How to establish salary ranges

Mark Mutingwende / Posted On: 31 May 2021 / Updated On: 25 September 2022 / Analytics / 402

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How to establish salary ranges



Salary ranges speak on the level of remuneration an organization is paying its employees. It does not speak on the company's capability but on what the company is doing in practice.

 

Employers can use salary ranges to keep track of their pay costs and maintain pay equity among their employees. It's vital for businesses to have solid reasons for paying their employees a given wage, and compensation ranges can help with that. The goal of this post is to show you how to create pay grades and salary ranges in a simple way. It is meant for general usage and should be customized to match the needs and objectives of a particular business.


Step 1: Determine the organization's compensation philosophy

In order to construct a viable salary range, the organization must first establish what its code or philosophy is towards compensation. For example, an organization could stipulate that its philosophy is to ensure that employees are paid 25% above the market average in an attempt to maintain competitive wages. The benefits of competitive wages are numerous but some key benefits include; boosted employee retention, high employee satisfaction which can lead to improved performance and elevated company attractiveness. However, another company’s philosophy could be to pay slightly below market average because the organization is not prioritizing employee retention which has one benefit of lowering costs but many disadvantages such as increased employee attrition and low employee morale.In most cases, only organizations with extremely attractive brand names (eg NIKE, Disney, Google) can get away with paying employee below market average, also in economies with high unemployment rates such as Zimbabwe where any source of income is considered better than nothing, generally employees and job seekers are “desperate”.In order to achieve these targets the company will need to make use of salary surveys specific to its industry, this will enable it to determine the level of remuneration it wishes to achieve. Determining the compensation philosophy necessitates a thorough examination of the company's compensation views. The idea is to develop a pay philosophy and stick to it when it comes to compensation practices.

 

Step 2: Conduct a job analysis

A job analysis, also known as job evaluation, is a method of obtaining, documenting, and analyzing information about a job in order to evaluate the activities and duties it entails, its relative relevance to other jobs, and the skills. required to do the job, and the working circumstances.It is a systematic process of determining the worth of a job to other jobs. The objective of this process is to determine the correct rate of pay. It is therefore not the same as job analysis. Rather it follows the job analysis process, which provides the primary data to be evaluated. In simple words, job evaluation is the rating of jobs in an organization. This is the process of establishing the value or worth of jobs in a job hierarchy and compares the relative intrinsic value or worth of jobs within an organization. The main objective of job evaluation is to ensure equitable remuneration for the relative value of a job.

 

Step 3: Group into job families

After developing current and accurate job descriptions, an employer should decide whether to classify the jobs into distinct job families or use a single pay grade system for all roles within the firm. A company might have an administrative job family, a technical job family, a management job family, and an executive job family, for example. It may have distinct job groups or divisions based on geographical locations (various countries or regions). Consider a job that falls into the Executive family, this position would naturally consist of more critical decision making and a higher salary than a job that falls into say the General hand Family.

 

Step 4: Rank positions using a job evaluation method

A job evaluation is a process of ranking jobs (rather than the individuals who work in them) based on their content in order to indicate the relative value and level of responsibility of all jobs in relation to one another. There are numerous ways for evaluating jobs, including the Paterson technique, which is briefly described below:

The Paterson decision band technique is a job evaluation methodology based on the job classification method. Professor invented the technique. The Paterson system is based on the idea that an employee's ability to make decisions is the most important function. Decision-making is a common feature of payment that exists in all jobs and allows us to categorize them.

 

All jobs, according to the Patterson method, can be classified into six decision-making bands based on the difficulty of the judgments that job holders must make. Band A decisions are completely specified, while band F decisions are difficult policy formation decisions. Following that, the decision-making bands are separated into subgroups based on a coordinating component.

 

Step 5: Conduct market research

Market research ensures that employee pay is equal to those of similar positions in the marketplace. Conducting research allows the employer to gain access to market conditions. Employers should aim to get information from more than one market survey resource wherever possible, at least for benchmark positions. However, the employer must make sure to compare their organization with similar organizations in terms of size, philosophy, and revenue. Most market research is available in the form of salary surveys of national statistics. Employers should recognize right away that each company has its own collection of roles, and that it will be hard to find identical matches for all of them. Organizations may need to evaluate jobs that closely match the main elements of a specific profession, as well as compensation data for other job types.

 

Step 6: Create job grades

Job grades are classifications that combine jobs of similar value together. Organizations can either utilize their job assessment data to group roles into job grades or use their market data to classify roles based on salary survey data that is similar. The market banding method is used in this guide. The number of grades a company has usually depends on the size of the organisation. A company with a roster of over 500 employees can have twenty grades while a small firm of 30 employees can have just five grades.

 

Step 7: Create a salary range based on research

A company must determine minimum, midrange, and maximum pay ranges for each pay grade. Employers frequently regard the middle of a wage range to be somewhere between the 25th and 75th percentiles. If they want to meet the market, some employers will use the 50th percentile, median, mean, or mode.

A standard wage range is usually between 30% and 40%. It is normal for top wage grades (i.e., executives and top management) to have a higher range (often exceeding 40%), while the lowest income grades frequently have the smallest range (sometimes smaller than 30 percent). Broadbanding occurs when an employer decides to have a small number of salary grades and to make the ranges much wider.

 

Step 8: Determine how to deal with salaries, not within range

Although certain changes may be necessary, the employer can determine these ranges based on market facts and its pay philosophy in general.

Following the placement of current employee salaries into the range, numerous employees will invariably fall outside of the guidelines and ranges provided by the business.Salaries/wages that are beyond the organization's maximum rate for the position's compensation range are referred to as "red circle rates." Strategies to rectify red circle rates include the following:

  • Instead of base salary increases, give star employees a bonus equal to the pay increase they would have received. This permits an employee's extraordinary performance to be recognized without having to increase his or her base pay.
  • Investigate growth opportunities to help you advance to the next pay grade.
  • By freezing compensation, you can prevent additional compensation rises.

Green circle rates" are salaries that are less than the minimum wage set by the employer for the position's salary range. Green circle rates are just as troublesome as red circle rates in that they do not adhere to any set of rules. One option is to grant salary raises that are at least as high as the range's minimum. If an employee has been performing below expectations, an exception may be made.

 

Step 9: Updating and aging

Compensation is rarely constant. The rate of pay fluctuates in response to external market and economic conditions. Aging is the process of raising wage grades in line with the market without having to pay for fresh wage survey data every year. Using the Employment Cost Index is one approach to do this (ECI). The annual Cost of Living Adjustment is another possibility.

 

Conclusion

Salary ranges require great thought and research in order to determine salaries that are fair, uniformly progessive, competitive and that adhere to the company philosophy. In order to gain access to market research organizations may have to pay for Salary Surveys or they can opt for public data published by the National Statistics body. Though the process is rigorous, the benefits of well thought of salary ranges are immense for both the employer and the employee.

 

References

  1. Carl Tapi. Everything You Need To Understand About Job Evaluation. Harare,Zimbabwe. 2020.
  2. McMahon, J.R. & Hand, J. Measuring the Marketplace: An Approach to Designing and Conducting a Salary Survey, Scottsdale, AZ.., World at Work, 2001

 

 

Mark Mutingwende is a Business Analytics Graduate Trainee at Industrial Psychology Consultants (Pvt) Ltd a management and human resources consulting firm.

Phone +263 4 481946-48/481950/2900276/2900966

Cell number +263788512701

Email: [email protected] or visit our website at www.ipcconsultants.com 


Mark Mutingwende
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