How Does a Salary Range Work?
How is a salary range determined and how does It work?
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 for employees.
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 demonstrates the interrelationships of the jobs utilized by an employer.
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 and 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. More flexibility exists for senior leaders.
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.
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 general help employers, set the salary range for a particular job.
In larger 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.
But, the bottom line is that you want to create salary ranges that motivate your employees to contribute and that help you attract and retain the most superior employees.
How to offer a salary that motivates employees
Information online makes researching salary ranges easier than setting salaries has ever been in the past—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 high base salaries.
A longer-term company, with fairly stable sales and earnings, may put more money in base salary.
Find Comparison Factors for Salary
While I believe every organization can benefit from industry comparison studies, if conducted by reputable organizations, the bigger question is whether you are competitive within your local market for most of your positions.
Research 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 of similar size, sales, and markets. 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.
One manager at a GM plant offered his star staff person a 7 percent increase because she had accomplished all of her goals and he said she walked on water.
Motivating? Should have been, however, it was not when the staff person knew others in the organization were receiving 10 percent increases and more. It demotivated her.
Additionally, your pay system must help you create the work culture you desire. Paying an individual for his solo performance accomplishments alone, will not help you develop the team environment you want.
Thus, you must carefully define the work culture that you want to create and aim your best salary increases at those contributing to the success of that culture. If you want your organization to change, define the change, and pay the employees commensurate with their support of and contribution to the change.
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 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
The U.S. has experienced a period of high unemployment in the past. Many skilled people were available because of job loss, the economic downturn, the demise of many dot-com companies, and other reasons. Currently, however, the economic reality is that you may have to hire good people for more money than in the past.
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.
However, 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, economically unsustainable and unfair to longer-term employees.
If you try to underpay, even if an employee accepts a job, she may never feel valued by your organization if her pay is out-of-line with her experience and contribution. She may never really stop her job search, using your company as a resting place until the right offer arrives.
You will also want to consider percentages of increase in salary in similar jobs in your local area. Ask yourself if this is an employee you really want to keep? If so, pay the employee a salary that makes you her employer of choice.
Create Salary Ranges Within Your Organization
People always talk about salary and pay issues. No matter what you ask them not to discuss their salary and other personnel issues at work, they do and they have the right to do so. Thus, grouping similar positions with similar responsibility and authority into pay ranges usually makes sense and will bear the scrutiny of your employees.
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.
Recognize 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 pay 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
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.
Ways to address bonuses, as part of your overall pay system, are limited only by your imagination. The recommended bonus structures are fair, consistent, understandable, communicated up front, and tied to measurable, achievable goals.
The better the shared picture of what constitutes eligibility for a bonus, by the organization and the employee, the more likely the bonus will result in employee motivation and success.
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. Yes, individual compensation is confidential, but your methods for determining pay must be clear and understandable to employees.
If you take these tips to heart and apply them within your organization, you increase the likelihood that you’ll have happy, motivated employees. The alternative is to use your salary system and salary ranges to create disgruntled, grumbling, unhappy people.
Which group do you think will do a better job of serving your customers? Increasing your profitability? Making you the employer of choice? Increasing your positive visibility in your community? Is there any question in your mind?