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February 06, 2012
Key Concepts Behind Pay Ranges

As the economy improves, employers are focusing on reducing turnover and attracting new employees. In terms of compensation, many employers are their pay structure, including reassessing pay ranges. However, before taking any steps, it’s important for employers to understand the key concepts behind the pay structure.

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In a BLR webinar titled "Pay Grades that Work: How to Retain Top Talent and Stop Compensation Complaints," David Wudyka key terms related to pay ranges.

A pay structure is a mathematically integrated set of pay ranges. Ranges are connected in a specific mathematical relationship, which allows the entire structure to work administratively.

The pay ranges can be either traditional or broadbanded. Traditional is also occasionally referred to as "narrow" in range. Wudyka explained that the primary difference is the width of the range of pay within a job family; "the issue here is one of width and flexibility, if you will, within the broadbanded range to permit – usually – people to acquire job skills that reside in a group of jobs, say, within a job family. That enables people to reward people for acquiring those skills, such as in a skill-based pay program."

Control points are the key points within pay ranges. They include the minimum, midpoint, and maximum. The minimum is the lowest market value of any job in the grade. The midpoint is the "middle rate" and the predicted average pay rate for any job in the grade. The maximum is the highest market value of any job in the grade.

Sometimes pay ranges are divided into quartiles. Pay rates in quartiles can symbolize who is paid in those quartiles. For example, new employees might be in the first quartile, while top performers and long term employees might be in the fourth quartile.

The spread refers to the distances from minimum to maximum and between midpoints. For the spread from minimum to maximum, these spreads should increase by grade by 1 or 2 percent. The spread from midpoint to midpoint, on the other hand, should be between 7 to 12 percent, with a goal of 10 percent. These spreads are important because the minimum to maximum pay ranges must be able to absorb base pay increases, especially at executive levels. Midpoint to midpoint spread is important because pay administration is affected and facilitated by this spread; ranges must sensibly overlap to allow the pay structure to function properly.

Once you understand the key concepts of pay grades, you still need to have the data to build pay ranges upon. Build your ranges only from quality pay survey data. The best surveys are done geographically by industry. Use confidently-matched job pay data for benchmark jobs as your basis.

In a related article, David Wudyka discusses why your company may need pay ranges.

For more information on pay grades and pay ranges, order the webinar recording. To register for a future webinar, visit http://catalog.blr.com/audio.

David Wudyka, managing principal and founder of Westminster Associates, manages and oversees all company operations, including the design, development, and implementation of all client HR programs. His specialties include human resource analytics, audits of HR operations, employee retention strategies, and group incentive plans.

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