Managing Employee Pay with Ranges

I spend quite a bit of time working with people to develop appropriate structure for their organizations. How many grades should they have? How wide should the ranges be? How can I make sure my ranges are aligned to the market? I’ve written before about pricing based on the job vs pricing based on the employee, which is a very strategic step forward for the organization. The question is, once you build your ranges around the market, how do you determine where to place your employees within range?

General considerations

There are some general answers you need to have in order to determine where to place your employees in range:

• Hiring, or entry point. Where do employees enter into the range? Do they always enter the range at the min of the range? What are the cases in which a new incumbent would enter below range? Above the min of the range? Can employees come into range at the midpoint?
• Moving through the range. What are the determinants that dictate when an employee moves up in range? Performance? Tenure? Acquiring new skills or certifications? How often can an employee move up in range? Can they move up in range at all? Movement through the range should relate to the stated compensation philosophy – what does your organization value? Can employees move *down* in range and if so, what determines that movement?
• Maxing out of the range. Is there a point at which employees will no longer be eligible for increases to their base pay? If so, are they still eligible for lump sum bonus payouts? What are the bonus payouts based on – performance? Top of scale bonus?
• Moving to a new grade and range. Do employees move between grades and ranges? If so, how and what are the criteria that must be met? Typical situations that merit movement between grades are promotions and transfers. Can employees be transferred to a position at a lower grade level – and if so, does their pay drop? If it drops, how far does it drop? When people move to the new grade, where in the new range should they fall?

Some specific examples
The considerations above work well for many organizations who want to have a more general sense of how placement in range can happen. Some organizations need to get more specific about the details of employee movement in, through, and between ranges. The following are some specifics I’ve seen:

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• Hiring
  Some organizations have a high volume of turnover in very entry level jobs. In this case, it may be appropriate to bring people in below range, and after successful completion of the training or orientation period, they would be bumped to the bottom of the range. This both offsets the cost of training new staff and provides an incentive to new employees to stay. Another specific strategy I’ve seen in place is to create tiered approvals for hiring rates: 

  Entry Level Range Penetration	Approval
  0-10%	Hiring Manager
  10-25%	Director Level
  25-50%	Vice President Level
  50%+	Full Executive Team

• Moving through range
  Some organizations create specific caps on the percent increase for which an employee is eligible. For example, employees may receive up to 10% increase based on performance, new skills, or tenure. Any additional increase would be given in the case of a promotion and should be approved by a Director.
• Maxing out of the range
  If your organization wants to create a cap in the base pay range, it may make sense to provide a way to still allow additional earning potential, especially amongst your top performers. Some organizations will create a policy where those who cap out are still eligible for performance-based bonuses where if an employee fulfills x,y, and z criteria, they will be able to earn up to q% of base. With this strategy, employee base pay is still appropriate relative to the market and when it comes time to do increases next year, they won’t be increased exponentially out of range.
• Moving to a new grade and range
  Some organizations have to get specific about what happens when employees move between grades. For example: employees receiving a promotion to a new grade will be entitled to an increase to the same range penetration of the new range or a 12% increase, whichever is greater.

Develop a policy and stick with it
Organizations handle the question of where to place employees in range in a variety of ways. Some are very general, giving approximate rules for how their employees get into, move through, max out, and move between ranges. Other organizations get specific, down to the last percentage point. The critical issue about determining placement in range is that you want to be consistent. Decide how you want employees to relate to their ranges, and then write those decisions into your compensation policy.

How do you know if your organization needs to get specific? That will depend largely on your organizational culture. Also, the amount of manager involvement you have will speak to how detailed your policy needs to be. If you have a high level of manager involvement, often your policy will be much more detailed. If your execs are generally making the calls, a more general guideline will often suffice.

One final thought on managing employee pay with ranges: often organizations talk about a strategy of targeting such and such percentile of the market, usually the 50^th percentile. Once you build your structure, and create a range around that percentile, you would expect that your employees will fall along that range based on the criteria you’ve outlined. Ultimately, while your employees may fall low (or high) in range because of their experience, performance, tenure, skill-set, etc, you’re still targeting the 50^th percentile of the market. In fact, if you have a lot of employees falling at one end or another of the range, it’s a good indicator for you to either develop further training or reexamine the actual requirements for the job. And, if you have employees falling at both ends of the spectrum, you may have more than one level of the job.