By Susan M. Heathfield

Market pay is vital

Is the pay in your organization competitive with the pay in today's job market? You can answer this question by taking a look at the quantity and caliber of the applicants who you are attracting. Equally, high employee retention rates demonstrate a great deal about your organization's competitiveness in the marketplace.

Regardless of what workplace studies reveal, working is about compensation. Working can be about much more, too, but the bottom line for people is that their work must pay their bills. Employees desire reasonable, viable, and market-responsive salaries. Compensation is the visible demonstration that an employee's work is valued. Consequently, effective compensation is one of an employer's most important and powerful communication tools.

Collecting market pay data

Therefore, the value that you assign to jobs in your organization's compensation system should be driven by the most up-to-date information about market pay. You can obtain practical market pay data, which includes information about salary, benefits, and bonuses, from a continual analysis of the competitive job market.

Large organizations, which have many resources and compensation professionals, might even design and administer custom surveys to regularly obtain market pay data. Smaller organizations must use market surveys conducted by national, local, and professional associations.

Or you can match your jobs to commercially available compensation studies that provide compensation information for:

• Your industry
• Your geographic region
• Your company size
• The number of people that you employ
• Your job descriptions

Assess the potential value of salary survey data by the method used to compile it and the similarity of the data's job descriptions to the jobs you need to match.

In addition to salary surveys, you can collect market data from similar organizations, although you might want to avoid the illusion of price fixing. Market information is also available from colleagues, from professional association surveys of members, and from the National Compensation Surveys available on the Bureau of Labor Statistics site (www.bls.gov). You can get an indication of the average pay for particular jobs by searching online job boards.

How to use market pay data to construct pay scales

Regardless of your market pay data sources, you should use the following steps to apply market pay data for developing appropriate pay scales:

1. Verify that your data is correct, and match the data to your specific job descriptions to appropriately value each job.
2. Arrange the jobs along a market line according to the value of the job as determined by your market pricing data.
3. Use the market line to develop pay grades by grouping jobs with similar market values. The number of pay grades that you need is determined by the number of hierarchical levels you have in your organization. Numbers of levels of supervision, technical sophistication of jobs, and your desire to create ranges that allow for career development without promotion are also factors in determining the number of pay grades.
4. Determine the pay range for each pay grade. The pay range is the distance between the minimum and the maximum compensation point allotted to each job. This allocation is the result of your market pay data research and your internally conducted job evaluations. Jobs with lower salary values have more narrow ranges, and executive jobs have the largest salary ranges. According to the Society for Human Resource Management site (www.shrm.org), the following are common ranges:
   • Nonexempt manufacturing: Narrow range of 20%–25%, or flat rate
   • Nonexempt clerical: Relatively narrow range of 30%–40%
   • Exempt professional, administrative, supervisory: Wider range of 40%–50%
   • Exempt managerial and executives: Widest ranges of 50% or more
5. Calculate a minimum point, midpoint, and maximum point in each pay range, with equal distance between each point. According to the SHRM Web site, the following is a typical pay structure:
   • Production employees: 10%–20%
   • Clerical employees: 20%–40%
   • Exempt employees: 35%–50%
   • Management employees: 45%–60%
6. Draw a market line across your pay grades based on your organization's compensation philosophy.
   • Organizations that have highly technical, hard-to-replace positions might want to draw their organizational pay line across the 75th percentile and pay above-average wages.
   • Stable industry organizations might want to pay below the midpoint but compensate with better-than-average benefits.
   • Organizations with high turnover and ongoing training might want to pay at the minimum point, because employees are expected to work only short-term assignments.
7. Assign the appropriate value to each job based on your organization's compensation philosophy and the qualifications, experience, potential contribution, and market value of each job holder.

What is a broadband pay structure, and why does it matter for market data?

In a broadband pay structure, the numbers of salary grades are consolidated. Fewer ranges mean that the spread of the ranges is wider and that there is less overlap with other ranges.

Broadband pay structures evolved as organizations sought to flatten their hierarchies and move decision-making responsibilities closer to the point of the necessity and knowledge in organizations. In flattened organizations, fewer promotional opportunities exist.

Broadband pay structures therefore provide an opportunity for career growth without the necessity for promotion. Broadband pay structures encourage the development of broad employee skills, because nonmanagerial jobs are appropriately valued and skill development is rewarded.

These pay structures are not as sensitive to rapidly changing market pricing conditions, so they cost less to administer and manage. According to Keith Fortier and Christopher Fusco, in their Salary Structures white paper on Salary.com: "Whereas the design characteristics of traditional structures emphasize internal equity and focus the employee's attention on the world inside the firm, broadbanding focuses employees on the changing needs of the organization and helps them experience an internal culture that more closely reflects the external business environment and the competitive recruiting market."

Conclusion

Market pay data is an essential component in developing a salary structure for your organization. Combined with job evaluation data and your organization's commitment to internal pay equity, market pay data is the best tool for developing pay grades and pay ranges. Broadband pay structures, touted since the early 1990s, offer an additional opportunity to use the interchange between your internal pay structures and the marketplace.

About the author   Susan M. Heathfield is a management and organization development consultant who helps organizations strategically value and utilize people. Her company promotes business success and profitability through consultation, executive and management coaching, organization development strategies, human resources system and policy development, team building, customized training, and writing.