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Originally published 8/14/19 - Updated 1/18/23
If in looking at your employees' salary ranges, it seems scattered and without rhyme or reason... chances are you run the risk of underpaying a qualified employee and having them leave for more pay elsewhere.
By the same token, you run the risk of over-paying a poor employee, and that carries its own set of potential consequences. It makes smart business sense to have a system for salary ranges and for awarding pay increases. But how? Here are some general steps for creating salary ranges for jobs in your company.
1. Analyze Positions
To be able to assign a specific salary range to each position, you must know the activities and responsibilities that come with the job, the qualifications needed to execute the job, and the work conditions under which the job should be performed.
2. Cluster Positions Into “Families”
You’ll need to determine whether there should be one pay grade system for all the jobs in your company or whether you should separate jobs into “families.” For instance, you might have an information technology family, an administrative family, and a management family.
3. Rank Positions According to Level of Responsibility
This requires evaluating the content of the job, as shown in the job description, and using it as a marker for comparing other positions.
If you have many jobs to compare, consider using a formal job evaluation method, such as the Hay System, which takes a three-factor approach to measure positions within the same group: know-how, problem-solving, and accountability.You can use this system to evaluate education, skills, experience, and working conditions for Accounts Payable Specialist I, Accounts Payable Specialist II and Accounts Payable Specialist III, for example.
If you have only a few jobs to compare, however, you can simply rank jobs based on their value to the company.
4. Research Salary Surveys
The goal is to determine how much employers in your industry pay for similar positions. While you can use a free resource, such as the Bureau of Labor Statistics, you’ll likely need to pay a fee for more current and targeted information.
5. Develop Salary Ranges
Each salary range should include a minimum, midpoint, and maximum base rate of pay. According to WorldatWork, a nonprofit human resources association, a traditional salary range spreads from 20 percent to 40 percent.
For example, if your research shows an average salary of $28,000 for your lowest-paid accounts payable specialist, a 20 percent spread would equal $22,400 (minimum), $28,000 (midpoint), and $33,600 (maximum).
Ranges tend to be higher for senior positions. For instance, ranges may run from 25 percent for lower positions to 75 percent for senior positions.
Typically, employers who want to meet the market rate use the 50th percentile or the market median. The market rate is usually offered to employees who are in good standing with the company and are productive in their roles.
Keep in mind that these are just examples and you’ll need to create ranges that are specific to your organization’s needs and goals.