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Salary ranges help employers control their pay expenses and ensure pay equity among employees.
It is critical that employers have rational explanations for why they pay their employees a certain
rate, and defined salary ranges help accomplish that.
The purpose of this guide is to provide a basic set of
steps for creating compensation grades and salary ranges. It is intended for general use and should be tailored to
meet an organization’s specific needs and goals. Employers
and HR professionals without experience and knowledge
of compensation design principles should consult with an
expert for help as developing a compensation structure is a
critical element within every organization.
Before creating salary ranges, the organization must first
determine what its approach or philosophy is to compensation.
What is the mindset that drives pay decisions? Determining
the compensation philosophy requires an in-depth
look at the company’s beliefs regarding compensation. The
key is to create a philosophy and be consistent in its application
regarding pay practices.
An employer can choose to lead, lag or match the market
when compensating employees. Being a market leader
means that the organization pays more for jobs than its
competitors. Typically, an organization does this to gain an
advantage or attract talent away from its competitors. If an
employer decides to match the market, it pays roughly the
same as its competitors, and if an employer lags the market,
it is paying less than market rates. Generally, an employer
rarely chooses to lag the market as a conscious pay
strategy. It is often either discovered after market research
reveals the practice, or it may be the result of a limited
compensation budget. In rare circumstances an employer’s
brand may be so attractive (e.g., Disney, Google) that the
employer can pay lower-than-market wages without a negative
impact on recruitment and retention.
A company’s attitude toward compensation will drive its
decisions through the rest of this process. Therefore, it is
critical to know the employer’s pay philosophy and have
executive buy-in from the outset.
A job analysis is a process for gathering, documenting and
analyzing information about a job to determine the activities
and responsibilities it includes, its relative importance to
other jobs, the qualifications necessary for performing the
job and the conditions under which the work is performed.
This can be done by observing employees, conducting
surveys or interviewing employees doing the job, or using
a combination of these methods. The end result of a job
analysis is a clearly defined job description.
Once an employer has developed current and accurate job
descriptions, it should determine whether to group the jobs
into separate job families or have one pay grade system for
all positions throughout the organization.
For example, an
organization may have an administrative job family, technical
job family, management job family and executive job
family. It may have different job families based on geographic
locations (different countries or regions) or different
A job evaluation is the process of rank-ordering jobs—not
the people in them—based on job content to demonstrate
the relative worth and level of responsibility of all jobs to
one another. There are several job evaluation methods; the
two most common methods are explained below.
The content of jobs can be described in terms of factors.
Factors are qualities of a job that are common to many
kinds of jobs, such as skill, effort or working conditions.
Each factor is assigned a weight, or points, according to
how much of that particular factor is present in the job.
Simply stated, the more points assigned to a job, the more
worth the job has to the organization. Jobs with more worth
are compensated more than jobs with lesser worth. There
may be a group of factors to apply to all jobs or different
factors for distinct functions or a combination of companywide
and function-specific factors. One example is the Hay
point method system, which uses only three factors and
measures the degree that these three factors are required
for each position. The Hay system factors are know-how,
problem-solving ability and accountability.
The ranking method is a much more simplistic approach to
rank-ordering the value or worth of each job in comparison
to other jobs within the same job family. Job ranking places
jobs in a hierarchy of their value to the company. This method
is an estimated approach rather than a formal calculation
as described in the point factor method. The less-rigorous
ranking method is often used in smaller organizations
that have fewer jobs to compare.
Conducting market research ensures that wages paid
to employees are comparable to similar positions in
When conducting salary market research, employers
should consider the following:
Job titles vary between organizations. Employers
should read the descriptions of the jobs surveyed to
make sure that the related tasks, functions and levels
of responsibility match the positions at their organizations.
To obtain current, accurate salary information,
employers will typically need to purchase salary data.
A few resources, such as the U.S. Bureau of Labor
Statistics (BLS), offer free data, but the data may be
older and too broad in terms of industry, geography
or other factors.
Whenever possible, employers should try to obtain
information from more than one market survey resource,
at least for benchmark positions. Professional organizations sometimes offer data at a discounted
price. For example, if an employer wants to hire a large
group of engineers, it could check with the local engineering
association to see if the association conducts salary research
and offers price breaks to members.
To avoid violating antitrust laws, employers should
not contact other organizations directly for compensation
information. Using information from a vendor
that is in writing, that uses averaged pay rates and
aggregate data received from various sources, and
that does not directly identify survey participants is in
the best interest of the organization.
When collecting market data, employer-reported
data are generally more reliable than employee-
provided salary information. Avoid Internet
searches for free salary data, which often contain
compensation that has been self-reported by employees.
Employers should realize from the outset that
each organization has jobs that are unique and that
it will be impossible to find exact matches for all
jobs. Organizations may need to consider jobs that
closely fit the principal aspects of a particular job and
consider salary data for more than one type of job.
Job grades are groupings of positions with similar worth.
Organizations can either use their job evaluation data to
group positions into job grades or use their market data
to band together positions based on similar salary survey
data. This guide uses the market banding method.
An employer can have as many or as few pay grades
as it wants. A startup or small organization may have only
three or four pay grades. The federal government, by
contrast, uses 15 pay grades based on the level of difficulty, responsibility and qualifications required. Individuals with a
high school diploma and no additional experience typically
qualify for GS-2 positions; those with a bachelor’s degree
for GS-5 positions; and those with a master’s degree for
Employers should note the range of pay in the salary surveys
and other information that may be relevant
when establishing an average salary. For each
pay grade, an organization will need to establish
minimum, midpoint and maximum pay ranges.
Often employers consider their midpoint of a
salary range to be somewhere between the 25th
percentile and the 75th percentile. Some employers
will use the 50th percentile, the median, mean
or mode if they want to meet the market. If a company’s
philosophy is to lead the market, the salary
point will be above the 50th percentile for most
positions. A simple way to establish a proposed
midpoint is to average the market data between
the different positions grouped in a grade. There
is no hard and fast rule on creating salary ranges.
In this guide, we use the midpoint as the base for developing
the salary range. Other methods also are available, such
as using the minimum salary as the base.
A traditional salary range is commonly 30 percent to 40
percent. It is common that top salary grades (i.e., for executives
and top management) have a wider range (sometimes
greater than a range of 40 percent) and that the lowest
salary grades often have the narrowest range (sometimes
smaller than 30 percent). Broadbanding occurs when employers
decide to have very few salary grades and to make
those ranges much wider.
The formulas for a 30 percent range using the midpoint
as the base are:
Maximum = Midpoint x 1.15
Minimum = Midpoint x 0.85
The formulas for a 40 percent range when the midpoint is
Maximum = Midpoint x 1.20
Minimum = Midpoint x 0.80
Pay grade ranges will usually overlap. The more overlap,
the more cost-effective it will be for career progression; less
overlap will require a larger pay increase for internal promotions.
Each job family can have its own pay grades and pay
ranges that are established independently from other job
At this stage in the process, an employer can look at what
it is paying its employees in comparison to the data it has
collected and the proposed salary grades and ranges for
positions. The organization may need to make some adjustments,
but overall the employer can rely on market data and
its pay philosophy to set these ranges.
After the salaries for current employees have been
placed into the range, several employees will inevitably not
be in line with the guidelines and ranges the employer has
"Red circle rates” are salaries/wages that are above the
maximum rate the organization has established for the
position’s salary range. Strategies to rectify red circle rates
include the following:
Lower an employee’s base pay to bring it in line with the
range. This option will likely lower employee morale and may
motivate an employee to start job hunting. For this reason, it
is important to encourage valuable employees to seek developmental
opportunities that could lead to promotion.
“Green circle rates” are salaries below the minimum rate
the employer has established for the position’s
Green circle rates are equally as
problematic as red circle rates in that they do
not follow established guidelines. A solution is to
provide pay increases up to at least the minimum
in the range. An exception may be if an employee
has been performing below expectations. In this
case, the employer may want to consider requiring
successful completion of a performance improvement
plan prior to receiving a pay increase.
Compensation rarely remains static. The rate of
pay is constantly changing with external market
and economic activity.
Aging is the activity of increasing salary grades
with the market without the cost of purchasing
new salary survey data each year. One way to do
this is by using the Employment Cost Index (ECI).
The ECI is a component of the National Compensation
Survey, which is produced by the BLS. It
measures changes in the cost of total compensation,
which includes wages, salaries and the
employer’s cost of employee benefits. Another option is to
use the annual Cost of Living Adjustment, published each
year by the Social Security Administration.
Ultimately, salary survey data should be gathered and reviewed
every two to three years so that appropriate adjustments
can be made to the organization’s salary ranges.