In a tight labor market, it’s critical to get salary ranges correct. You don’t want to miss out on hiring a great employee because you aren’t paying enough for the job position. When you start to establish salary ranges, it’s important that HR leaders and CFOs work together with the realization that the pay scale is a key driver of recruiting and retention.
How to Determine Pay
Defined pay ranges not only ensure you’re paying employees fairly but can also be used during budget planning and to control labor costs. Check out these 8 steps to developing salary ranges:
- Do You Want to Lead, Lag or Match?
- Review Job Descriptions
- Rank the Job Positions
When you’re a market leader, top talent will view your company as a popular one. If you decide you just want to match the market, you’ll simply pay the same as your competitors. If you’re lagging, it’s probably not intentional—at least it shouldn’t be. Oftentimes you discover you’re behind the curve when you take time to review your current pay scale and compare it to the market.
This can be a tedious process but it’s important for HR leaders to work with managers and employees to find out what they really do on a day-to-day basis. Conducting an online survey is an efficient way to ask your workforce to define all aspects of their jobs. Then you can build official job descriptions based on the feedback.
Once you have the updated job descriptions, evaluate each one and organize them by relative worth and responsibility. Some of the more common ways to classify are:
- Ranking — The ranking method categorizes job roles based on the overall value and complexity within your organization.
- Points — The points method is more complex and uses a predetermined scale (e.g. 1-10) for the importance of key job elements. Jobs are scored based on the total number of points and pay ranges are assigned accordingly.
- Classification — This system categorizes comparable job content and value (such as executive, managerial, skilled and semi-skilled labor). This method works well for larger organizations and puts jobs of the same class into similar compensation packages.
Conduct Market Research
Use a compa-ratio to determine which employees are being paid below or above average for their pay range. The U.S. Bureau of Labor Statistics is a great place to start your research, but don’t ignore popular salary information websites/apps like Glassdoor and Indeed. Rest assured, anyone applying to your company is checking the salary intel that others post online. Make sure that you’re comparing apples to apples when you’re in this phase. The tasks, functions and level of responsibility should closely match.
Create Pay Grades
Use either your job evaluation data or market data to group job positions by similar salary survey data. Note the salary highs and lows in order to determine how you want to position yourself in the market. Each group of job positions with similar market salaries makes up a pay grade. A small business may only have three or four pay grades while a large company could have dozens.
Create Salary Ranges within Pay Grades
For each pay grade you’ll have to create a minimum, midpoint and maximum pay range. There are no hard and fast rules for these. A traditional salary range is 30%. If you use the midpoint salary as your base (ex. $50,000), multiply it by 1.15 to get the maximum range ($57,500) and .85 for the minimum ($42,500).
Make Adjustments for Existing Employees
When you compare the salaries of your current employees to the salary ranges you just established, it’s inevitable that you’ll discover some are paid more or less than the new ranges dictate. If your employees are below the new salary threshold, you have the option to increase their pay.
If you’re paying an employee a salary that’s above his/her pay grade, you have a few options. One is to forgo the next scheduled raise and instead give him/her a bonus. That way you’re not raising the base salary even higher. Or you could consider promoting the employee to the next pay grade. Of course, you could lower his/her base pay or make them ineligible for future increases, but that would have a negative impact on morale and engagement.
Monitor and Update
Salaries always fluctuate, so it’s important to ensure you continue to monitor the market. This doesn’t mean you have to conduct salary surveys every year, but if there are significant economic changes, it likely will be worth an evaluation.
Additional Benefits and Perks
While sticking to your established salary range is important to stay on budget, you may want to consider adding additional perks in order to attract the right candidate. Offering benefits such as tuition reimbursement, mentoring, professional development courses, childcare, wellness credits and flexible schedules can be more attractive than a higher salary to some people.
For more ideas on how to better manage labor costs or improve the employee experience, visit Paycor’s HR Center of Excellence.
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