In a recent post, compensation consultant Ann Bares questions whether salary ranges, long a staple of compensation programs among America’s companies and organizations, are still a useful tool given the relatively slow pace of salary annual growth during the past two decades. There is no question that administering salaries — and, in particular, differentiating rewards according to performance — is challenging in what I’ve long described as a “four percent world” (or, perhaps, for the past two years, a “zero to three percent world”). However, I believe that for the vast majority of nonprofit organizations, salary ranges remain an important and effective tool. This is especially true for growing nonprofits, which find themselves adding staff and needing to ensure that salaries are equitable and competitive while simultaneously managing compensation costs.

A couple of years ago, I was retained by an organization in just that situation. The organization, which had been in existence for about 20 years, experienced significant growth through the previous decade growing from fewer than 50 employees to more than 200. One of the problems the organization was experiencing was a high level of employee turnover particularly among young, high-potential employees in their second and third years of employment. The organization’s management assumed this was related to compensation.

As I began to speak with employees and managers, I found that there was, in fact, a connection to compensation. But, rather than dissatisfaction with the actual compensation levels, an issue that emerged was that employees had no sense of what future opportunities existed compensation-wise in their current jobs or in positions to which they might aspire. Employees also questioned whether there was consistency and equity in compensation levels and the linkage between pay and performance.

Salary ranges are the foundation of a compensation program that can address each of these concerns and can serve the needs of a nonprofit organization and its employees in a rational, straightforward and effective manner.

Let’s take a broad view. Every organization’s compensation scheme, whether a formal program or a collection of informal practices and decisions, strikes a balance between the fairness of pay among employees within an organization and the ability to compete for talent in external markets. Ideally, objective measures of performance play a role. The relationship between these forces is illustrated below:

This continuum is anchored at either end by purely hypothetical schemes. In perhaps an ultimate — but not at all real-world — manifestation of internal equity, everyone in the organization would simply be paid the same amount. At the other end, pegging each employee’s pay to the market value of their skill set in something approaching real time would be the ultimate hypothetical extreme of external competitiveness.

We find a couple of alternatives to salary ranges along the continuum. To the left are maturity curves, which have, thankfully, fallen out of favor in most environments (primary and secondary education being one of its last bastions, but don’t get me started on that). To the right is broadbanding. This practice, which has emerged in some for-profit settings in the past two decades, has not gained much traction among nonprofit organizations most likely due to its stronger external market orientation and relative sophistication.

Near the middle of the continuum, we find salary ranges that provide each employee with a range of compensation opportunity based on their relative position in the organization and generalized market positioning. The employee’s actual pay is determined by performance over time most commonly through the use of a merit increase grid. Such grids are simple but effective tools that provide base salary increases based on two factors: 1) annual performance — which should be objectively evaluated through a performance management process, and 2) the employee’s current position in the salary range.

In constructing salary ranges, designing the annual merit increase grid and managing the compensation program overall, there are opportunities for the organization to tweak the relationships among internal equity, external competitiveness and performance to strike the balance that best represents the organization’s compensation philosophy and responds to its fiscal realities. When designed and utilized appropriately, salary ranges provide an effective way of ensuring equity and competitiveness in the organization’s pay practices by linking pay to performance, by communicating current and future opportunities to employees and by managing compensation costs.

In my next post, we’ll take a closer look at the construction of salary ranges and some of the considerations involved with its implementation and management.

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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: ##Erika**

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Last updated on April 19th, 2010 at 10:50 am