustments and the projected cost of closing the pay gap (as determined by FEPCA) between Federal salaries and those in the private sector. As a result, FEPCA has never been fully implemented.

Some of the other government agencies have actually rebelled from the GS pay banding practice all together. According to Government Executive Magazine, the Office of Federal Housing Enterprise Oversight (OFHEO) decided to completely abandon the banding system in 2005. OFHEO's Chief Human Capital Officer Janet Murphy said that one of the problems OFHEO encountered with the old system was that employees wanted more opportunities for vertical promotion. Broad pay bands offered more horizontal movement and more opportunities for raises within the same job classification, but not enough of a career ladder, she said. The Washington Post also comments on this idea in a recent article.

Broad pay bands also led to overcompensation, Murphy said. Employees moved quickly within the bands, and were soon earning beyond their market value when compared with similar financial institutions such as the Federal Deposit Insurance Corporation and the Federal Reserve Board.

What do you do when some of your senior employees have reached the top salary for their position? Different executives have different feelings on the matter, as expressed in this ASAE & The Center for Association Leadership article. Michel J. Paque, CAE, Executive Director at the Ground Water Protection Council in Oklahoma City says, “We have just reached a point where we are considering establishing upper salary ranges or limits. To keep and reward our senior employees, we are considering an annual performance bonus based on the prior year’s bottom line. The bonus would be one time only and reassessed each year. Salaries would remain static for at least two years in between each annual review. This has been well received by the affected employees. It also creates a team atmosphere on viewing the association’s bottom line.”

But Karen L. Garst, Executive Director at the Oregon State Bar in Lake Oswego answers that: “This is a difficult issue. If you keep adding to the top level because you have employees who have topped out, you make reaching the top impossible for other employees. In addition, you end up pricing the position outside of market rates, which is difficult to change once you have put it at a higher rate. We increase our minimum and maximum pay for each position by the cost of living each year. This means that people at the top [of their ranges still] get at least some raise each year…Studies show that while compensation can be a demotivator, it usually isn't a key motivating force.”

When making the choice of how to structure pay bands for you company, the most important factors to consider, according to Jennifer Loftus, National Director of Astron Solutions, are the following:

1. Your organization’s size
2. Your organization’s fiscal constraints
3. Your organization’s culture
4. The size of your HR department
5. Your compensation philosophy

“While similar in concept, compensation structures are uniquely different for each organization. What works successfully in one company may be disastrous in another. Your organization must balance the 5 items above to determine the best suited structure for achieving your unique organizational goals. Without some type of pay system, however, your organization may end up underpaying and overpaying some employees, sacrificing fiscal controls, and possibly losing your star employees and rewarding behaviors or competencies that don’t achieve your organization’s strategic goals.” The up-front time and effort required to develop a pay structure will provide you and your organization with a return on investment in both the short- and long-terms.

Looking for a top-notch presenter for your human resource organization's meeting? Both Jennifer Loftus and Michael Maciekowich present highly-rated sessions on a variety of compensation and employee retention issues. For more information, send an e-mail to info@astronsolutions.com.

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Copyright 2007, Astron Solutions, LLC

ISSN Number 1549-0467