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June 15, 2012
When Employees Are Paid Above Guidelines

So you have your salary structure firmly in place. The pay grades make sense and everyone is safely contained within a nice, neat little box on the organizational chart.

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But wait, what’s this? There are three people who are paid above the upper limit of the salary grade, and one of your managers has (again) requested a new employee receive pay above the grade at which he’s being brought aboard. What’s a compensation manager to do?

This was the subject of a recent online discussion among several compensation industry professionals, and we dug a little deeper to bring readers some details. After all, this kind of thing happens from time to time – or maybe, if your organization is like many others, more often than that.

Watch out when paying above the salary range

In fact, the genesis of the discussion seems to have come from frustration with the frequency of salary grade challenges from hiring managers. They ask for a higher-than-recommended pay grade because the candidate is already receiving or is requesting more money than the new job pays. The company in question will sometimes handle the problem by placing the incumbent into a higher pay grade that would justify the requested salary, rather than sticking with the system they have in place. Be careful with this approach, warns talent and remuneration consultant Jude Sotherlund (www.linkedin.com/in/judesotherlund). 

Sotherlund’s concern is that, when a company assigns a pay grade because the incumbent is negotiating a higher base salary than the company has determined to be warranted, they may open themselves up to discrimination lawsuits if those for whom these exceptions are made are most often in a non-protected class. “I’m doing the same job; why wasn’t I given a higher salary and grade?” another new employee could legitimately ask. Be wary. If this situation occurs at your organization on a fairly regular basis, it could be a signal that your pay grades are incorrect and would benefit from a closer look.

Sometimes "out-of-range" pay is warranted

Sotherlund recommends that, as long as everyone is cognizant of the potential for manager bias and discrimination, there are some instances in which paying above guidelines may be justified. Most often, she says, this will be due to seniority or performance. Stellar performers and compensation guideline outliers are often the same people. By generating a report of individuals in your organization whose compensation, merit increases, bonuses and other incentive pay were outside of guidelines, you can often identify the people managers believe to be future organizational leaders.

“In cases where a manager wants to hire a person at a rate higher than the pay grade, I would discuss with the hiring manager the credentials, skills, experience, etc. that make the manager believe the person should be an outlier to the pay structure,” Sotherlund says. “It is not advisable to move a person to a higher salary grade if the position is appropriately slated in the lower grade range. But in some cases, the applicant’s skill set, knowledge base, leadership experiences, etc. are better suited for a higher level position than the one for which he or she is being considered.”

“When an applicant is negotiating for a higher salary, or is worried about tax implications of leaving the former job, or relocation costs,” she continues, “there may be another compensation vehicle that is more appropriate for those expenses. All too often managers jeopardize the validity of the base pay structure by providing unusually high salaries at time-of-hire, or out-of-guideline salary increases, rather than utilizing the more appropriate bonus plans.”

Is the pay grade system passé?

The validity of the base pay system is exactly what another expert, pay and performance consultant Howard Risher is questioning. Our current pay systems are vestiges of a by-gone era, he says, and should be re-evaluated.

“Over the past 20 years or so,” Risher says, “the way we think about and organize work has been evolving. The idea of a job, and the view of work organizations as interconnected jobs — boxes on an organizational chart — originated in a different era. Much of HR and work management see the job description as the starting point.” And those job descriptions, Risher says, are often less-than-accurate.

Why? Because jobs are always changing; this became particularly apparent during and now following the Great Recession, as employees picked up the slack in the wake of the layoffs of their coworkers. Some jobs are perpetually in flux, Risher says. “Unanticipated problems or new situations arise almost daily in the workplace. At one time, we relied on defining goals for each position at the beginning of a year. But along the way, many workers start new projects, tackle new problems, and otherwise adapt to change throughout the year,” he says. “Annual goals make little sense in today’s world of work.”

So those outliers should, perhaps, not be considered outliers at all, according to Risher. “In workforce management, we now focus on the A Players. Sometimes, it’s not that one job is more important than another job, rather it’s the value of the incumbent and their performance. With knowledge jobs, the incumbents are expected to grow and expand their capabilities. The more they know, the more value they have.

“Scientists, engineers and computer specialists stand out as jobs where the key is the knowledge and problem solving ability of the incumbent that determines how much they are worth.” To solve for this evolution, Risher recommends salary banding. “It is intuitively a better model for managing the pay of knowledge jobs.

“The focus has to be on the market, and what the market pays for a skill set,” Risher continues. “Internal job value is no longer relevant. It is impossible, for example, to determine the job value of a nurse and then compare it to the job value of an accountant. It’s obviously apples and oranges. Even within the nursing occupation, it makes no sense to compare one nurse with other nurses (although we do it routinely) since the real value of a nurse is what he or she does in a crisis. All of this can be force-fitted into the traditional model for managing salaries, but it’s not a good fit.”

Good data, sensible grades, documentation are important

The answer may lie somewhere between. Make sure you are confident in your market pricing and job matching, recommends one commenter. And spend some time going over your evaluation of the job and pay grade recommendation with managers who request outlier pay. Another participant in the conversation made a simple but effective point: a job is worth what it is worth. Don’t change the grade unless the job itself changes.

Most importantly, when you decide to pay outside of the guidelines your company has set, make sure you document why you’re doing so. Sotherlund says, “The manager should document the rationale, which is often performance if a positive outlier. Out-of-guidelines pay amounts that are still within the salary range for the position may or may not require review by the compensation department. But if a manager wishes to hire or pay a current employee outside the range for the position altogether, this should require approval by the compensation department and senior management. The decision must be well-documented as to why they are outliers to the salary range, and care should be taken to ensure the practice is nondiscriminatory.”

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