How Does a Salary Range Work?

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Salary range is the range of pay established by employers to pay to employees performing a particular job or function. Salary range generally has a minimum pay rate, a maximum pay rate, and a series of mid-range opportunities for pay increases.

The salary range is determined by market pay rates, established through market pay studies, for people doing similar work in similar industries in the same region of the country.

Pay rates and salary ranges are also set up by individual employers and recognize the level of education, knowledge, skill, and experience needed to perform each job.

The salary range should reflect employer needs such as the overlap in salary ranges that will allow career development and pay increases without promotion at each level. It also considers the percentage of increase the organization will offer an employee for a promotion.

The salary range for executive-level positions is normally the largest. The salary range for lower-level positions is normally the narrowest. There is always more flexibility with regards to senior leaders because their decisions impact the bottom-line.

What Employers Look at to Determine Salaries

Many companies participate in salary market surveys to create a trustworthy resource for salary research. More and more salary research is occurring online using salary calculators.

Salary range is also affected by additional demographic and market factors. These factors include the number of people available to perform a specific job in the employer’s region, competition for employees with the needed skills and education, and the availability of jobs.

In large organizations, an entire salary (or pay structure) is established to classify jobs, the relationship of one job to another, and the salary (or pay) ranges that fairly compensate the individuals performing the jobs.

In the end, you want to create salary ranges that motivate your employees to contribute. You also want to attract and retain the most superior employees.

How to Offer a Salary That Motivates Employees

Available information online makes researching salary ranges easier than previously—but, also trickier. The role of salary in helping you create a motivated, contributing workforce is inestimable.

These tips will help you address pay and salary range issues in a way that contributes to employee motivation in your organization.

Determine Salary Philosophy

Determine your organization's salary philosophy. Do you believe in raising the level of base salaries in your organization, or do you appreciate the flexibility of variable pay?

A growing, entrepreneurial company, with variable sales and income, may be better off controlling the levels of base salaries. When times are good, the company can tie bonus dollars to goals achieved. In lean times, when money is limited, the company is not obligated to have high base salaries.

A strategically forward-thinking company, with fairly stable sales and earnings, may put more money in base salary.

Find Comparison Factors for Salary

The big question is whether you are competitive within your local market for most of your positions.

Start by researching the salary range for similar positions and job descriptions.

The job description is particularly important for comparisons but usually harder to find for comparison. Determine whether you are competitive with similar positions with organizations that have a similar size, sales volume, and market share. If you can find companies in the same industry, especially in your area or region, that is another good comparison source.

What Goals Must Salary Help You Achieve?

Pay must relate to the accomplishment of goals, the company mission, and vision. Any system that offers an employee the average increase for their industry or length of service (usually 1-4 percent) is counter-productive to goal accomplishment. Even an above-average increase that differentiates one staff person from another can demotivate.

Additionally, your pay system must help you create the work culture you desire. Paying an individual for his or her solo performance accomplishments alone, will not help you develop the team environment you want.

Therefore, you must carefully define the work culture that you want to create and pay the employees commensurate with their support of (and contribution) to that culture.

Finally, your salary strategy must align with your human resources goals and strategies. If the HR function is charged with developing a highly skilled, outstanding workforce, you must pay above industry or regional averages to attract the quality of employees you seek.

Paying less than comparable firms will bring you mediocre employees and fail to fulfill your desire to create an outstanding workforce. If on the other hand, the HR strategy is to get cheap labor in the door quickly, with little regard for turnover, you can pay people less salary.

Assess the Competition and Labor Markets

When unemployment is high, skilled people are available because of job loss and the economic downturn. Currently, however, the economic reality is that you may have to hire good people for more money than in the past—because things are brighter.

This economic reality is constantly changing and it affects the economic realities of salaries for employers and employees. In upcoming years, the war for talent, which is expected to occur as employers compete for fewer people with highly needed skills, the need for a fair, market-driven salary range is a given.

If you overpay or underpay an employee, it will eventually come back to haunt you.

Overpay and you risk throwing your salary range off-kilter. It becomes economically unsustainable and unfair to longer-term employees. 

If you try to underpay, even if an employee accepts a job, he or she may never feel valued by your organization and will continue to job search, using your company as a resting place until the right offer arrives. Nothing impacts employee morale as much as individuals who feel they are underpaid in comparison with others based on their contribution and that of other similar jobs.

Tout Your Benefits Package Role in Salary Satisfaction

An organization that offers better than average benefits may pay less salary and still have motivated, contributing employees. If your health plan fees go up and you continue to pay the cost, this is the same as money put in your employees’ pockets.

The range of benefits you offer, and their cost to the employer, is a critical component of any salary approach. The biggest mistake organizations make is the failure to communicate the value of the benefits offered.

Determine Bonus Philosophy and Potential

Ways to address bonuses, as part of your overall pay system, are limited only by your imagination. You may pay a bonus that is determined individually based on the value of the goals accomplished and the person to your organization. You may give all employees the same bonus, based on group goal attainment, across the board.

You may also use profit sharing in which a portion of company profits is paid out equally to every person who was employed during the time period.

Communicate Your Salary Philosophy and Approach

In many organizations, who gets what and why is a cause for consternation, gossip, demotivation, and unhappiness. The more transparent you make your pay and salary philosophy and determinations, the more likely you are to achieve positive employee morale and motivation.

Don’t keep your salary philosophy a secret. Even though individual compensation is confidential, your methods for determining pay must be clear and understandable to all employees.

Recognize That Salary Ranges Are Becoming Less Used

Salary ranges are becoming less relevant in the modern world of HR, but they do provide several essential and needed banks for employers to erect for employees.

According to compensation consultant, Ann Bares in "Compensation Force," "I've had the chance to work with many organizations who don't have a formal salary structure, either smaller organizations yet to put in place any pay rules and policies or more established businesses who have (at some point) ditched their structures in an attempt to foster more 'flexibility.' What I've found, more times than not is that salary decisions in these places are all over the map, with little rhyme or reason, and often made in response to pressure (employee complaints or implicit/explicit threats of leaving).

 And everyone knows it.  Especially the employees.

"Having a salary structure of some kind in place ensures that there is a set of guardrails to prevent pay decisions from falling too far off the road. Perhaps more importantly, having a structure in place gives employees at least a minimal amount of assurance that there are rules which are followed and that salary decisions aren't based entirely on whim, favoritism or discrimination."

In the end, if you take these tips to heart and apply them to your organization, you will increase the likelihood that you’ll have happy, motivated employees.