With data getting better and easier to access, some of us are getting used to updating job pricings on the fly. But when to update your salary structure has always been a poser, especially for smaller organizations. Not only do we have to schedule a timeout to do the work, but we are wary about the results. For example, who knows what the results will mean in terms of (heaven forbid) salary adjustments? Why not let sleeping dogs lie?
There are rules of thumb that will give you a systematic way of dealing with this question. The annual work is painless enough that even a one-person Human Resource department can deal with it. The refresh work is harder, but actually fundamental to the professional use of salary structures. After all, they are management tools that guide our organization's salary administration decisions. They should have a data reliability that is built on working principles. If, for instance, we have two or more ranges where multiple employees have maxed out, let's face it, it's getting hard to consider the structure valid.
Here's one rule of thumb. Each year, spot check a representative sample of jobs in each salary grade. Things to look for?
- Are the midpoints still aligned with the market pay for your jobs? Since you are driving pay decisions against midpoints, their validity is key.
- Do your jobs still fit within the assigned range?
- Do you have high demand jobs with salaries that keep inching up? You may need to evaluate their placement in the structure. Check whether your job leveling indicates your high demand jobs should move up to another range or do you still have some latitude?
Here's the other rule of thumb. Don't fall in love with your salary structure! This is where the hard work comes. Salary structures should be tested about every three years. Two years, if you have many high demand jobs where the salaries are chasing the market each year, or even more often. How do you do a salary structure refresh? Here's a high-level outline.
- Competitive market benchmarking of at least two-thirds of your jobs. You'll need to do that many to test your midpoints validly.
- Adjustment of midpoints and range spreads, as necessary. If you have a lot of employees maxing out, you need a fix or you may need more grades.
- Adjustment to the number of grades in the structure. How do you know when this is needed? If your company has added a number of new jobs, or a new location, odds are you need to rework the structure. If the market rates are getting compressed between salary ranges, you may need fewer grades.
- Assessment of where current employees fall in the adjusted structure, to confirm the new structure and plan for salary management issues that you'll face at the next salary review.
In almost all industries, letting salary structures go beyond three years means that the validity of your structure is weakening. Since we are using the structure to make many critical decisions, this is not a wise leadership position to take. The salary structure is our tool as business leaders so we should be able to use it without offering excuses.
Margaret O'Hanlon brings deep expertise to discussions on employee pay, performance management, career development and communications at the Café. Her firm, re:Think Consulting, provides market pay information and designs base salary structures, incentive plans, career paths and their implementation plans. Earlier, she was a Principal at Willis Towers Watson. A former Board member for the Bay Area Compensation Association (BACA), Margaret coauthored the popular eBook, Everything You Do (in Compensation) Is Communications, a toolkit that all practitioners can find at everythingiscommunication.com.
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