A company' pay structure
Content
A company's pay structure is the method of administering its pay philosophy. The two leading types of pay structures are the internal equity method, which uses a tightly constructed grid to ensure that each job is compensated according to the jobs above and below it in a hierarchy, and market pricing, where each job in an organization is tied to the prevailing market rate. A company needs job descriptions for all its positions so that people know where they fall within the organization. A pay structure helps answer questions about who's who, what each person's role is, and why people are compensated differently. It also helps human resources personnel to fairly administer any given pay philosophy. For example, a company might want to pay everyone at market; or pay some people at market and some above it. Opportunities for incentives are also dealt with in the pay structure. For example, people with strategic roles will likely have opportunities for higher incentives. Outsource if necessary Many firms have one or more in-house compensation consultants who can set up a pay structure consistent with the company's pay philosophy. Small organizations and other companies without the resources to hire a compensation consultant can either train someone in how to set up a pay philosophy, or outsource this service. Start with a payroll budget When setting up a pay structure, most companies start with a payroll budget. Senior management usually sets payroll budgets during the annual planning. The budget for merit increases is generally kept separate from the overall budget to allow for market adjustments. Companies research what merit increases and salary movements historically have been (approximately 3.5 percent on average in recent years) and then project the budgets for market adjustments and merit increases. If turnover is high, a company may have to move people's salaries more quickly than if turnover is low and there is more time to implement the pay structure. Benchmark the value of each job Once it is known how many jobs are to be priced and the total amount allocated to spend, a company should benchmark as many jobs as possible. Benchmarking means matching an internal job to an external job of similar content. Make sure to benchmark jobs to job content, rather than job title. For example, a bookkeeper and an accountant I may seem similar, but a comparison of the job descriptions should reveal the job to which isreally being matched. When benchmarking, the market value goes to the job, not to the person filling it. Price "spaces, not faces." In order to make the best use of an organization's resources, it is important for a company to acquire survey data for similar companies. Salary Wizard Professional (for small businesses) and CompAnalyst (for large businesses) are a great place to get data that represents organizations of similar size, industry, and location. In small companies people are often called upon to fill hybrid jobs - for example, a person might be asked to be both HR manager and office manager. It is important to review the data for each
of the components of the hybrid job, and develop a market price accordingly. Tips for benchmarking jobs
Select surveys that are appropriate for the positions being surveyed: right job, right geographic area, right company size, etc. Stay general. Job descriptors such as those found in compensation surveys and in Salary.com products are not intended to be all-inclusive job descriptions. They are generic descriptions that best describe the essential functions of a job, rather than the application of that job in a specific company. Select job descriptors based on content, rather than job title. Match closely. A job descriptor should be at least 70 percent of an incumbent's current job responsibilities. Make as many matches as possible. Match the job function, not the person. Combine judiciously. Job descriptors can be blended, but no more than two descriptors per survey should be combined to represent an incumbent's job. Review the level guide. Surveys have a variety of ways for describing and representing different levels for different jobs. Involve employees as much as possible in benchmarking jobs.
Use internal equity method to create salary ranges by pay grade The internal equity method of structuring pay involves creating a series of grades or bands, with wide ranges at the top of the pay structure and narrower ranges at the bottom. Each grade represents a different level within the company. A company must determine how many grades are required, choosing a reasonable number based on how many employees work in the organization today and the variety of jobs at the organization. The number of grades can always be expanded later. A company of 30 people might start with 10 grades, although small companies normally do not benefit from pay grades as much as larger companies because of the frequent instance of hybrid positions in small companies. A company should also give each grade a spread, so that people can move within their grade as they progress in their jobs. Additionally, creating a minimum and a maximum for the whole company is recommended. The midpoint of the lowest grade should reflect the lowest value of the lowest job in a benchmarking study. The midpoint of the highest grade should reflect the highest value of the highest job. From one grade to the next, there should be a 15 percent midpoint progression, meaning the midpoint of one grade should be about 15 percent higher than the midpoint of the grade below it. This is to ensure that promotions are accompanied by meaningful pay increases. Benchmarked jobs are then slotted into the pay grades. Some positions are often forced into a
grade, and some grades won't be fully aligned. Ideally companies look for a narrow margin of approximately 5 to 10 percent between the market median and the midpoint of the grade. Market data may not be available for all jobs. Such jobs are often slotted into comparable grades for the company according to the scope of the job, the responsibilities, the size of the budget the position handles, etc. For example, if a suitable benchmark for a financial manager cannot be found, the job is slotted into the rough equivalent of the HR manager if they are equally valued at your organization. Broadbanding is the pay practice of creating large ranges and control points within a grade to give people wide latitude to move within their job without outgrowing the payscale. However, studies have shown that after five to seven years of doing the same job, people no longer improve dramatically in that job. A pay philosophy might take this principle into account by stipulating that no one will be paid more than 120 to 130 percent of market, regardless of how well he or she performs. Many nonexempt jobs are compensated in traditional pay grades. These jobs benefit from a more structured approach to pay. Use market pricing to relate jobs to external forces An alternative to the traditional grid-based pay structure is the market pricing approach, which is rapidly becoming the prevalent method of pricing jobs. With the market pricing approach, people are compensated in relation to the market value of their job, regardless of their level in the organization. The market may suggest, for example, that certain information technology workers should be paid more than chief technology officers. The pertinent value in the market pricing method is not the midpoint of a grade, but the midpoint of that job in the market, along with the employee's comparatio, or salary divided by the market rate. Over time, the employee's pay should move closer to market as performance moves closer to expectations for that job. Under the market pricing method, the salary for a job may still be capped at120 to 130 percent of market. Labor unions also typically do market studies in collaboration with the human resources department or with a third party. A company striving to compete with the possibility of a unionized workforce might pay more than the union's market study recommends. Speak plainly about the numbers to save time Hiring managers should know what they can afford to pay, and they should be able to communicate that range to candidates. With recruitment and retention so critical to the success of a business, it is to everyone's advantage for a hiring manager to disclose a salary range up front. Even in a telephone interview it may help get the right candidate in the door if the manager reads the job description and discloses the pay range. And if candidates have done thorough salary research, the conversation about compensation is likely to begin with market data anyway.
ay Structures / Salary Structures
What are Pay Structures or Salary Structures?
Pay structures, also known as salary structures, set out the different levels of pay for jobs, or groups of jobs, by reference to:
their relative internal value, as established by job evaluation external relativities, via market rate surveys where appropriate, negotiated rates for the job
What are the main characteristics of Pay Structures?
indicate rates of pay for different jobs provide scope for pay progression via performance, competence, contribution, skill or service contain pay ranges for jobs grouped into grades, individual jobs or job families.
Why do organisations need Pay structures?
establish a logically-designed framework within which equitable, fair and consistent reward policies can be implemented determine levels of pay for jobs and people basis for the effective management of relativities help monitor and control the implementation of pay practices communicate the pay opportunities available to employees.
The most important types of pay structure, or salary structure, are: Graded structures – a sequence of overlapping job grades into which jobs of broadly equivalent size are allocated. Each grade has a range, the maximum of which is usually 20 to 50% above the minimum. Broadband – similar to conventional graded structures, but with far fewer and far wider bands. The maximum of the band can be 100% or more above the minimum.
Job Family Structures – Each job family has a different graded structure. Jobs are allocated to a job family based on activities carried out; skills and competencies e.g. Information Technology is a perfect example of a job family for which there is usually a separate grade structure. There are many other types of pay structures and salary structures e.g. pay spines, benefit structures, spot rates, fixed rate, time rate. All of these pay structures will be looked at in more detail in the next chapter.
(I) PAY RANGES
Each grade or band has a pay range or scale with a minimum and a maximum. It also has a reference point. The reference point is the market rate i.e. the going rate for the job in the market and is equivalent to the mid-point or the maximum of the range depending on the pay progression method used. MIN------------------------------MID-POINT------------------------------MAX Reference Point Or MIN-----------------------------------------------------------------------------MAX Reference Point A number of companies refer to the reference point as 100% of the range and annotate other significant points of the range in percentage terms relative to the reference point i.e. the two ranges shown above might be annotated like this: MIN------------------------------MID-POINT------------------------------MAX 80% Reference Point 100% and MIN-----------------------------------------------------------------------------MAX 67% Reference point 100% 120%
As you can see each position on the scale and therefore each salary within the scale, can now be referred to as a percentage. Some companies call this percentage a compa-ratio (comparative ratio) and it is a term widely used in Reward Management. It is the salary expressed as a percentage of the reference point, and therefore when it is calculated for one job or as an average for many jobs how far from the market you are paying people.
(ii) PAY PROGRESSION
Remember, 100% is usually the reference point or the market rate for the job i.e. the rate of pay for a fully competent individual performing all aspects of the job well. Generally, there are two main ways to progress through the range: Old type – fixed incremental system 67% 100%
MIN------------------------------------------------------------------------MAX Inexperienced New Developing Experienced Fully competent
In this type there are usually annual increments, with perhaps some element of performance appraisal, so that the better you perform the greater the increment you receive and the faster you progress to the maximum of the scale. An employee starts at the bottom of the scale i.e. 67% compa ratio if they are new into the job and no previous experience. An experienced recruit would start at a position on the scale which was in line with existing staff of similar experience. An experienced, fully competent employee fulfilling all aspects of the job description should be paid around the maximum of the scale i.e. the going market rate for the job.
Newer type
Experienced New Fully developed to do all Inexperienced aspects of the job and Developing competent in all aspects of Steep learning curve the job. 80% Minimum 100% Mid point
Exceptional performers. Additional responsibilities. Project work Coaching 120% Maximum
As in the previous type of pay range, an employee would start at the bottom of the scale (in this case 80% compa ratio) if they were new to the job or had no previous experience. Likewise an experienced recruit would start at a position on the scale which is in line with existing staff of similar experience. A fully experienced employee, competent in all aspects of the job should be paid around the mid point which is the going rate for the job.
This type of pay range differs from the previous one now as it extends beyond 100%. Usually, organisations with this type of pay progression have some sort of paying for performance system, where people who continually exceed their performance targets could earn, in this example, 20% above the market rate for the job. Differing rates of progression through the scale can depend on performance, contribution, stage of development, and the demonstration of skills and competencies. Some companies only allow progression through the scale at the time of the annual salary review. Others also have mid-year review or review 6 months after recruitment or promotion. There is a most interesting fact relating to the two examples of pay progression: if they were applied to two companies which use the same market rate for a particular job then the job holder in the company with performance pay has the potential to earn 20% more basic salary than the job holder in the company with annual increments. This is worth remembering when looking at the whole issue of market data and the ability to recruit and retain staff. Although both companies pay the same basic salary to a fully competent employee, the company with performance pay is more attractive to employees because they can potentially earn more with that company than with the company using annual increments.
he Advantages and Disadvantages of Broadbanding
Broadbanding is the term applied to having extremely wide salary bands, much more encompassing than with traditional salary structures. Whereas a typical salary band has a 40 percent difference in pay between its minimum and maximum, broadbanding would typically have a 100 percent difference. Most of the time, creating enormously large bands is done as a measure to support a restructuring. It combines and consolidates the number of levels or job grades. This article will discuss the advantages of broadbanding in an overall compensation strategy, as well as the disadvantages.
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The Advantages of Broadbanding
Streamlines Hierarchy
Sometimes an organization has become too hierarchical for the strategic direction of the company; finding it has become too slow to react, taking too much time to get information from
the top down and even less effective at getting messages from the lower rungs up to the ears of senior management. Broadbanding reduces the number of levels or layers within a company. This is the best face-saving way for an organization to collapse salary ranges and supporting delayering. This flattens an organizational structure and reduces the hierarchy.
Facilitates Internal Movement
Whether we like it or not, some great person-to-job matches just do not happen because of the way a job has been classified or positioned with an assigned salary band. If that new position is not a lateral or at a higher rung, most rational people will not seriously consider a transfer that results in a demotion. That is just not a positive step for their career development. With broadbanding, more internal movement is facilitated, because the probability increases that one’s current job and alternate position are within the same enormous range of pay. This makes pay take a back seat and puts forward other attributes of a position, encouraging internal mobility and potentially more developmental assignments.
Puts Added Trust in Managment
With broadbanding, managers have great latitude to pay what they want to an employee. This absolutely can reduce the push-pull between the hiring manager and the human resources organization. Now the issue of pay shifts to the control of the hiring manager and the challenge of "Does one have enough money in the current budget?" or not. The perception of HR as a regulating gate keeper to preserve the salary structure diminishes. Managers are entrusted with greater autonomy.
The Disadvantages of Broadbanding
No Awareness of External Market Rates
Traditional salary structures, when done right, give current information to your management team about what market rates are. With broadbanding, if a manager wants to pay at the market midpoint, they are left baffled and guessing. There is no midpoint in a broad band. That also means the compa-ratio tool can not be used.
May Lead to Inequities
Broadbanding’s flexibility and trust in management may or may not be warranted. In a broadbanding system, it is relatively easy to have two people with the same responsibilities have earnings that are thousands and thousands of dollars apart. Broadbanding weakens the linkage between salary growth and skill development for the next higher-level, since it is so far off as to not be a motivator. Do you want supervisors and their direct reports in the same pay band? That can easily happen with broadbanding. It only takes a few reckless managers rewarding a few individuals inappropriately to have an entire pay system called into question. Whether your pay system is fair or not fair is not quite as
important as if it is perceived as fair. If your pay system is perceived as not fair, you could see an increase in EEOC complaints. Did you know the Department of Labor added 700 additional auditors after the passage of the Lilly Ledbetter Equal Pay Act in 2009? People don’t call and ask for an audit when they believe their conditions are fair.
Lack of Cost Controls
It certainly may call into question why have salary bands at all if they are so wide. You need to evaluate if your other cost control training and measures are strong enough to hand over this much authority and autonomy to your managers. Moving to broadbanding may require thinking through other incentives that had previously been tied to salary grades, such as bonuses or stock.
Promotions
In my opinion the absolute worst thing about broadbanding is the severe reduction in opportunities for promotions. Fewer salary bands lead to fewer opportunities to climb to the next band; meaning fewer promotions to celebrate with family and friends. Think seriously before you minimize this great motivational tool. If you are committed to moving to broadbanding, yet this is of concern to you, keep an eye on your turnover rates and conduct exit interviews to monitor the pulse of why your talent is moving to your competitors.
Conclusion
It is your call whether broadbanding is a tool for use in your organization or not. Broadbanding is a very effective tool to reduce salary grades or job classifications, but it definitely has its drawbacks.
Broadbanding defined
Broadbanding is a job grading structure that falls between using spot salaries vs. many job grades to determine what to pay particular positions and incumbents within those positions. While broadbanding gives the organization using it some broad job classifications, it does not have as many distinct job grades as traditional salary structures do.[1] Thus, broadbanding reduces the emphasis on ‘status’ or hierarchy and places more of an emphasis on lateral job movement within the company. In a broadbanding structure an employee can be more easily rewarded for lateral movement or skills development, whereas in traditional multiple grade salary structures pay progression happens primarily via job promotion. In this way, broadbanding is a more flexible pay system. This flexibility, however, can lead to internal pay relativity problems as there isn’t as much control over salary progression as there would be within a traditional multilevel grading structure.
Selection of broadbanding
Broadbanding works better for some organizations than others.[2] Hierarchical and/or risk averse companies with a preference for well defined policies and procedures would be better served by
a traditional multi-grade structure. Flat organizations that are flexible, have a higher tolerance for ambiguity, and encourage lateral or cross functional movement would be good candidates for broadbanding. Also, implementing broadbands in some countries may be easier than in others. In countries where promotions and titles are very important socially, companies may need to consider letting employees use an external business title based on employee age or years of service, that is different than the job title used for position grading internally. Also, some employees may feel lost, or not know how to build their careers without a vertical corporate ladder to climb. In this case, the company will need to be able to give examples to the employees of how lateral movement can enhance their career opportunities. For a suitable organization in the right cultural setting, broadbanding can do the following: • Reward performance more efficiently – as the pay ranges are wide, the company has the flexibility to reward a star performer, even when they aren’t getting promoted. • Take the emphasis off of job evaluation – because the number of levels have been reduced, job evaluation can be streamlined as there aren’t as many distinct grades that need to be considered when slotting a job into the structure. • Manage a flexible/mobile workforce – for companies that have staffing needs that change frequently or are difficult to predict, or work within a business environment that is in flux, broadbanding offers a program that is easier to maintain than a traditional system with many distinct levels. One concern noted by companies that have implemented broadbanding is that compensation costs may go up. This is due to the wider than normal band taking away that more gradated top end control on salary levels. This can be effectively managed through the use of market data, in order to help managers to validate their pay decisions for a particular employee to the external market before proceeding to give higher than normal pay increases. Broadbanding, like other grading systems, relies on the buy-in of all key stakeholders including the business managers, HR managers, and employees. Tailored communication to each of these groups will go a long way towards ensuring the successful implementation of a broadbanding program.
Broadbanded Salary Structures
Broadbanded Salary Structures became all the rage, at least in the literature and on the consultant/guru rubber chicken circuit in the '90s. This was a huge swing of the pendulum from compensation programs featuring a zillion narrow pay grades -- an even greater swing when one considers the Texas-sized "career bands" that some companies adopted.
After all the hype, it turns out that not that many organizations thought broadbanding is their silver bullet. At the close of the 90s, a Wyatt survey of 1,300 companies found that less than one in ten used broadbands. If one removes the larger companies from the survey (5,000 employees or more), only 6% to 7% used this approach.
Is broadbanding another passing fad?
A few companies find that it works for them, but most are redesigning their structures to allow pay ranges to reflect the market. The trend is toward common-sense salary structures, with plenty of room to compete for talent and continue to reward stars without busting through a pay grade ceiling. A lot of lessons have been learned the hard way. Now compensation folks can move on to other challenges.
Follow-Up
This week, Compensation-L subscribers were asked, "Whatever happened to broadbanding?" Our reply: Broadbanding is still around, although it is getting far less press than it did in the nineties. Like all tools, it's great for achieving specific outcomes, but can cause great damage when misapplied.
Definition:
Broadbanding (or 'broad grades') is the consolidation of traditional pay structures, consisting of many, narrow pay ranges into a few, wider ranges or bands.
Purpose:
Broadbanding is intended to support agile, flatter, faster-paced, de-bureaucratized organizational cultures.
Use:
Broadbands are imperative for companies with competency-based pay programs, but are also used in companies with longevity- and performance-based pay programs. Companies employ broad banding to:
facilitate change avoid multiple pay structures drive pay decision-making downward (empowering managers) provide greater latitude in management pay decisions promote lateral moves or in-grade promotions reduce use of promotions to increase pay promote career development / learning
reduce the need for precise job analysis/evaluation promote fewer, broadly-defined jobs focus on the person instead of the job facilitate quick responses to changing goals and circumstances
Structure:
Companies adopting a broadband structure generally reduce the number of salary ranges by onehalf to two-thirds. The broadband range spread is generally 75% to 125%. It may be greater. Most broadbanding companies use 10 bands:
2 for the executive level 4 for the managerial and professional level 4 for the non-managerial or hourly level
Midpoints:
Broadbands typically do not have a single midpoint; they have a minimum and maximum. Broadbanding companies use a range of techniques for control purposes, including a series of reference points relating to career levels in a job family, market based zones linking a group of benchmark jobs to anchor the structure to the market, and so-called shadow ranges.
Wide (or Fat) Grades:
Some organizations use wide grades (also called fat grades). These are simple traditional pay ranges that have been modified so that there are fewer of them than previously used. Their minimum-to-maximum spread is greater than tradition-bound ranges of the last century. These structures may help to counter grade creep and make for a more realistic approach to pay decision-making, but, typically, do not free a company from traditional pay administration practices.
Prevalence:
Broadbands (and career bands) are still viewed as a novel approach to pay, yet to be proven workable. While companies continue to move to broadband pay programs, anecdotal reports indicate that many early-adopters are returning to more traditional (albeit relatively wide) pay structures.
Success:
Successful use of broadbanding requires that:
top management has a clear goals, understands the pros and cons, commitment all managers are mature and highly trained in HRM and compensation
Pitfalls: Before moving to broadbanding, companies should consider the following:
Broadbanding demands that managers are aware of, and can interpret, market pay data Broadband control points are not precise for individual jobs Broadbanding increases the potential for employees to float to the top of the band, way out of sync with the market Broadbands lack the automatic cost-control mechanism inherent in narrow pay ranges Broadbanding eliminates the possibility for precise job analysis/evaluation
Final Thoughts
As with all compensation methods, companies should carefully weigh broadbanding's pros and cons to ensure to it fits with their organizational culture and business goals. A broad banded pay structure groups a combination of job classifications into pay bands and places a larger spread between bottom and top rates of pay. Together with the greater pay range within each band and the smaller number of bands, broad banding is quite distinct from conventional grading systems. Pay progression through each band is normally related to competency based, performance, contribution or market rates of pay.
When should broad banding be introduced?
Broad banding is often introduced as a means of enabling an authority to redesign and remodernise its salary structure. It can be introduced in stages rather than across the whole organisation. There are two main reasons for doing this:
to address severe recruitment and retention difficulties in certain parts of an organisation. It is more appropriate here to limit the changes to the job areas that are experiencing the greatest labour market pressures. In such circumstances, a common approach is to combine related classifications into a job family to move employees to multi-functional teams where the scope of broad banding will be more extensive and the structure more complex. If a team is organised to either complete a related set of tasks or all related activities in the delivery of a service, the bands may have to accommodate its unrelated classifications. One approach is to link progression to a competency based pay structure where employees are rewarded for the acquisition of new skills (competencies). Each recognised competency attained can be used as the basis for moving an employee onto the next spinal column point.
The width of pay bands
Broad banding allows authorities the freedom to design bands that meet their specific requirements. When aligned to job families this approach can be tailored to meet the needs of individual service delivery areas. A fundamental consideration is to decide on the spread between the lowest spinal column point in the band, and the highest. The range of pay within bands could involve maximums that are 30% to 50% higher than the minimum rates. Some private sector organisations have often opted for wider bands, in some cases as high as 100%, to allow for a wider variation in pay to reflect performance. An obvious starting point is to use the minimum spinal column point from the lowest classification and the maximum spinal column point from the highest classification.
Developing a broad banded pay structure
Pay is a fundamental aspect of any bargaining arena and as a result the details of a broad banded pay structure will normally need to be negotiated with the trade unions. Pay expert Michael Armstrong, recommends the following 12 steps for developing and installing a broad banded pay structure in his publication 'Employee Reward':
reach an agreement that it is the most appropriate pay structure for progression provisionally estimate the number of bands that will be required by analysing the organisation's structure and the various roles carried out at each level decide on the width of bands, the degree of overlap (if any), the anchor points and pay zones carry out a job evaluation exercise to define band boundaries and revise the band structure as appropriate conduct a pay survey to establish market rates position roles in bands (singly or in clusters) on the basis of relative size as established by job evaluation results and market rates. This will be based on judgement to establish the weight to be given to internal and external relativities. A decision will also need to be made on the extent to which it is policy to provide for market relativities to drive pay decisions decide on the basis for progressing pay within zones and for adjusting pay levels following a change in role decide on the role of job evaluation in defining band boundaries, guiding band positioning decisions and dealing with new roles or equal value queries examine existing rates of pay for employees, identify any increases and establish any cases where pay protection may be necessary draw up procedures for managing the structure including the allocation of roles to bands, the use of job evaluation, the conduct of pay reviews, fixing salaries for recruitment purposes or following a change in role, maintaining data on market rates and the use of performance management processes to assist in making pay review decisions brief and train managers on the new structure and their roles in managing pay communicate the details of the new structure and how it affects them to staff
Conflicting pressures
There are conflicting pressures between employers and trade unions in progressing employees through broad bands. In traditional pay structures the trade unions have sought to link the movement through the spinal column points of the pay grade with the amount of time the incumbent has spent in it. The upward movement from the lowest spinal column point to the next, and up until the top of the grade has been reached, has been automatic with the passage of time. The chief concerns of the unions are that the process for determining positions within the band are fair, understandable and free from bias. Automatic time served progression meets these criteria. Conversely, employers have often sought to explore methods that can link movement between spinal column points to individual employee appraisal results. The concept of a broad banded pay structure is often viewed as an opportunity to link the introduction of a method or pay that will reward employee contribution. The employers' goal is often to introduce a pay system that rewards individuals whose performance is superior by accelerating their movement within the band. These traditional trade union and employer positions are founded on two fundamentally different philosophies on pay and reward. Broad banding exacerbates the issue because of the greater range between the bottom and top of the band. However, the two different ideological stances towards progression do not have to be mutually exclusive. It is relatively straightforward to envisage a hybrid approach combining pay that recognises contribution and time served progression. This could be achieved by reducing time served progression to fewer incremental stages and making any further progress contingent on some agreed form of employee contribution. Advantages:
it provides greater flexibility for organisations to make and administer pay decisions there is more scope for lateral career development because broad bands create a flatter organisational structure it can be used as a mechanism for facilitating an organisation to change from a traditional hierarchical approach to one that is flatter, multi skilled and more flexible. This is achieved by replacing a traditional structure comprised of many vertically integrated narrow bands with a much smaller number of wider bands that allow for greater individual progression an organisation operating with a small number of bands is able to address communication issues more effectively because it grades far more employees within the same pay category if it is linked to a performance related, team or contribution method of pay reward system it can closely align pay progression to the corporate goals of the organisation as more employees will be classified in the same band it can be used to reduce the status consciousness that is often found in a narrow banded pay structure. This in turn might help to focus employee attention to the external environment rather than internal equity when aligned to a competence based method of reward it can encourage employee development and therefore, multi-skilling
Disadvantages:
the elimination of a narrow banded grading structure and the status conferred on employees as they progress up the hierarchy might instil resentment in highly status conscious-employees there is a danger of band drift because the amount of spinal column points between the lowest and the highest points of a broad band are considerably greater than in a narrow banded pay structure. This means that extra resources are needed to carefully control and monitor the structure it can increase the likelihood for an authority to be involved in a discrimination case under equal value legislation. To avoid this, equality-proofed broad banding arrangements must be established market rates of pay will have to be continuously monitored if broad banding is used to address recruitment problems that have arisen due to external competition. This can be a very costly and time-consuming process and can place extra pressures on HR and pay specialists within the authority there is no evidence to suggest that a broad banded pay structure will suit the culture or every organisation. If it is imposed without the commitment of the majority of the workforce there is a danger of breaking the psychological contract between the employer and the employees. This in turn can cause significant motivation problems if employees believe that the decision of their line manager on their pay progression has been subjective and has ignored set criteria for assessment such as the effect of market rates or individual / team contribution the whole process can be undermined if broad banding is not introduced with a full and clear explanation of how it will effect individual employees it will be rejected as a concept that is too difficult to understand the time and resources needed to train line managers to make pay decisions at appraisal is considerable, but unavoidable if possible discrimination cases under equal value legislation are to be avoided if a broad banded structure is linked to a competency based reward system the scope for employees to acquire new skills will need to be tightly controlled to avoid costs increasing too rapidly
Spot salaries
Spot salaries are fixed to specifically defined spinal column points within a grading structure. There is no progression up to or beyond the rate for each position. Spot salaries are one of the least discriminatory of pay methods because everyone is paid the rate for the job from day one and the pay structure cannot be distorted by differential progression. However, using fixed points may cause motivation issues and make employees focus too much on the specific job description.
Spot salaries have typified the payment system for former manual and craft employees in local government. It may also make employees focus on the specific job description to an undesirable extent.
Narrow bands
Narrow banded pay structures closely resemble the former APT&C grading structure. These mainly comprise of four and three increment grades which sit within a vertical hierarchy. This grading structure encompasses anything from twelve to eighteen bands. Each band comprises of six clerical grades, two senior officer grades and four to ten principal officer grades. Progression through a narrow band is generally via automatic annual increments.
Career grades
Career grades allow employees in defined occupations to progress through a number of linked grades or associated pay scales while they are undertaking formal training and taking on more responsible duties. Promotion bars outline the paths for progress and usually depend on the employee attaining a training qualification and/or satisfying defined levels of increased responsibility. Strict progression criteria must be outlined from the start of this method; in instances where a recent job evaluation exercise has taken place, it is advisable to redesign or re-calibrate the career progression scheme to deliver appropriate levels of responsibility within the new pay structure. ob families essentially categorise jobs on the similarity of their characteristics. Each job family contains different levels of responsibility that reflect the uniqueness of its individual pay structure. Jobs within the families can be linked by:
occupation such as environmental health officer or accountant the nature of work performed such as social care function such as leisure or housing services
This means that civil engineering staff could belong to:
an occupational job family covering just professional engineers and technicians a job family covering all employees involved in the primary function of construction including craft employees and road-workers a job family covering the generic function of construction, this would additionally include departmental personnel and administrative staff
Why choose job families?
The CIPD's 'Study of Broad Banded and Job Family Pay Structures,' published in January 2000, identified four key reasons for an organisation to use a pay structure based on job families. These are:
to map career paths to achieve greater flexibility to identify groups of employees that can be linked to the market to provide rewards based on personal contribution and progress
A job family pay structure
A key distinction that makes job families different to traditional grading structures is that each job family has separate pay arrangements. This arrangement is especially attractive to employers because it allows them the possibility of responding quickly to external factors that can have a damaging effect on certain areas of service delivery. Each specific job family within the organisation is allowed the freedom to set its own number of pay bands within a grading structure. This approach has the advantage of tailoring grading structures to specifically meet the needs of job groupings within different areas of service delivery.
Responding to the external job market
Placing employees in job families is a means of responding to pay levels set by the market place. These are determined by the value other employers place on employees with skills that are in scarce supply. A job family with acute skill shortages is free to set higher pay rates to match the competition from outside. Conversely, a job family in a service delivery area without any skills shortages can manage its budget more effectively by setting lower rates of pay within its grading structure. As the labour market for professional workers has increased in recent years job families have grown in popularity. This is because an organisation can respond to market pressures quickly with the flexibility to adjust the pay within an affected job family.
The link to broad banding and the market
The attraction for placing job families within a broad banded pay structure is that it provides employers the scope to determine an individual's position within it, based on the labour market. This can either be done on an individual basis where employers respond to the labour market with recruitment and retention offers, or collectively where wage surveys are used to set special increases for the classifications in the band.
The individual approach
To obtain a retention increase and a subsequent movement up the pay band existing employees have to provide evidence of job offers from other organisations. New employees with the desired skills and experience are appointed to whatever spinal column point in the broad band is needed to entice them in. The goal of the employer in these circumstances is to ensure that salaries of new recruits and existing employees with highly marketable skills are kept as closely aligned to what is being paid in the external market as possible. Such an approach is almost inevitably going to meet with opposition from the trade unions. An obvious point of inequality that could arise is a situation where an existing employee is responsible for training a new recruit that is being paid significantly more than they are. The approach is also unsuitable because local authority employers have limited ability to influence the size of their budget. They are therefore likely to have difficulty in being able to continually match job offers being made by the private sector for staff with skills that are keenly sought after.
The collective approach
The collective approach uses labour market survey data to adjust rates of pay of the job families that are experiencing labour market pressure. All incumbents, not just new recruits and those receiving job offers elsewhere receive a pay increase. This approach aligns the entire job family with the external labour market. These market adjustments can take the form of special step increases within the existing broad band or moving employees to the next broad band within the pay range. The collective approach minimises the problems of wage compression resulting from high job offers to attract new employees and is, therefore, likely to reduce a feeling of resentment from existing employees. An obvious drawback to the collective approach for employers is the added costs of raising the salaries of all incumbents rather than the minority that receive recruitment and retention increases under the individual approach. However, such considerations need to be set firmly within the context of equal work for equal value legislation. This makes the collective approach by far the most viable option. It is important to note that market adjustment in both the individual and collective approach should not preclude the opportunity for employees to progress further in the grade on the basis of time, individual or team performance, competence or contribution. Advantages:
job families have the advantage of enabling individuals to identify how to progress in organisations that provide a multitude of services like local authorities. This is because each family has its own career path clarifying what individuals need to do to progress from one level to the next by breaking down grading structures into job families, decisions on pay can be made with far greater flexibility both lateral career development and multi-skilling can be achieved within the context of a defined job area
almost any job can be accommodated in any form of job family that is decided upon the viability of a broad banded pay structure can be reinforced because the job family can be used to facilitate career and pay progression by specifying what is needed for a pay increase in offering employees a flexible career and progression structure, job families can support organisations with a flatter hierarchy it is easier to set competencies within job families because they are able to inter-relate with the specific job area. This means that the risks of employees having to satisfy competencies that bear no relation to their work area before they can receive a pay increase are minimised
Disadvantages:
it might be difficult for staff to move from one job family to another. This could cause motivational problems for disillusioned staff who feel that they are trapped in one part of the organisation for the rest of their career there is an inherent danger that awarding pay linked to the external market is discriminatory. The placing of employees into job families might not be enough justification to prevent the possibility for comparisons to be drawn by less well-paid employees in different job families tracking the market is a time consuming and costly process. Yet it has to be done meticulously and constantly, if pay is based on the market to avoid claims of discrimination the more job families that exist the more difficult the process of tracking the market will be to control. The process can also be controversial if the viability of market data as an empirical source has not been agreed in advance there is a risk of raising expectations when linking job families to the market. This is because employees might perceive the worth of their job to be similar to ones they see advertised in the press. In reality even jobs with the same title will differ widely in responsibility from one organisation to another the trade unions are unlikely to find the granting of special increases to certain job families within an authority to be politically viable in the long term although the labour market always produces winners and losers the winners are often only a small minority of the overall bargaining unit. Devising a pay structure that could be viewed by the majority of the workforce as catering to the needs of a small privileged group, is likely to cause resentment. This is in turn might escalate into motivational problems leading to a downturn in performance
of the components of the hybrid job, and develop a market price accordingly. Tips for benchmarking jobs
Select surveys that are appropriate for the positions being surveyed: right job, right geographic area, right company size, etc. Stay general. Job descriptors such as those found in compensation surveys and in Salary.com products are not intended to be all-inclusive job descriptions. They are generic descriptions that best describe the essential functions of a job, rather than the application of that job in a specific company. Select job descriptors based on content, rather than job title. Match closely. A job descriptor should be at least 70 percent of an incumbent's current job responsibilities. Make as many matches as possible. Match the job function, not the person. Combine judiciously. Job descriptors can be blended, but no more than two descriptors per survey should be combined to represent an incumbent's job. Review the level guide. Surveys have a variety of ways for describing and representing different levels for different jobs. Involve employees as much as possible in benchmarking jobs.
Use internal equity method to create salary ranges by pay grade The internal equity method of structuring pay involves creating a series of grades or bands, with wide ranges at the top of the pay structure and narrower ranges at the bottom. Each grade represents a different level within the company. A company must determine how many grades are required, choosing a reasonable number based on how many employees work in the organization today and the variety of jobs at the organization. The number of grades can always be expanded later. A company of 30 people might start with 10 grades, although small companies normally do not benefit from pay grades as much as larger companies because of the frequent instance of hybrid positions in small companies. A company should also give each grade a spread, so that people can move within their grade as they progress in their jobs. Additionally, creating a minimum and a maximum for the whole company is recommended. The midpoint of the lowest grade should reflect the lowest value of the lowest job in a benchmarking study. The midpoint of the highest grade should reflect the highest value of the highest job. From one grade to the next, there should be a 15 percent midpoint progression, meaning the midpoint of one grade should be about 15 percent higher than the midpoint of the grade below it. This is to ensure that promotions are accompanied by meaningful pay increases. Benchmarked jobs are then slotted into the pay grades. Some positions are often forced into a
grade, and some grades won't be fully aligned. Ideally companies look for a narrow margin of approximately 5 to 10 percent between the market median and the midpoint of the grade. Market data may not be available for all jobs. Such jobs are often slotted into comparable grades for the company according to the scope of the job, the responsibilities, the size of the budget the position handles, etc. For example, if a suitable benchmark for a financial manager cannot be found, the job is slotted into the rough equivalent of the HR manager if they are equally valued at your organization. Broadbanding is the pay practice of creating large ranges and control points within a grade to give people wide latitude to move within their job without outgrowing the payscale. However, studies have shown that after five to seven years of doing the same job, people no longer improve dramatically in that job. A pay philosophy might take this principle into account by stipulating that no one will be paid more than 120 to 130 percent of market, regardless of how well he or she performs. Many nonexempt jobs are compensated in traditional pay grades. These jobs benefit from a more structured approach to pay. Use market pricing to relate jobs to external forces An alternative to the traditional grid-based pay structure is the market pricing approach, which is rapidly becoming the prevalent method of pricing jobs. With the market pricing approach, people are compensated in relation to the market value of their job, regardless of their level in the organization. The market may suggest, for example, that certain information technology workers should be paid more than chief technology officers. The pertinent value in the market pricing method is not the midpoint of a grade, but the midpoint of that job in the market, along with the employee's comparatio, or salary divided by the market rate. Over time, the employee's pay should move closer to market as performance moves closer to expectations for that job. Under the market pricing method, the salary for a job may still be capped at120 to 130 percent of market. Labor unions also typically do market studies in collaboration with the human resources department or with a third party. A company striving to compete with the possibility of a unionized workforce might pay more than the union's market study recommends. Speak plainly about the numbers to save time Hiring managers should know what they can afford to pay, and they should be able to communicate that range to candidates. With recruitment and retention so critical to the success of a business, it is to everyone's advantage for a hiring manager to disclose a salary range up front. Even in a telephone interview it may help get the right candidate in the door if the manager reads the job description and discloses the pay range. And if candidates have done thorough salary research, the conversation about compensation is likely to begin with market data anyway.
ay Structures / Salary Structures
What are Pay Structures or Salary Structures?
Pay structures, also known as salary structures, set out the different levels of pay for jobs, or groups of jobs, by reference to:
their relative internal value, as established by job evaluation external relativities, via market rate surveys where appropriate, negotiated rates for the job
What are the main characteristics of Pay Structures?
indicate rates of pay for different jobs provide scope for pay progression via performance, competence, contribution, skill or service contain pay ranges for jobs grouped into grades, individual jobs or job families.
Why do organisations need Pay structures?
establish a logically-designed framework within which equitable, fair and consistent reward policies can be implemented determine levels of pay for jobs and people basis for the effective management of relativities help monitor and control the implementation of pay practices communicate the pay opportunities available to employees.
The most important types of pay structure, or salary structure, are: Graded structures – a sequence of overlapping job grades into which jobs of broadly equivalent size are allocated. Each grade has a range, the maximum of which is usually 20 to 50% above the minimum. Broadband – similar to conventional graded structures, but with far fewer and far wider bands. The maximum of the band can be 100% or more above the minimum.
Job Family Structures – Each job family has a different graded structure. Jobs are allocated to a job family based on activities carried out; skills and competencies e.g. Information Technology is a perfect example of a job family for which there is usually a separate grade structure. There are many other types of pay structures and salary structures e.g. pay spines, benefit structures, spot rates, fixed rate, time rate. All of these pay structures will be looked at in more detail in the next chapter.
(I) PAY RANGES
Each grade or band has a pay range or scale with a minimum and a maximum. It also has a reference point. The reference point is the market rate i.e. the going rate for the job in the market and is equivalent to the mid-point or the maximum of the range depending on the pay progression method used. MIN------------------------------MID-POINT------------------------------MAX Reference Point Or MIN-----------------------------------------------------------------------------MAX Reference Point A number of companies refer to the reference point as 100% of the range and annotate other significant points of the range in percentage terms relative to the reference point i.e. the two ranges shown above might be annotated like this: MIN------------------------------MID-POINT------------------------------MAX 80% Reference Point 100% and MIN-----------------------------------------------------------------------------MAX 67% Reference point 100% 120%
As you can see each position on the scale and therefore each salary within the scale, can now be referred to as a percentage. Some companies call this percentage a compa-ratio (comparative ratio) and it is a term widely used in Reward Management. It is the salary expressed as a percentage of the reference point, and therefore when it is calculated for one job or as an average for many jobs how far from the market you are paying people.
(ii) PAY PROGRESSION
Remember, 100% is usually the reference point or the market rate for the job i.e. the rate of pay for a fully competent individual performing all aspects of the job well. Generally, there are two main ways to progress through the range: Old type – fixed incremental system 67% 100%
MIN------------------------------------------------------------------------MAX Inexperienced New Developing Experienced Fully competent
In this type there are usually annual increments, with perhaps some element of performance appraisal, so that the better you perform the greater the increment you receive and the faster you progress to the maximum of the scale. An employee starts at the bottom of the scale i.e. 67% compa ratio if they are new into the job and no previous experience. An experienced recruit would start at a position on the scale which was in line with existing staff of similar experience. An experienced, fully competent employee fulfilling all aspects of the job description should be paid around the maximum of the scale i.e. the going market rate for the job.
Newer type
Experienced New Fully developed to do all Inexperienced aspects of the job and Developing competent in all aspects of Steep learning curve the job. 80% Minimum 100% Mid point
Exceptional performers. Additional responsibilities. Project work Coaching 120% Maximum
As in the previous type of pay range, an employee would start at the bottom of the scale (in this case 80% compa ratio) if they were new to the job or had no previous experience. Likewise an experienced recruit would start at a position on the scale which is in line with existing staff of similar experience. A fully experienced employee, competent in all aspects of the job should be paid around the mid point which is the going rate for the job.
This type of pay range differs from the previous one now as it extends beyond 100%. Usually, organisations with this type of pay progression have some sort of paying for performance system, where people who continually exceed their performance targets could earn, in this example, 20% above the market rate for the job. Differing rates of progression through the scale can depend on performance, contribution, stage of development, and the demonstration of skills and competencies. Some companies only allow progression through the scale at the time of the annual salary review. Others also have mid-year review or review 6 months after recruitment or promotion. There is a most interesting fact relating to the two examples of pay progression: if they were applied to two companies which use the same market rate for a particular job then the job holder in the company with performance pay has the potential to earn 20% more basic salary than the job holder in the company with annual increments. This is worth remembering when looking at the whole issue of market data and the ability to recruit and retain staff. Although both companies pay the same basic salary to a fully competent employee, the company with performance pay is more attractive to employees because they can potentially earn more with that company than with the company using annual increments.
he Advantages and Disadvantages of Broadbanding
Broadbanding is the term applied to having extremely wide salary bands, much more encompassing than with traditional salary structures. Whereas a typical salary band has a 40 percent difference in pay between its minimum and maximum, broadbanding would typically have a 100 percent difference. Most of the time, creating enormously large bands is done as a measure to support a restructuring. It combines and consolidates the number of levels or job grades. This article will discuss the advantages of broadbanding in an overall compensation strategy, as well as the disadvantages.
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The Advantages of Broadbanding
Streamlines Hierarchy
Sometimes an organization has become too hierarchical for the strategic direction of the company; finding it has become too slow to react, taking too much time to get information from
the top down and even less effective at getting messages from the lower rungs up to the ears of senior management. Broadbanding reduces the number of levels or layers within a company. This is the best face-saving way for an organization to collapse salary ranges and supporting delayering. This flattens an organizational structure and reduces the hierarchy.
Facilitates Internal Movement
Whether we like it or not, some great person-to-job matches just do not happen because of the way a job has been classified or positioned with an assigned salary band. If that new position is not a lateral or at a higher rung, most rational people will not seriously consider a transfer that results in a demotion. That is just not a positive step for their career development. With broadbanding, more internal movement is facilitated, because the probability increases that one’s current job and alternate position are within the same enormous range of pay. This makes pay take a back seat and puts forward other attributes of a position, encouraging internal mobility and potentially more developmental assignments.
Puts Added Trust in Managment
With broadbanding, managers have great latitude to pay what they want to an employee. This absolutely can reduce the push-pull between the hiring manager and the human resources organization. Now the issue of pay shifts to the control of the hiring manager and the challenge of "Does one have enough money in the current budget?" or not. The perception of HR as a regulating gate keeper to preserve the salary structure diminishes. Managers are entrusted with greater autonomy.
The Disadvantages of Broadbanding
No Awareness of External Market Rates
Traditional salary structures, when done right, give current information to your management team about what market rates are. With broadbanding, if a manager wants to pay at the market midpoint, they are left baffled and guessing. There is no midpoint in a broad band. That also means the compa-ratio tool can not be used.
May Lead to Inequities
Broadbanding’s flexibility and trust in management may or may not be warranted. In a broadbanding system, it is relatively easy to have two people with the same responsibilities have earnings that are thousands and thousands of dollars apart. Broadbanding weakens the linkage between salary growth and skill development for the next higher-level, since it is so far off as to not be a motivator. Do you want supervisors and their direct reports in the same pay band? That can easily happen with broadbanding. It only takes a few reckless managers rewarding a few individuals inappropriately to have an entire pay system called into question. Whether your pay system is fair or not fair is not quite as
important as if it is perceived as fair. If your pay system is perceived as not fair, you could see an increase in EEOC complaints. Did you know the Department of Labor added 700 additional auditors after the passage of the Lilly Ledbetter Equal Pay Act in 2009? People don’t call and ask for an audit when they believe their conditions are fair.
Lack of Cost Controls
It certainly may call into question why have salary bands at all if they are so wide. You need to evaluate if your other cost control training and measures are strong enough to hand over this much authority and autonomy to your managers. Moving to broadbanding may require thinking through other incentives that had previously been tied to salary grades, such as bonuses or stock.
Promotions
In my opinion the absolute worst thing about broadbanding is the severe reduction in opportunities for promotions. Fewer salary bands lead to fewer opportunities to climb to the next band; meaning fewer promotions to celebrate with family and friends. Think seriously before you minimize this great motivational tool. If you are committed to moving to broadbanding, yet this is of concern to you, keep an eye on your turnover rates and conduct exit interviews to monitor the pulse of why your talent is moving to your competitors.
Conclusion
It is your call whether broadbanding is a tool for use in your organization or not. Broadbanding is a very effective tool to reduce salary grades or job classifications, but it definitely has its drawbacks.
Broadbanding defined
Broadbanding is a job grading structure that falls between using spot salaries vs. many job grades to determine what to pay particular positions and incumbents within those positions. While broadbanding gives the organization using it some broad job classifications, it does not have as many distinct job grades as traditional salary structures do.[1] Thus, broadbanding reduces the emphasis on ‘status’ or hierarchy and places more of an emphasis on lateral job movement within the company. In a broadbanding structure an employee can be more easily rewarded for lateral movement or skills development, whereas in traditional multiple grade salary structures pay progression happens primarily via job promotion. In this way, broadbanding is a more flexible pay system. This flexibility, however, can lead to internal pay relativity problems as there isn’t as much control over salary progression as there would be within a traditional multilevel grading structure.
Selection of broadbanding
Broadbanding works better for some organizations than others.[2] Hierarchical and/or risk averse companies with a preference for well defined policies and procedures would be better served by
a traditional multi-grade structure. Flat organizations that are flexible, have a higher tolerance for ambiguity, and encourage lateral or cross functional movement would be good candidates for broadbanding. Also, implementing broadbands in some countries may be easier than in others. In countries where promotions and titles are very important socially, companies may need to consider letting employees use an external business title based on employee age or years of service, that is different than the job title used for position grading internally. Also, some employees may feel lost, or not know how to build their careers without a vertical corporate ladder to climb. In this case, the company will need to be able to give examples to the employees of how lateral movement can enhance their career opportunities. For a suitable organization in the right cultural setting, broadbanding can do the following: • Reward performance more efficiently – as the pay ranges are wide, the company has the flexibility to reward a star performer, even when they aren’t getting promoted. • Take the emphasis off of job evaluation – because the number of levels have been reduced, job evaluation can be streamlined as there aren’t as many distinct grades that need to be considered when slotting a job into the structure. • Manage a flexible/mobile workforce – for companies that have staffing needs that change frequently or are difficult to predict, or work within a business environment that is in flux, broadbanding offers a program that is easier to maintain than a traditional system with many distinct levels. One concern noted by companies that have implemented broadbanding is that compensation costs may go up. This is due to the wider than normal band taking away that more gradated top end control on salary levels. This can be effectively managed through the use of market data, in order to help managers to validate their pay decisions for a particular employee to the external market before proceeding to give higher than normal pay increases. Broadbanding, like other grading systems, relies on the buy-in of all key stakeholders including the business managers, HR managers, and employees. Tailored communication to each of these groups will go a long way towards ensuring the successful implementation of a broadbanding program.
Broadbanded Salary Structures
Broadbanded Salary Structures became all the rage, at least in the literature and on the consultant/guru rubber chicken circuit in the '90s. This was a huge swing of the pendulum from compensation programs featuring a zillion narrow pay grades -- an even greater swing when one considers the Texas-sized "career bands" that some companies adopted.
After all the hype, it turns out that not that many organizations thought broadbanding is their silver bullet. At the close of the 90s, a Wyatt survey of 1,300 companies found that less than one in ten used broadbands. If one removes the larger companies from the survey (5,000 employees or more), only 6% to 7% used this approach.
Is broadbanding another passing fad?
A few companies find that it works for them, but most are redesigning their structures to allow pay ranges to reflect the market. The trend is toward common-sense salary structures, with plenty of room to compete for talent and continue to reward stars without busting through a pay grade ceiling. A lot of lessons have been learned the hard way. Now compensation folks can move on to other challenges.
Follow-Up
This week, Compensation-L subscribers were asked, "Whatever happened to broadbanding?" Our reply: Broadbanding is still around, although it is getting far less press than it did in the nineties. Like all tools, it's great for achieving specific outcomes, but can cause great damage when misapplied.
Definition:
Broadbanding (or 'broad grades') is the consolidation of traditional pay structures, consisting of many, narrow pay ranges into a few, wider ranges or bands.
Purpose:
Broadbanding is intended to support agile, flatter, faster-paced, de-bureaucratized organizational cultures.
Use:
Broadbands are imperative for companies with competency-based pay programs, but are also used in companies with longevity- and performance-based pay programs. Companies employ broad banding to:
facilitate change avoid multiple pay structures drive pay decision-making downward (empowering managers) provide greater latitude in management pay decisions promote lateral moves or in-grade promotions reduce use of promotions to increase pay promote career development / learning
reduce the need for precise job analysis/evaluation promote fewer, broadly-defined jobs focus on the person instead of the job facilitate quick responses to changing goals and circumstances
Structure:
Companies adopting a broadband structure generally reduce the number of salary ranges by onehalf to two-thirds. The broadband range spread is generally 75% to 125%. It may be greater. Most broadbanding companies use 10 bands:
2 for the executive level 4 for the managerial and professional level 4 for the non-managerial or hourly level
Midpoints:
Broadbands typically do not have a single midpoint; they have a minimum and maximum. Broadbanding companies use a range of techniques for control purposes, including a series of reference points relating to career levels in a job family, market based zones linking a group of benchmark jobs to anchor the structure to the market, and so-called shadow ranges.
Wide (or Fat) Grades:
Some organizations use wide grades (also called fat grades). These are simple traditional pay ranges that have been modified so that there are fewer of them than previously used. Their minimum-to-maximum spread is greater than tradition-bound ranges of the last century. These structures may help to counter grade creep and make for a more realistic approach to pay decision-making, but, typically, do not free a company from traditional pay administration practices.
Prevalence:
Broadbands (and career bands) are still viewed as a novel approach to pay, yet to be proven workable. While companies continue to move to broadband pay programs, anecdotal reports indicate that many early-adopters are returning to more traditional (albeit relatively wide) pay structures.
Success:
Successful use of broadbanding requires that:
top management has a clear goals, understands the pros and cons, commitment all managers are mature and highly trained in HRM and compensation
Pitfalls: Before moving to broadbanding, companies should consider the following:
Broadbanding demands that managers are aware of, and can interpret, market pay data Broadband control points are not precise for individual jobs Broadbanding increases the potential for employees to float to the top of the band, way out of sync with the market Broadbands lack the automatic cost-control mechanism inherent in narrow pay ranges Broadbanding eliminates the possibility for precise job analysis/evaluation
Final Thoughts
As with all compensation methods, companies should carefully weigh broadbanding's pros and cons to ensure to it fits with their organizational culture and business goals. A broad banded pay structure groups a combination of job classifications into pay bands and places a larger spread between bottom and top rates of pay. Together with the greater pay range within each band and the smaller number of bands, broad banding is quite distinct from conventional grading systems. Pay progression through each band is normally related to competency based, performance, contribution or market rates of pay.
When should broad banding be introduced?
Broad banding is often introduced as a means of enabling an authority to redesign and remodernise its salary structure. It can be introduced in stages rather than across the whole organisation. There are two main reasons for doing this:
to address severe recruitment and retention difficulties in certain parts of an organisation. It is more appropriate here to limit the changes to the job areas that are experiencing the greatest labour market pressures. In such circumstances, a common approach is to combine related classifications into a job family to move employees to multi-functional teams where the scope of broad banding will be more extensive and the structure more complex. If a team is organised to either complete a related set of tasks or all related activities in the delivery of a service, the bands may have to accommodate its unrelated classifications. One approach is to link progression to a competency based pay structure where employees are rewarded for the acquisition of new skills (competencies). Each recognised competency attained can be used as the basis for moving an employee onto the next spinal column point.
The width of pay bands
Broad banding allows authorities the freedom to design bands that meet their specific requirements. When aligned to job families this approach can be tailored to meet the needs of individual service delivery areas. A fundamental consideration is to decide on the spread between the lowest spinal column point in the band, and the highest. The range of pay within bands could involve maximums that are 30% to 50% higher than the minimum rates. Some private sector organisations have often opted for wider bands, in some cases as high as 100%, to allow for a wider variation in pay to reflect performance. An obvious starting point is to use the minimum spinal column point from the lowest classification and the maximum spinal column point from the highest classification.
Developing a broad banded pay structure
Pay is a fundamental aspect of any bargaining arena and as a result the details of a broad banded pay structure will normally need to be negotiated with the trade unions. Pay expert Michael Armstrong, recommends the following 12 steps for developing and installing a broad banded pay structure in his publication 'Employee Reward':
reach an agreement that it is the most appropriate pay structure for progression provisionally estimate the number of bands that will be required by analysing the organisation's structure and the various roles carried out at each level decide on the width of bands, the degree of overlap (if any), the anchor points and pay zones carry out a job evaluation exercise to define band boundaries and revise the band structure as appropriate conduct a pay survey to establish market rates position roles in bands (singly or in clusters) on the basis of relative size as established by job evaluation results and market rates. This will be based on judgement to establish the weight to be given to internal and external relativities. A decision will also need to be made on the extent to which it is policy to provide for market relativities to drive pay decisions decide on the basis for progressing pay within zones and for adjusting pay levels following a change in role decide on the role of job evaluation in defining band boundaries, guiding band positioning decisions and dealing with new roles or equal value queries examine existing rates of pay for employees, identify any increases and establish any cases where pay protection may be necessary draw up procedures for managing the structure including the allocation of roles to bands, the use of job evaluation, the conduct of pay reviews, fixing salaries for recruitment purposes or following a change in role, maintaining data on market rates and the use of performance management processes to assist in making pay review decisions brief and train managers on the new structure and their roles in managing pay communicate the details of the new structure and how it affects them to staff
Conflicting pressures
There are conflicting pressures between employers and trade unions in progressing employees through broad bands. In traditional pay structures the trade unions have sought to link the movement through the spinal column points of the pay grade with the amount of time the incumbent has spent in it. The upward movement from the lowest spinal column point to the next, and up until the top of the grade has been reached, has been automatic with the passage of time. The chief concerns of the unions are that the process for determining positions within the band are fair, understandable and free from bias. Automatic time served progression meets these criteria. Conversely, employers have often sought to explore methods that can link movement between spinal column points to individual employee appraisal results. The concept of a broad banded pay structure is often viewed as an opportunity to link the introduction of a method or pay that will reward employee contribution. The employers' goal is often to introduce a pay system that rewards individuals whose performance is superior by accelerating their movement within the band. These traditional trade union and employer positions are founded on two fundamentally different philosophies on pay and reward. Broad banding exacerbates the issue because of the greater range between the bottom and top of the band. However, the two different ideological stances towards progression do not have to be mutually exclusive. It is relatively straightforward to envisage a hybrid approach combining pay that recognises contribution and time served progression. This could be achieved by reducing time served progression to fewer incremental stages and making any further progress contingent on some agreed form of employee contribution. Advantages:
it provides greater flexibility for organisations to make and administer pay decisions there is more scope for lateral career development because broad bands create a flatter organisational structure it can be used as a mechanism for facilitating an organisation to change from a traditional hierarchical approach to one that is flatter, multi skilled and more flexible. This is achieved by replacing a traditional structure comprised of many vertically integrated narrow bands with a much smaller number of wider bands that allow for greater individual progression an organisation operating with a small number of bands is able to address communication issues more effectively because it grades far more employees within the same pay category if it is linked to a performance related, team or contribution method of pay reward system it can closely align pay progression to the corporate goals of the organisation as more employees will be classified in the same band it can be used to reduce the status consciousness that is often found in a narrow banded pay structure. This in turn might help to focus employee attention to the external environment rather than internal equity when aligned to a competence based method of reward it can encourage employee development and therefore, multi-skilling
Disadvantages:
the elimination of a narrow banded grading structure and the status conferred on employees as they progress up the hierarchy might instil resentment in highly status conscious-employees there is a danger of band drift because the amount of spinal column points between the lowest and the highest points of a broad band are considerably greater than in a narrow banded pay structure. This means that extra resources are needed to carefully control and monitor the structure it can increase the likelihood for an authority to be involved in a discrimination case under equal value legislation. To avoid this, equality-proofed broad banding arrangements must be established market rates of pay will have to be continuously monitored if broad banding is used to address recruitment problems that have arisen due to external competition. This can be a very costly and time-consuming process and can place extra pressures on HR and pay specialists within the authority there is no evidence to suggest that a broad banded pay structure will suit the culture or every organisation. If it is imposed without the commitment of the majority of the workforce there is a danger of breaking the psychological contract between the employer and the employees. This in turn can cause significant motivation problems if employees believe that the decision of their line manager on their pay progression has been subjective and has ignored set criteria for assessment such as the effect of market rates or individual / team contribution the whole process can be undermined if broad banding is not introduced with a full and clear explanation of how it will effect individual employees it will be rejected as a concept that is too difficult to understand the time and resources needed to train line managers to make pay decisions at appraisal is considerable, but unavoidable if possible discrimination cases under equal value legislation are to be avoided if a broad banded structure is linked to a competency based reward system the scope for employees to acquire new skills will need to be tightly controlled to avoid costs increasing too rapidly
Spot salaries
Spot salaries are fixed to specifically defined spinal column points within a grading structure. There is no progression up to or beyond the rate for each position. Spot salaries are one of the least discriminatory of pay methods because everyone is paid the rate for the job from day one and the pay structure cannot be distorted by differential progression. However, using fixed points may cause motivation issues and make employees focus too much on the specific job description.
Spot salaries have typified the payment system for former manual and craft employees in local government. It may also make employees focus on the specific job description to an undesirable extent.
Narrow bands
Narrow banded pay structures closely resemble the former APT&C grading structure. These mainly comprise of four and three increment grades which sit within a vertical hierarchy. This grading structure encompasses anything from twelve to eighteen bands. Each band comprises of six clerical grades, two senior officer grades and four to ten principal officer grades. Progression through a narrow band is generally via automatic annual increments.
Career grades
Career grades allow employees in defined occupations to progress through a number of linked grades or associated pay scales while they are undertaking formal training and taking on more responsible duties. Promotion bars outline the paths for progress and usually depend on the employee attaining a training qualification and/or satisfying defined levels of increased responsibility. Strict progression criteria must be outlined from the start of this method; in instances where a recent job evaluation exercise has taken place, it is advisable to redesign or re-calibrate the career progression scheme to deliver appropriate levels of responsibility within the new pay structure. ob families essentially categorise jobs on the similarity of their characteristics. Each job family contains different levels of responsibility that reflect the uniqueness of its individual pay structure. Jobs within the families can be linked by:
occupation such as environmental health officer or accountant the nature of work performed such as social care function such as leisure or housing services
This means that civil engineering staff could belong to:
an occupational job family covering just professional engineers and technicians a job family covering all employees involved in the primary function of construction including craft employees and road-workers a job family covering the generic function of construction, this would additionally include departmental personnel and administrative staff
Why choose job families?
The CIPD's 'Study of Broad Banded and Job Family Pay Structures,' published in January 2000, identified four key reasons for an organisation to use a pay structure based on job families. These are:
to map career paths to achieve greater flexibility to identify groups of employees that can be linked to the market to provide rewards based on personal contribution and progress
A job family pay structure
A key distinction that makes job families different to traditional grading structures is that each job family has separate pay arrangements. This arrangement is especially attractive to employers because it allows them the possibility of responding quickly to external factors that can have a damaging effect on certain areas of service delivery. Each specific job family within the organisation is allowed the freedom to set its own number of pay bands within a grading structure. This approach has the advantage of tailoring grading structures to specifically meet the needs of job groupings within different areas of service delivery.
Responding to the external job market
Placing employees in job families is a means of responding to pay levels set by the market place. These are determined by the value other employers place on employees with skills that are in scarce supply. A job family with acute skill shortages is free to set higher pay rates to match the competition from outside. Conversely, a job family in a service delivery area without any skills shortages can manage its budget more effectively by setting lower rates of pay within its grading structure. As the labour market for professional workers has increased in recent years job families have grown in popularity. This is because an organisation can respond to market pressures quickly with the flexibility to adjust the pay within an affected job family.
The link to broad banding and the market
The attraction for placing job families within a broad banded pay structure is that it provides employers the scope to determine an individual's position within it, based on the labour market. This can either be done on an individual basis where employers respond to the labour market with recruitment and retention offers, or collectively where wage surveys are used to set special increases for the classifications in the band.
The individual approach
To obtain a retention increase and a subsequent movement up the pay band existing employees have to provide evidence of job offers from other organisations. New employees with the desired skills and experience are appointed to whatever spinal column point in the broad band is needed to entice them in. The goal of the employer in these circumstances is to ensure that salaries of new recruits and existing employees with highly marketable skills are kept as closely aligned to what is being paid in the external market as possible. Such an approach is almost inevitably going to meet with opposition from the trade unions. An obvious point of inequality that could arise is a situation where an existing employee is responsible for training a new recruit that is being paid significantly more than they are. The approach is also unsuitable because local authority employers have limited ability to influence the size of their budget. They are therefore likely to have difficulty in being able to continually match job offers being made by the private sector for staff with skills that are keenly sought after.
The collective approach
The collective approach uses labour market survey data to adjust rates of pay of the job families that are experiencing labour market pressure. All incumbents, not just new recruits and those receiving job offers elsewhere receive a pay increase. This approach aligns the entire job family with the external labour market. These market adjustments can take the form of special step increases within the existing broad band or moving employees to the next broad band within the pay range. The collective approach minimises the problems of wage compression resulting from high job offers to attract new employees and is, therefore, likely to reduce a feeling of resentment from existing employees. An obvious drawback to the collective approach for employers is the added costs of raising the salaries of all incumbents rather than the minority that receive recruitment and retention increases under the individual approach. However, such considerations need to be set firmly within the context of equal work for equal value legislation. This makes the collective approach by far the most viable option. It is important to note that market adjustment in both the individual and collective approach should not preclude the opportunity for employees to progress further in the grade on the basis of time, individual or team performance, competence or contribution. Advantages:
job families have the advantage of enabling individuals to identify how to progress in organisations that provide a multitude of services like local authorities. This is because each family has its own career path clarifying what individuals need to do to progress from one level to the next by breaking down grading structures into job families, decisions on pay can be made with far greater flexibility both lateral career development and multi-skilling can be achieved within the context of a defined job area
almost any job can be accommodated in any form of job family that is decided upon the viability of a broad banded pay structure can be reinforced because the job family can be used to facilitate career and pay progression by specifying what is needed for a pay increase in offering employees a flexible career and progression structure, job families can support organisations with a flatter hierarchy it is easier to set competencies within job families because they are able to inter-relate with the specific job area. This means that the risks of employees having to satisfy competencies that bear no relation to their work area before they can receive a pay increase are minimised
Disadvantages:
it might be difficult for staff to move from one job family to another. This could cause motivational problems for disillusioned staff who feel that they are trapped in one part of the organisation for the rest of their career there is an inherent danger that awarding pay linked to the external market is discriminatory. The placing of employees into job families might not be enough justification to prevent the possibility for comparisons to be drawn by less well-paid employees in different job families tracking the market is a time consuming and costly process. Yet it has to be done meticulously and constantly, if pay is based on the market to avoid claims of discrimination the more job families that exist the more difficult the process of tracking the market will be to control. The process can also be controversial if the viability of market data as an empirical source has not been agreed in advance there is a risk of raising expectations when linking job families to the market. This is because employees might perceive the worth of their job to be similar to ones they see advertised in the press. In reality even jobs with the same title will differ widely in responsibility from one organisation to another the trade unions are unlikely to find the granting of special increases to certain job families within an authority to be politically viable in the long term although the labour market always produces winners and losers the winners are often only a small minority of the overall bargaining unit. Devising a pay structure that could be viewed by the majority of the workforce as catering to the needs of a small privileged group, is likely to cause resentment. This is in turn might escalate into motivational problems leading to a downturn in performance
