January 5, 2010

Q & A with Compensation Experts: Pay Ranges, Pay-for-Performance and Merit Increases

What’s going on these days with compensation and what questions do HR managers have about it all?

The following is a collection of questions asked during PayScale webinars over the last several months. The topics covered include: having difficult conversations with employees about pay, finding ways to reward a top performer whose pay is already near the top of their range and how to support managers in having conversations about pay with employees. Answers are provided by PayScale director of customer service and education, Stacey Carroll, MBA, SPHR, and also Betty Richardson, CCP.

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Q: What do you do if you’re basing your ranges on the market and the market actually goes down?

A: We’ve actually dealt with this issue in the past year as we’ve seen some positions within the market go down. This is an important point and I think that folks should decide in advance what you are going to do in these sorts of scenarios. Most people are not going to adjust their ranges down for any one year movement. They’ll probably keep their salary ranges where they are at but make a decision to possibly move those salary ranges in the future if they start to see an ongoing trend.

We have also seen that quite a few organizations have frozen their pay to allow for the changes or lack of changes in the market. That’s another strategy.

Q: In handling the difficult “I found a salary report on the internet” conversation with an employee, how would you recommend addressing a situation where an employee’s compensation is truly under the market?

A: First, make sure that the manager really does not have the ability to make adjustments because if your organization does support making adjustments when someone is under the market, I think that’s the first remedy.

However, if your organization is not in the position to make adjustments, the key is to be open and honest with the employee about the situation and let them know that you are aware that they’re sitting low in the range and you are going to make every effort to try and move them up but the limiting factor is the budget and, unfortunately, your hands are tied.

And then, again, focus on those things that may be impactful to that employee. Maybe there are other ways to reward that employee that don’t include salary. Maybe it’s additional time off, maybe it’s getting to work on some additional projects outside of the scope of their responsibility, or skills development that will help them get to that next level. It’s a continuously hard conversation to have but it is important and it does have to center around honesty. You don’t want to try and hide it as if they aren’t behind the market.

Q: How do you best handle questions from the employee of, “Who told you that? Who said that about me?”

A: It’s a matter of saying, “In the course of gathering this information I talked to many different individuals who interact with you on a regular basis. I am not going to give out information about who I talked to. But, I am going to give you the specifics of the situation and talk to you about how your behavior can be corrected.”

Q: I like the idea of a merit increase matrix that looks at both the internal equity issues, as well as the external equity to ensure that we’re paying competitively in the marketplace. How does the matrix work if you have made the decision to pay some positions above market and some positions below market and some at market?

It would be more difficult and you would almost have to have a separate matrix for each one. For example, an organization may say, “We know we’re going to need to pay our scientists above market and that’s our plan but we’re going to pay our finance people below market.” You would have different matrices for those populations. Another option, though I would not recommend it, is to grade them accordingly so that you would take your compensation plan into consideration when you’re grading and you would put some of your finance positions into lower grades so that your philosophy could play out.

Q: The problem I have with explaining the merit increase matrix (where performance rating is compared to position in the pay range) is with those employees whose pay rate falls is in the fourth quartile (at 76th percentile or above), they exceed their performance goals and yet may receive a lesser increase than those at the lower end of the range. How do you approach this to avoid negative feelings and manage expectations?

A: Whether you have a matrix or not, there’s only a certain amount a position is worth within a company. My suggestion to make this situation a little bit easier is to be sure that at the start of any plan there be communications and reminders on a regular basis about what the philosophy is. And, that the plan has two parts. The first part is pay-for performance but the second is that it be market competitive. You need to communicate that it is important for an organization from a financial standpoint to be sure that overall you’re paying roughly at, or wherever your target position is, against the market. And, that no company can afford to be paying all positions, or even any category of positions, significantly above the market.

The other part of that discussion can be: the reality is that they are paid well above the market, but the question then becomes, “What can they do so that they can be eligible for additional increases?” This is true for anyone in any category. The discussion needs to shift to, “What can the employee do to have the opportunity to make more money?” as opposed to, “What should the company do so they can pay more?” You shift the conversation to the thing that the employee can do. Certainly, if they are an exceptional performer, perhaps they need to gain specific skills, go on to a special project, get exposure to something else so that they may become eligible for a promotion. If they are promoted, they will be moved from that highest paid category to, depending on how your ranges are structured, one of the two lower-paid or below-midpoint categories.

So, if they can do something to warrant a promotion they are then eligible for future increases.

Do you have any salary range topics you would like to see covered here on Compensation Today? Write us a comptoday@payscale.com.

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