Screwy Midpoint Differentials Leads to Screwy Salary Management

Inconsistent midpoint differentials are a pet peeve of mine, as long time readers probably recall.

Midpoint differentials - for those of you who don't eat, drink and sleep compensation - are the jumps between salary range midpoints as you work your way up a traditional salary range structure.  I favor midpoint differentials that follow a consistent and logical pattern.  But I regularly encounter salary structures where the midpoint differentials look as though they came from a random number generator.  The tables below show examples to illustrate the difference. 
In many cases this chaos happens unintentionally over time, when salary ranges are added or tweaked on an isolated basis in order to address particular pay situations. 

In other cases, the uneven midpoint differences are actually created on purpose, the results of an initial design decision to create midpoints for groups of jobs clustered by current value (whether that be a market or internally generated value such as job evaluation points).  Although some consultants and compensation books do advocate tailoring structures and midpoint differences around job group values in this way, this approach is ultimately problematic in the real world where, over time and often even within the first year of the program, these job groupings will change as jobs are added, eliminated or altered in content and value.  In today's fluid labor market, it strikes me as silly to take a snapshot of current job inter-relationships and create a "permanent" structure which precisely reflects this, as if things were going to move in lock-step forever forward from this point.  How many organizations today operate in that kind of static environment?

Why - regardless of how it came to be - does it matter that midpoint differentials are inconsistent?

It matters because inconsistent midpoint differentials play havoc with an organization's attempts to manage promotions, job re-evaluations and/or job upgrades in an equitable and consistent manner.   If a one-grade promotion means a 5% increase in job value in some cases, and a 23% increase in job value in other cases, it is difficult to conceive and manage salary treatment guidelines that address each situation in a fair manner.  The same holds true for job re-evaluations or upgrades.  It might be easier to defend upgrading a job in a situation where moving up entails only a 5% difference in value versus the situation where a grade change entails a 23% leap, making it difficult to handle these decisions in an equitable way.

At the end of the day, screwy midpoint differentials create the conditions for screwy salary administration.  Who can afford that in today's litigious, discrimination-wary world of work?

Image courtesy of pmosblog.wordpress.com

Comments

[working girl]

Yeah! What you said.

[Margaret Dyekman]

I very much agree with your premise - for medium and large companies. But would like to mention a situation in which we used ranges for jobs without a grade structure. For small organizations, in this case 35 employees in about 14 jobs in three departments, we developed market-based ranges with range spreads that mirrored the 25th, median, and 75th percentiles (with some rounding). Putting in a range structure with consistent midpoint progression would have left a structure with many empty grades and the false hope of moving up. Also would have seemed like administrative trivia to "force" a small company into a sructure. So maybe my point here is it's not really a grade/range stucture, but instead market-based pay ranges for individual jobs. But in other situations, consistent midpoint progression makes a ton of sense for career definition, pay administration, etc, etc.

[Paul Weatherhead]

Thank you, Ann, for a discussion of a nuts-and-bolts compensation issue.

[Ann Bares]

Laura:

Thanky!

Margaret:

Really great point, thanks for mentioning it here. Developing an enduring set of salary ranges for a smaller organization can require a different approach and - to some extent - an exception to the consistency preference I've outlined here. I agree that job-based ranges (rather than a formal grade structure) is one option worth considering - has its own pros and cons, but (as you mention) can be preferable to a structure with a lot of empty grades. I've also had good luck with something of a hybrid approach, where we develop consistent "bunches" of grades - a few with relatively consistent midpoints covering admin and support jobs, a few covering professional and supervisory jobs, and a few covering management jobs. Saves us the issues of having one structure going soup to nuts, but with a lot of empty grades between different job levels - yet still provides some of the positives that consistent midpoint differentials lend to salary administration. Just takes an expert and thoughtful eye to devise the right solution in a smaller company setting.

Paul:

Always a pleasure - thanks for stopping by to comment!

[Deb McClanahan]

You've also provided a great argument for regular (and more rapid than we used to do) job and level reviews. As tech companies evolve and the technologies involved accelerate, jobs change rapidly. Systems engineers as an example do far different work today than they did in the past, driven by this rapid rate of change. Small company or larger, compensation professionals need to measure their pace and rate of reassessment
against the industries they're focused on. It is easy to get left behind.

[Ann Bares]

Deb:

Great point - we can't allow job and level reviews to lag too far behind in organizations and industries that are experiencing rapid growth and change. That's just asking for trouble!

Thanks for the added and important thought!

[Sherlyn Keiling]

Hi Ann - Thanks for the article. In premise, I agree with your concept, however, I prefer to have a more flexible approach to the midpoint differentials. For instance, at the entry level, I would expect employees to move more rapidly from one grade to another. In many instances, there isn't a tremendous difference between one grade and the next. However, as you move up the organization the difference in both responsibilities and pay increases. In your example of inconsistent differentials the percentages jump all over the place. I don't agree with that. As an example, my approach would have a 11% increase between midpoints for the first several grades that cover entry level positions. As we move up the organization, the midpoint differential would gradually increase to 20% or more The difference in pay between a Director and a Vice President could easily exceed 11%. In addition, I expand the difference between minimum and maximum to reflect the length of time an employee might remain in a job. In today's environment, as compensation professionals, I believe we need to be flexible in designing comp structures so that they fit the organization and it's employees and not have one size fit all.

[Ann Bares]

Sherlyn:

Here again - a great point and opportunity for clarification. Although my example does (for clarity's sake) show a set of midpoints differentials that are exactly identical going up and down the structure, what I am really advocating (and what I say above) is midpoints differentials that follow a "consistent and logical pattern". What you describe is consistent and logical to me (and I've used a similar approach for select clients), even though it is not a series of "identical" differentials. Certainly wider ranges for higher level positions is also consistent with logic and best principles. None of these more flexible types of consistency, if carefully thought through, would interfere with sound salary administration, to my mind.

So, flexible - yes - as long as it follows a consistent and logical and defensible trajectory, rather than a willy-nilly one.

Thanks for adding to the discussion!

[Blair Johanson]

Ann:

Thank you for pointing out a significant pay equity issue that we see when compiling two regional compensation and benefits studies each year. It is surprising the number of organizations that function without a formalized pay structure. Also, several that share their pay structures for the surveys continue to show inconsistent midpoint separations between grades. Since our compensation consultants are advocates for an internal points-factor job evaluation process, we use 200 point midpoint spread for executive management positions, 100 point spread for management, supervisors, professionals and a 50 point midpoint spread for all the remaining (usually hourly) positions. For smaller organizations, we allow the weighted point value to determine each position's midpoint.

[Ann Bares]

Blair:

Your example reinforces the importance of a logical and consistent, but not necessarily "identical", series of midpoint differentials - thanks for sharing!

[Gsalerts]

I would like to say this is an excellent blog that I have ever come across. Very informative. Please write more so that we can get more details.

[Warren Heaps]

Another watch out is patterns for midpoint differentials in developing markets. The trend we find in our surveys across 147 countries is there is a much larger jump between professional and manager level jobs, and again between manager and executives.

In fact, unlike the US and Europe, where the pay curve is usually a fairly straight line with a more or less constant slope, developing market pay curves look like hockey sticks. By the way, the same thing is true with range spans -- the usual 50% span in the US will fail in West Africa, where it's more common to see 120% or more.

Bottom line - be sure to monitor your differentials and spans against market data, and be sure you make adjustments that are specific for your organization in order to promote the behaviors and team cohesion desired.

[Ann Bares]

Warren:

An interesting consideration when designing and managing global programs - I would expect this becomes particularly prominent when an organization is using a global job evaluation system (as many do) to establish grade level and local market data to set pay ranges in each geography. Thanks for bringing an important point to our attention!