Are Salary Ranges Still Relevant?

Our salary ranges are not serving us as well as they once may have.  We know it.  Unhappily, most employees know it, too.  My Cafe colleague Margaret O'Hanlon called attention to this reality last week in her post Do You Know What Your Salary Ranges Mean?

Margaret notes that the traditional salary range model, which communicates the essence of the deal we offer employees, no longer delivers on its purported promises.  This is tough to deny and not hard to understand.  The salary range architecture most organizations use today gained much of its popularity in a period when base pay was moving at a much faster pace (e.g., 8-10% annually in the late 70's and early 80's compared to the tepid 3% of today). 

But what I found particularly interesting was the debate that popped up in the comment stream to Margaret's post.  At its essence, as I read it, the central question raised was this:

Do - should - salary ranges still reflect the cornerstone of the employment deal in that they outline and communicate the rules for setting and growing base pay?

OR

Are they an antiquated theoretical construct whose time has come and gone, an idea no longer in step with the realities of the real world?

My thoughts?  Yes ... and yes.

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.

With salary dollars being in scarce supply today and likely for the foreseeable future, having a salary structure in place ensures that there is a "median" and a set of guard rails to prevent pay decisions from falling too far off the road. And perhaps more importantly, and to Margaret's point, having a salary structure in place typically 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.

And yet, clearly, our long-held model of base salary management is falling out of step with business and economic reality.

Where do we go from here? I don't believe that ditching structure entirely is an answer.  Broadbanding taught us that less is not necessarily more (or is it that bigger isn't necessarily better?).  Tighter salary budgets, if that is our longer-term reality, might call for tighter ranges - but will these fly in today's fast-paced and fluid reality?  Do we move toward a newfangled mash-up of pay steps and ranges?  Does this issue portend the long-awaited, often-touted death of the job and the corresponding advent of person-based pay? 

What are you seeing .. and what's your take?

Creative Commons image "Dinosaur Adventure" by Dave Catchpole

Comments

[Margaret O'Hanlon]

Thanks, Ann, for keeping this question alive. One of the principles of employee compensation is that our practices are systematic. Salary ranges are the foundation of that system. They represent the pay opportunities for an employee's "career" in a certain job title. If that system doesn't hold up any more -- you start in the first third and move up at a pace that represents your performance and skill development -- what is today's rationale for our system? How do we explain paying above/below market? (It just turned out that way because of our budgets?)

[Blair Johanson]

If we took a poll of our clients, I believe a large percentage of them would affirm the use of salary structures with grades and ranges for consistent management of employee compensation. We encourage our clients to utilize the salary ranges as boundaries but to not let rigid salary structures prevent the organization from attracting and retaining top performing employees. We know that an increasing number of organizations are using market pay data to establish employee pay reference points by job title and/or to validate internal pay range competitiveness. This has become an issue for compensation professionals since 1) market pay data is inconsistent enough to required several study reference points to establish a true median and/or average and 2) the evolution of less market position title benchmarks due to the growth of hybrid positions as a result of the recent economic depression. We support the combined use of internal job valuing and external market pricing to establish and maintain a systematic and defensible base pay compensation management structure and then supplement this structure with two-tiered merit pay plans or incentive pay plans to reward top performing teams and individuals.

[Ann Bares]

Margaret:

So right - having a strong, credible system is not only a key principle for pay management, it is vital to gaining employee trust and confidence in our pay practices.

Blair:

I would also expect your clients (and mine) to respond that way. Those responsible for the day-to-day management of salaries know the importance of having a structure to consistently frame and guide pay decisions.

Thanks for the comments!

[Juliana]

From my experience, some companies use a structure as the min and max of what they can pay a candidate without actually talking about career progression, competencies, internal equity. It hurts my head to think about it but until they are willing to change...

[Drew]

Thanks for the post. I have been struggling with the structure question myself in a new role. The issue I have is with treating jobs within a grade the “same” when there are distinct market differences.

Let’s say we a structure with 15% midpoint differentials and that you have 2 jobs in one grade. You have fairly reliable data (both market and business input) that shows one of those jobs has a market rate 5% below midpoint and the other is 5% above. It seems that if you target midpoint (for fully functioning in role) you end up underpaying one, and overpaying the other. It might seem that both are "close enough" to midpoint, but 10% difference between two roles is significant. When you look to hire you may be challenged in landing that role that falls higher in your range (if you use the range to dictate offers). If you use the market data to dictate offers then the job that falls in the upper end of the range may get the short end of the stick as it has less upside (and maybe lower increases if you use a matrix or managers rely on grade midpoint for increase guidance).

How do you address market differences such as these within a range? The graphic Margaret shared in her article as commonly accepted seems to ignore these market differences.

Thanks!

[Ann Bares]

Juliana:

I hear you - very short-sighted approach to salary setting, which is hard to watch because we know it will come back to bite someone later...

Drew:

Thanks for your comments and questions. Haven't had the chance yet, but will try to come back over the weekend and provide some response to the good questions that you pose.

[John A Bushfield]

This is an important topic, and I'm surprised that variable comp hasn't been mentioned. My view is that because the workforce model is changing, allowing (encouraging?) more virtual work, increased use of teaming, constantly evolving projects, etc., traditional compensation tools will become increasingly irrelevant. Job descriptions are already irrelevant in the newer technology companies, since by the time one is developed the job will have changed. Moreover, the whole performance management/evaluation trauma, the results of which have typically influenced salary actions, will likewise experience dramatic changes. Thus compensation practices will necessarily have to adapt to these changes.

Base pay, currently established by job function/level/title, will be replaced with an algorithm that recognizes skills and abilities, regardless of the particular function being performed. Variable pay will replace salary increases, tied to specific outcomes and occurring more than once or twice a year. The only way base pay increases is when the individual adds skills or gains knowledge that increases his/her value to the organization.

These are just a few of the practices that I see in my Compensation Crystal Ball. There will be more.

[Ann Bares]

Drew:

Circling back to your comment with some thoughts. My take: I tend to use the terminology "estimated market value" to describe the market rate for any job because it really is that, an estimate based on the best available survey information at that point in time, aged in a manner that reflects your presumptions about how market pay is really moving for that particular skill/talent set. Certainly, we try to make market pay measurement as rigorous and scientific as possible, but that doesn't change the fact that judgment and estimation brings a fair amount of art (in addition to science) to the table.

Certainly the act of grouping jobs into a single salary range suggests less precision than giving each job a unique range based on its own market rate, but that all hangs on how precise our market-determined rates are to begin with.

Bottom line, I think worrying too much about grouping jobs with the kind of difference in market values you describe may be according too much precision to the process of market valuation. A year from now, they could be 3% apart -- or 17% apart -- in market value. So while we want to keep an eye on market values versus grade assignments over time, we also want to be careful not to jump the gun in reacting to differences.

My thoughts - anyone else care to weigh in with a different opinion?

[Danny]

Human nature wants growth, wants to see change and movement, so keeping salaries constant and tinkering with variable pay, is for dreamers - ain't going to happen anytime soon with the promise of this great algorithm that is around the corner. Let's face the facts, you either ditch salary structures like Netflix has done and pay purely based on Market - which means that you fire anyone who doesn't meet the high bar of performance ( Netflix model) or you have a structure that identifies high performers ( top talent, Hi Po, Key people, what ever you call them) and give those folks ( usually 20% of the population) a much bigger slice of the scarce salary dollars. Even if you are moderately successful at predicting your top talent, it is a much better approach than spreading your salary dollars amongst everyone. For that to happen, you need to have some sort of a working Talent management model, identify which employees contribute uniquely to moving the business forward, innovating and creating a competitive differential, and load the increases in their favor. Approach your compensation from the perspective of Total Comp and the positioning you want to take wrt the market. Looking at just salaries is myopic and misses the big picture. Even if you have scarce salary budgets you can incent top performers with a promise of a reward in the future ( RSUs, Long term bonus etc) and drive a higher total comp than just a salary. If you don't have dollars even for that, then better not work in such a place