Pay structure: Grades & Ranges
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Pay Structure:Grades & Ranges
www.payscale.com
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• Why Pay Structure?
• Elements of a Pay Structure
• Building a Pay Structure
• Step 1: Identify Multiple Schedules
• Step 2: Determine Pay Grades
• Step 3: Develop Ranges
• Step 4: Assign Grades to Positions & Adjust for Internal Equity
• Using Pay Ranges
• Compa-ratio
• Maintaining Structure 2
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Why Pay Structure?
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Why Pay Structure?
• Clarifies the market and internal value for each job, and provides a way to manage employee pay effectively
• Quantifies compensation costs & enables budget decisions
• Validates compensation strategy & aligns to business goals
• Provides a tool to talk with employees about development
• Ensures pay equity
• Determines pay for non-benchmark jobs
• Allows ease of administration 4
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Elements of a Pay Structure
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Pay Schedules
• Sets of Pay Grades, multiple markets grouped (geography, industry, etc)
Pay Grades
• A label for a group of jobs with similar relative internal value
• Associated with a pay range
Pay Ranges
• The upper and lower bounds of compensation, includes a range minimum, midpoint, and maximum
Elements of a Pay Structure
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Pay Schedules
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6 Different Pay Schedules:
o Home Schedule– 3 labor markets, within 2.5% of HQ
o Schedule A, Minus 15% Schedule – 4 labor markets
o Schedule B, Minus 10% Schedule – 7 labor markets
o Schedule C, Minus 5% Schedule – 4 labor markets
o Schedule D, Plus 5% Schedule – open
o Schedule E, Plus 10% Schedule – 1 labor market
Sets of Pay Grades with multiple markets grouped together
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Pay Grades & Ranges: What are they?
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Range:
• a lower and upper limit associated with a pay grade
• generally has a minimum, midpoint, and maximum
Grade:
• an identifier of a pay range
• multiple jobs can be grouped in a pay grade
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Building a Pay Structure
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• Provides a way of grouping together multiple labor markets, using the same set of pay grades
• Streamlines pay structure
• Consideration: how complex is your organization?
• Industries and/or lines of business
• Retail & Social Services
• Sales
• Engineers vs Admin
• Locations
Step 1: Identify Multiple Schedules
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• There are no fixed rules for every organization
• Decide how many grades you will have. Number of pay grades varies in response to:
• The size of the organization
• The vertical distance between the highest and lowest level job
• How finely the organization defines jobs and differentiates between them (i.e. levels)
• The pay increase and promotion policy of the organization.
• Determine the definition of each grade
Step 2: Determine Pay Grade
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Step 3: Develop Ranges
• Midpoint Differential
• Distance between midpoints
• Formula: =(MidB-MidA)/MidA
• Range Spread
• Distance between bottom and top of range
• Formula: =(Max-Min)/Min
• Typical range spreads are 30% to 60%
• Min relative to Mid
• Formula: =Mid/(1+(Range Spread/2))
• Max relative to Min
• Formula: =Min*(1+Range Spread)
RangeRange Width Min Mid Max
A 40% $8.50 $10.25 $12.00
B 41% $9.75 $11.75 $13.75
C 42% $11.25 $13.50 $16.00
D 43% $12.75 $15.50 $18.25
E 44% $14.75 $18.00 $21.25
F 45% $16.75 $20.50 $24.50
G 46% $19.25 $23.75 $28.25
H 47% $22.00 $27.25 $32.50
I 48% $25.25 $31.25 $37.50
J 49% $29.00 $36.00 $43.25
K 50% $33.25 $41.50 $49.75
L 52% $37.75 $47.75 $57.50
M 54% $43.25 $54.75 $66.50
N 56% $49.25 $63.00 $76.75
O 58% $56.25 $72.50 $88.75
P 60% $64.25 $83.50 $102.75
Q 62% $73.25 $96.00 $118.50
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Considerations
Difference at the base vs top of the structure
• Broad range spread at the top, narrower at the base
• Time to proficiency
• Differentiation of skill sets
• Manager input
Overlap between ranges
• Long tenure/high performing employees can earn higher wages
• Provides more cost effective career progression within the org
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• Align positions to structure by matching market value with closest range midpoint
• Adjust for internal equity.
• Positions with similar level of responsibility and value to the organization.
• Where market is between two grades, use internal equity to tip.
Step 4: Assign Grades to Positions
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Position GradeAssignments
Job Code Grade
Client Service Associate 1
Marketing and Business Development Associate 2
Executive Assistant 3
Sr. Client Service & Compliance Administrator 4
Office Manager 4
Client Advisor 6
Senior Client Advisor 7
Director of Client Services & Operations 7
Vice President 8
Director of Investment Research 8
Senior Investment Strategist 9
Owner President 10
Owner CEO 10
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Using Pay Ranges
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How do you use the pay range?Employee Placement in Range
o Min = New Hire
o Midpoint = Proficient & meeting performance expectations
o Above midpoint = Takes into account tenure, performance, education –whatever org values most
Guidelines or Policies
o Develop guidelines or policies about:
o Where new employees enter ranges
o How current employees move within ranges
o What happens when an employee is promoted?
o How much discretion do managers have?
o Get specific, where it makes sense17
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Employee Placement in Range
Range MidpointMinimum Maximum
$20,000 $32,000$26,000
Range Midpoint:Range Minimum: Range Maximum:
Lower limit of a pay range/band. Pay for new or less experienced employees should be closer to minimum.
The midpoint identifies the proficiency point. Market
based ranges have a midpoint that aligns with the
target percentile in the market.
The upper limit of a pay range/band. Pay for more tenured employees or star
performers should be approaching this number.
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Employee Placement in Range
Range MidpointMinimum Maximum
$20,000 $32,000$26,000
Green-Circled Employees Red-Circled Employees
Employees that are paid below the minimum of the pay range.
Employees that are paid above the maximum of the pay range.
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Comparing Employee Pay to Ranges
Range MidpointMinimum Maximum
$20,000 $32,000$26,000
50% Penetration
33% 66% 100%0%
Range Penetration:
A percentage that shows an employee’s position in the range. The percentage shows a relative comparison to the minimum of the range.
= (Employee Pay – Min) / (Max – Min)
Range Penetration = 0%Employee’s pay is at the minimum
Range Penetration = 50%Employee’s pay is at the midpoint
Range Penetration =100%Employee’s pay is at the maximum
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Comparing Employee Pay to Ranges
Range MidpointMinimum Maximum
$20,000 $32,000$26,000
> 1.0
=1.0 compa-ratio
< 1.0
Compa-Ratio:
A quick number to identify employee’s pay relative to the midpoint of the range. Calculated by:
= Employee Pay / Midpoint
Compa-Ratio < 1.0EE Pay is below proficiency point
Compa-Ratio = 1.0EE Pay is at the proficiency point
Compa-Ratio > 1.0EE Pay is above the proficiency point
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Maintaining a Compensation Structure
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• New positions
• Benchmark and assign grades based on market value
• Evaluate ranges to market
• Annually based on market research
• Shift ranges as necessary (2-3 yrs)
• Evaluate Grade Assignments
• Revised job duties
• Hot Jobs
Maintaining a Compensation Structure
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Grade-Based Ranges vs.
Job-Based Ranges
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What are Grade-Based Ranges?
Jobs with similar level of responsibility and value to the organization are grouped together in a “grade”
Easy to:
• Maintain & Administer
• Adjust to local markets
• Keep current to market year-to-year
• Each grade has a range
• External Equity + Internal Alignment
• Can easily level positions (I, II, III, etc)
• Can “slot” non-benchmark job
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Grade Based Ranges
Job Code Grade
Client Service Associate 1
Marketing and Business Development Associate 2
Executive Assistant 3
Sr. Client Service & Compliance Administrator 4
Office Manager 4
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What are Job-Based Ranges?
• Focus is solely on External Equity
• No ranges for non-benchmark jobs
• May go down from year to year depending on the market
Ranges are built around the market value for the job, at the targeted percentile
• May be appropriate for smaller organizations
• Cumbersome for organizations with many jobs