If, in looking at your employees salary ranges, it seems scattered and without rhyme or reason...chances are you run the risk of under-paying 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 it's 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. In determining salary ranges, first analyze positions by reviewing their job descriptions. 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. Decide whether to 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 measuring 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 to learn the market rate for each position. 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 based on your research. 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 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.
6. In addition, you should know what to do about salaries that do not fall within the salary range. To ensure employee retention, check that salaries continue to fall within your updated ranges and ensure that your ranges change with market conditions. If your human resources team is not equipped to handle salary ranges, seek assistance from a compensation design expert.