Establishing a Salary Structure (Ranges)
Purpose of Process (see below how HRSource™ can help):
Salary structure (ranges) provides a basic tool for managing employee salaries. It establishes a minimum and maximum salary that the company will pay for a particular position. This promotes internal equity (equity in pay among employees of the company) and helps to manage company payroll costs.
Recommended Steps in the Process:
- Collect salary survey data and create a spreadsheet combining
survey data with your company data (See the Salary Survey process).
- Find those positions in which your company average varies
significantly from the market average and ensure those matches
are correct (or correct them on the spreadsheet).
- Sort the salary survey spreadsheet by market average pay rate.
- Establish salary range midpoints (refer
to the sample):
- Set the midpoint of your lowest salary range (grade 1) equal to the average of the lowest two market average pay rates as reported on the spreadsheet.
- Set grade 2's midpoint 15% higher than grade 1.
- Set grade 3's midpoint 16% higher than grade 2.
- Set grade 4's midpoint 17% higher than grade 3.
- Continue this process incrementing the range spread 1% for
every grade to create a total of 10 to 15 salary grades.
- Establish the range minimums and maximums by multiplying the
midpoints by the numbers indicated in the following chart (refer
to the sample):
Midpoint multiplied by this number equals the Grade Range Minimum Range Maximum 1 .785 1.215 2 .780 1.220 3 .775 1.225 4 .770 1.230 5 .765 1.235 6 .760 1.240 7 .755 1.245 8 .750 1.250 9 .745 1.255 10 .740 1.260 11 .735 1.265 12 .730 1.270
- Place your positions in the appropriate range:
- Select the range in which the midpoint is closest to the market average.
- If the market average falls near the middle of two of your range midpoints, such that it is difficult to decide in which range to place the position, select the range in which the midpoint is closest to the average market midpoint.
- Slot those positions which you were not able to match to the survey, in the appropriate range, based on comparability with other positions.
- Consider publishing your salary ranges on
internal job postings. The advantages of publishing the salary
ranges include:
- Indicates the position's level of responsibility
- Reduces the number of unqualified applicants
- Contributes to an atmosphere of openness and trust
- Demonstrates that wages are competitive
Be prepared for the questions from employees such as, "You posted a job that looks like mine, so why does it have a higher salary range." To answer this question, you must be able to explain the compensation system, including how salary ranges are created and the impact of performance and experience on salary. Another question to prepare for is "How do I prepare myself to move into the job(s) that are posted." This can lead to a constructive discussion on career advancement.
Be aware that knowledge of pay in other departments may encourage managers to inflate the pay level of their open positions to attract the best internal talent. When the compensation is in a state of flux (e.g. undergoing acquisitions or mergers), hold off on posting salary ranges.
Process Tips
Salary ranges are not absolutely essential. They can be an effective salary management tool. Pay equity, both inside the company and relative to the market, can be maintained without salary ranges though.
The process recommended above yields ranges that are broader and have fewer grades than more traditional companies. This allows for greater flexibility in determining the amount of salary to pay individual employees, but provides less control in managing salary cost than a more traditional salary structure.
The following is the formula for translating hourly pay rates to monthly and to annual:
- Hourly salary multiplied by 173.333 equals monthly salary.
- Monthly salary multiplied by 12 equals annual salary.
Also see the section entitled A Classic Approach to Compensation.
HRSource™ can help track and manage salary structure in several ways:
