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Developing a Compensation Plan, Step 4: Set Guidelines or Ranges

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Pay ranges provide guidelines for how to apply market data to pay your employees. They also help smooth out daily or monthly market fluctuations and set upper and lower bounds of possible pay. Today’s lesson will help you understand what goes into setting up pay ranges for your organization, including some decisions you’ll have to make along the way.

Establish Your Pay Ranges

The market value approximates the midpoint of the range. Typically, you’d bring people into a job at or near the minimum of the range. As they gain in skills and experience, and begin to demonstrate high performance and deliver results, they’d move through the midpoint of the range towards the max. Essentially, you pay people at market once they’ve demonstrated their value.

Decide to Use Job-Based or Grade-Based Ranges

Job-based ranges provide a min, mid and max for each job in each geographic location. They are built around the market value for the job. They focus solely on external equity, and could potentially go down from year to year depending on the market value.

Grade-based ranges group jobs with a similar market price, level of responsibility and value to the organization together within a “grade.” In grade structures, jobs are slotted based first on the market value, then adjusted to account for internal alignment. Organizations with a lot of leveled roles would do better with a grade structure. For more information on how to build a grade structure, check out this webinar.

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Determine Range Widths

Like most things in compensation, there is no hard and fast rule here. You’ll want to do what makes sense based on the size and shape of your organization. As a general rule, your range widths should get wider as you go up levels in the organization, starting around 30 percent and expanding to about 60 percent. Typically, your ranges would be narrower at the base of the structure to allow for movement between jobs. Ranges are wider at the top to allow for more differentiation of skill set, experience and performance, as well as to allow for more longevity in the role.

Calculate the Minimum and Maximum of Ranges

The final step to creating a salary range is determining the minimum and maximum for the range. After you identify the midpoint for the salary range, you’ll be able to complete this final step. In the example below, the market value is $69,885 and the range width is 50 percent.

Your final salary range in this example will look like this:

You can set ranges both on a salary and hourly basis using the same principles.

Next Steps

Try building out some ranges for your jobs.

Pro tip: Line up the market values so you can see your jobs of similar value near each other. This is one way to make sure your market points make sense for your internal organization. It will also help you set range widths consistently for the various levels and functions.

In the next lesson, we’ll help you round out your comp plan with policies and processes.

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