Salary Ranges, Part 2: Anatomy of a Range
In my previous post, I made a case for the use of salary ranges as the foundation of a formal compensation program for nonprofit organizations. Particularly for organizations experiencing or have experienced significant growth, the use of salary ranges can go a long way toward ensuring salaries are equitable and competitive while, at the same time, managing compensation costs. We also considered the importance of ranges as a communications tool clarifying for employees their compensation opportunities with the organization as well as the relationship between pay and performance.
Now, let’s take a closer look considering the construction of salary ranges and some of the considerations involved with their implementation and management. A “typical” salary range is illustrated below.
The midpoint of the range represents the market target for the given level of work — the amount the organization would theoretically look to pay a fully competent performer in the position. The minimum and midpoint are then constructed around that. As Ann Bares points out in her post, salary ranges constructed with a 50% “spread” — in other words, where the maximum of the range is 150% of the minimum for the range have become something of a de facto standard. That results in a range with a minimum equal to 80% of the midpoint and a maximum equal to 120% of the midpoint.
To reiterate a point made in my post earlier this week, an individual employee’s position in the range should be a function of performance over time. That is, high-performing employees should, over time, migrate toward the higher end of the range while employees who are lower performers should remain, or end up, in the lower portion of the range. A common misperception about salary ranges is that every employee should be at least at the midpoint of the range. This is a fallacy that, if followed, effectively limits the organization to only half of the range and targets pay overall at a higher level of market competitiveness than intended.
In last week’s post, we considered the influence of internal equity, external competitiveness and performance on every organization’s compensation approach whether a formal program or ad hoc practices. In the construction of salary ranges, the design of an annual merit increase grid and overall compensation program management, there are opportunities for the organization to not only adjust the relationship between these forces to strike the balance best representing the organization’s compensation philosophy but to also continually respond to budgetary constraints.
Once salary ranges are implemented, it is important to interpret the minimum and maximum as expressions of policy — that the minimum is the least amount the organization considers fair to pay for a given level of work and that the maximum is the most the organization is willing and able to pay for a given level of work. (Discussions of what to do when an individual’s salary falls below or above the range are frequently a part of my consulting in this area.)
Many organizations look to offer new employees starting salaries that are in the lower portion of the salary range (between minimum and midpoint in this illustration). Exceptions can, of course, be made when necessary to attract essential talent, but the details of doing so should be spelled out in the organization’s compensation management guidelines.
As the salary range anatomy and the considerations described in the preceding paragraphs illustrate, there is definitely a learning curve — for employees and managers — involved with implementing and utilizing salary ranges. But the investment is well worthwhile in that the ranges provide a rational and effective way of ensuring equity and competitiveness in the organization’s pay practices by linking pay to performance, by communicating current and future compensation opportunities to employees and in managing compensation costs.
Does your nonprofit utilize formal salary ranges? If so, what has your experience been? Do you find them effective and relevant? If your organization does not utilize them, have you experienced any problems in terms of equity, competitiveness, communication or costs?
Joe Brown is the Principal and Founder of Slope Resources, LLC. Slope Resources provides a range of human resources and organization management consulting services to nonprofit organizations of all types and sizes. Joe is also the author of the blog Done by People, which focuses on human resources and organization management in the third sector, and will be a presenter at the 2010 Nonprofit Human Resources Conference. For more information about Joe Brown and Slope Resources, please visit sloperesources.com.
photo credit: CarbonNYC
Salary Ranges, Part 2: Anatomy of a Range: http://blog.execsearches.com/2010/04/08/salary-ranges-part-2-anatomy-of-a-range/