In an effort to simplify salary administration, to encourage
employees to acquire new skills, and to promote lateral movement within
the organization, many employers have developed and implemented salary
banding programs. A salary banding system involves grouping multiple,
related jobs into large, expansive salary bands. For example, a company
may collect all existing secretarial, administrative assistants, and
clerical grades into one large salary band titled “Administrative,”
with a salary band of $9.26 per hour to $24.61 per hour. Salary movement
is then primarily determined by the acquisition of new skills or merit
increases, because promotions do not occur within the band because
an individual has been switched from one arbitrary title to another.
Banding provides more control over salary progression by requiring
salary increases either solely at the discretion of the employer or
upon meeting very objective criteria for increases that are set by
the employer. Two problems can occur: blue-circle rates and red-circle
blue-circle rates, or dots representing
employees paid below the minimums just established, and red-circle
rates, or dots showing employees paid above the maximum. Blue-circle
rates are easy to deal with; over a period of time, the employee’s
pay is raised to the point where it equals the position in the rate
range that corresponds to the employee’s actual performance.
Red-circle rates are another story. Obviously,
cutting the pay of an employee will not do much to gain acceptance
for the new wage program, so alternatives have to be considered. One
is to “grandfather” the employee; this means allowing the employee
to stay above the maximum until the person is promoted, terminated,
or retired. Another approach is to freeze the employee at that red-circle
rate until adjustments to the rate range finally capture the employee’s
rate back into the structure. Still another approach is to increase
the employee’s wage by only half of the adjustments made to the range,
again, until the rate is captured.
A similar problem occurs with employees
who are under- or overpaid in relation to actual performance. As defined,
the minimum, midpoint, and maximum rates are each definitions of pay
for specific levels of performance. So an employee performing 80 percent
of the job duties at 80 percent efficiency under normal supervision
and who is paid above the midpoint may have a pay rate similar to
a red-circle rate except that it is within the rate range. In this
case, counseling and performance evaluation feedback are needed to
bring performance in line with pay.
To operate effectively, the compensation program must
maintain the correct classification of employees through regular review
of the various classifications. Each employee is assigned to a particular
job with its corresponding job description, labor grade assignment,
and rate range. This is a normal outgrowth of the job analysis process.
Duties, assignments, and responsibilities change, however, which can
result in either wage overpayments or underpayments. It is therefore
advisable to periodically review job classifications. One way to avoid
improper payment is for a designated compensation administrator to
review every employee hire, promotion, demotion, and transfer for
Exempt, nonexempt. Each job (and each employee performing that job) must be classified
as "exempt” or “nonexempt." This has to do with whether the job is
exempt from the provisions of the Fair Labor Standards
Act (FLSA) and other statutes that require
payment of overtime.
Full time, part time. Part-time workers are often treated differently from full-time employees
when it comes to wages and benefits. The number of hours one must
work to be considered full-time is a matter of employer policy.
Temporary employees. Temporary workers sometimes receive less compensation or limited
benefits. Temporary workers provided by an agency are employees of
the agency, not the firm that uses their services, and therefore need
not be paid in accordance with the company compensation plan.
Present incumbent-only positions. An employer may create a position designed for the skills of a particular
employee or for a particular task. These jobs do not fit into the
employer's permanent organizational structure and are eliminated when
the employee leaves the company.
Several approaches are commonly used for determining
salary increases. The most common is performance/merit systems. Across-the-board
or general increases are often tied to increases in the cost-of-living
index. For unionized employees, the collective bargaining agreement
will include a negotiated provision for wage increases that usually
includes a fixed general annual increase that may be combined in some
instances with merit provisions and cost-of-living escalators that
add to the across-the-board increase when the cost-of-living index
goes up more than a predetermined amount.
Employee evaluation involves determining where each worker
should be paid within the rate range for the job. At the beginning
of the year, management sets the percentages so that they will match
the overall pay budget increase. Many employers utilize a grid system
with low, middle, and high ranges to determine what an employee's
wage should be based on job performance and current salary. Percentages
for salary increase, when warranted, can be found by matching up the
two coordinates. Employees currently paid at the lower end of the
range might expect a greater percentage raise than employees at the
higher end, as the following chart shows:
|$25,000--28,000||$28,100--32,000|| $32,100--36,000 |
|High performance (Top 20%)||7%||6%||5%|
|Middle (Middle 70%)||5%||4%||3%|
|Low (Bottom 10%)||3%||3% ||2%|
When their performance is reviewed, most employees want
to know: “How much of a raise am I getting?” While job performance
is a major factor in any pay raise decision, other factors may be
considered as well:
• The employer's overall financial situation
• The department's or division's “budget” for raises
• The employee's length of service
• The employee's qualifications (i.e., the scarcity of
certain talents in the labor market and the likelihood that the employee
will be paid more for them elsewhere)
• How much other employers in the local area are paying
for similar jobs
• What the employee requires in the way of incentives
• General economic conditions--the inflation rate, changes
in the cost of living, etc.
Cost of living. Increases
in the cost of living should be a major consideration when deciding
on a budget for pay raises. The primary tool for measuring the cost
of living is the Consumer Price Index (CPI), which is issued each
month by the U.S. Bureau of Labor Statistics. Some organizations have
an “escalator plan,” which grants employees across-the-board increases
in proportion to increases in the CPI.
Local rates. Wage
increases during the past 20 years have varied greatly among geographic
areas and job categories. Employers sometimes look to wage surveys
of similar organizations within their labor market area for guidance
in setting or adjusting wage rates. Most employers use “pay budget”
surveys rather than compensation surveys when comparing their annual
increases to other employers.
Promotion/demotion/transfer. A promotion occurs when an employee goes to a higher grade job, usually
with an increase in pay. A demotion is a change to a lower grade job
and may carry a pay decrease, but need not do so, depending on employer
policy and the particular circumstance. A transfer occurs when both
jobs are in the same grade. It's not unusual to transfer workers from
one job to another in the same grade with no pay change.
A “longevity increase” is a special pay raise awarded
to employees whose pay has been frozen because they are at the top
of their pay bracket. Companies that give longevity raises sometimes
stipulate that the employee is eligible for only two or three increases
of this type during the entire term of the employment.
"Red-circled" rates. If a longevity increase puts an employee's pay rate over the maximum
for the pay grade, the rate is referred to as “red-circled.” Red-circled
rate employees are normally not eligible to receive across-the-board,
merit, or cost-of-living raises until the top limit for their pay
grade becomes higher than their rate of pay.
employees with good records who have been ineligible for wage increases
because they have reached the top of their rate ranges may also be
rewarded with bonuses. This practice provides employees with an incentive,
but does not create red-circled rates. Furthermore, unlike increases
in base pay, a bonus is not locked in--it doesn't have to be given
year after year. Because it's discretionary on the part of management,
it may be given only when the employee's performance warrants it.
Please see the
national Bonus Payments
high-performing employees may also be rewarded with better benefits.
It may be possible to provide top employees with additional vacation,
personal leave time, or some other attractive benefit. This also has
the advantage of not creating red-circled rates, and it does not have
to be locked in--it can be modified yearly.
Comment. When inflation
is low or when compensation brackets are not adjusted regularly, longevity
increases help keep the compensation system in order. If such an option
is not available, supervisors may artificially upgrade jobs to get
pay increases for good workers who have been locked in at the maximum
for their grade, and this can distort the company's organizational
structure. Longevity increases, bonuses, or enhanced benefits are
options that can take the pressure off the pay program in such circumstances.