Grade-Based Ranges Versus Job-Based Ranges

In her Compensation Cafe post last week, Stephanie Thomas shared some interesting data from a recent Payscale survey on compensation practices.  Though Payscale divulges neither the number of respondents represented nor their demographics, I thought one particular set of results worth sharing here despite that flaw - and that concerns the approach to salary range determination.

Essentially, there are two possible roads to take here (at least as far as traditional salary ranges are concerned): grade-based ranges and job-based ranges. 

With grade-based ranges, jobs are grouped for purposes of salary administration, typically into salary grades.  The methodology of that grouping depends upon the job valuation approach used - the approach the organization uses to determine the relative value of its different jobs.  With a market approach, jobs will be grouped according to their market value.  When a formal job evaluation methodology (such as a point factor system) is used, jobs will be grouped according to their evaluation results (e.g., total points).  Let's say that the organization has a salary structure with 20 available grades.  Let's also say that the organization has 100 distinct jobs.  With this approach, each of those 100 jobs will be assigned to one of those 20 salary grades.

With job-based ranges, there is no grouping.  Each distinct job has its own distinct salary range, which reflects a range of salary opportunity based on either its market rate or its job evaluation results.  So, the organization that has 100 distinct jobs will also have 100 distinct salary ranges.

The charts below reflect the relative prevalence of grade-based and job-based ranges among the organizations surveyed by Payscale.  Across all respondents, 57% reported grade-based ranges and 43% reported job-based ranges.  As you can see below, however, the mix differs substantially by organization size.

 
I was surprised by how prevalent job-based ranges were, especially in the larger (>1,500 Ees) organizations. There are pros and cons to either approach, and I think job-based ranges make a lot of sense for employers where the pros outweigh the cons.  In the past, for most organizations, I think the pure administrative burden and hassle factor associated with so many salary grades kept bigger employers from going to this approach.  Technology has likely changed that.  Now you can have the flexibility and precision associated with job-based grades (what I see as the two biggest positives of this approach), with technology-enabled administrative ease.

But that's my take.  I'd be interested in yours.  Are you using grade-based or job-based ranges?  How's that working for you?  What do you see as the relative advantages and disadvantages?  And ... is there a trend underway here?

Comments

[E James (Jim) Brennan]

Someone asked a question about the difference between these on the WorldAtWork discussion site, too. Here's what I said:

I personally like the amalgam of both systems, where you have essentially job-based classifications maybe rounded off to one thousand or five thousand which are literal "midpoints" for compa-ratio calculation for all jobs with those central normative job values, whether determined by internal equity or by external market comparison, so one's "grade" might be $12,500 or $38,000 or $90,000 and you have none of the ancillary annoying and unnecessary arbitrary "grade policy" bumf like minimums and maximums, floors and ceilings. Each year your job's value changes per your evaluation scheme, usually up but occasionally nowadays down a bit. Managers are guided by common sense and enlightened policy as to what is the appropriate entry rate for this job versus that job, keeping in mind that the newly hired incumbent will be expected to close the residual between the actual salary and the (usually) escalating job value in the "proper" number of years per their sustained performance curve. No need for maximums, because if upper management approves the continued compounding of base salaries above the 150% compa-ratio point as a good deal, then no ceiling is required. When the supervisor can't get an additional management level to sign off on the budgeted increase, then the individual has met their necessarily unique value-added ceiling for this job. Time to apply for a more valuable job ("a promotional opportunity"), to shift gears to a different progression/advancement track, or to move on to a different department, if not willing to wait until incrementially maintained/improved performance justifies another raise.

You need good managers, because it essentially relies on sensible excercise of managment discretion.

[Travis Butchart]

My organization is likely moving to job-based ranges this year, mainly for the two pro's you have listed (flexibility and precision), but also to right the wrongs of the past. The change is meant to be a shakeup of a 40+ year compensation culture where grade numbers have more value than the salary ranges associated with them. By removing the labels, we're hoping for clearer focus on correctly classifying jobs and establishing competitive ranges.

My biggest concern is how to identify promotions, lateral moves, etc. without some ridiculously complex process. Other than that, technologically I'm anticipating smooth sailing for our ~40,000 employee base.

[Blair Johanson]

We have clients with both job-based and grade-based ranges. Historically, the smaller employers with less than 100 employees will identify with a job-based ranges approach as support by the PayScale study. Complimentary HRIS compensation management technology is beginning to move job-based ranges to include mid-size employers though most organizations with 100+ job titles still support grade-based range structures to foster career path identification and the reallocation of salary structure based compensation dollars to first and second range quartiles.

[Mercedes]

I see the greatest use of grade-based ranges within U.S. structures while the greatest use of job-based ranges is outside of the U.S. I see value in both, and I also see the need for job-based ranges inside of a larger grade-based range in order that we don't over or underpay for a role because the market midpoint is slightly higher or lower than the grade-based range midpoint. Doesn't necessarily have to be formally kept - although as others have mentioned, today's technology certainly makes it easier to track.

[Kim Walter]

In the large employers, it would be interesting to see if the ones who are using job-based ranges are also the ones who spend more on comp surveys and use tools to do market analysis for them. If you have robust market data and good tracking of your different jobs, it's sometimes easier to make job-based ranges than it is to create grade-based ranges and then go through the headache of slotting all your jobs into the ranges. Especially if you want global consistency across job levels - i.e. a Financial Analyst and a Tech Support Rep might be in the same grade in the US but not in India or China.

[Ann Bares]

Thanks so much everyone for the great comments and observations here.

Jim: I like your approach, but you're correct that it relies on sensible management discretion to succeed. Happens I've had my faith in sensible management discretion shaken enough times that I advise caution and a very clear-headed assessment before advising anyone in that direction.

Travis: I have also seen the move to job-based ranges as a means of shaking off the sins of the past. You're correct that this does, however, require a "re-definition" of what constitutes a promotion, lateral move or demotion. Some of my clients with job-based ranges have established guidelines in this regard (i.e., movement to a range 15% or more above the current constitutes a promotion, etc.)
Would be interested to hear what others have done.

Blair: Traditionally, I think your observations is correct - that smaller orgs select the job-based approach and larger orgs go with grades. As you and Kim point out, however, technology and tools are making it easier and more sensible for larger orgs to go gradeless - and take advantages of the pluses of this approach.

Mercedes: Interesting observation - my experience (which is admittedly limited outside the U.S.) has been the same... that grade-based systems are much more popular outside the U.S.

Kim: I would bet that you're right, that those (particularly the larger employers) using job-based ranges are also the ones who have invested more in tools and data ... which can make that approach actually administratively easier, as you note.