Compensation 101: Why Should Organizations Utilize Pay Ranges?

At Astronology® we like to explore all angles of a situation. In the past we’ve written articles on compensation related topics like green circle rates (employees paid below the minimum of the pay range) and red circle rates (employees paid above the maximum of the pay range). This article examines why organizations should make the effort to set pay ranges in the first place, and what value these ranges add to an organization. 

The term “pay range” is not one that is succinctly explained. The human resources section of About.com describes a pay range as: “…the range of pay established by employers to pay to employees performing a particular job or function. Salary range generally has a minimum pay rate, a maximum pay rate, and a series of mid-range opportunities for pay increases.” While this definition is foundational, it begins to direct us towards the goal of figuring out the how of the pay range question, but not really the why.

Erisa Ojimba, in a Salary.com article, explains that “a company’s pay structure is the method of administering its pay philosophy.” If developed logically and communicated successfully, the pay structure will strongly reflect your organization’s pay philosophy and give confidence to employees. A 2014 survey from SHRM noted that “employees ranked compensation / pay above job security as the most important contributor to job satisfaction.” Clearly, it is important for pay structures to be organized and strongly demonstrate competitive compensation in order to attract and retain employees. 

When developing a pay structure the following needs to be determined:

• Relevant data for establishing the relative value of a particular job to your organization. 
• Relevant pay range for a job with the stated value to your organization. 
• The value of each job position within the allotted pay range.

Once you have developed a pay structure, an on-going challenge is determining your organization's annual compensation budget. When set correctly, pay ranges can help you determine if you’re paying employees too little or too much.

When making the choice of how to structure pay ranges for your organization, the most important factors to consider, according to Jennifer Loftus, National Director of Astron Solutions, are the following:

• Your organization’s size
• Your organization’s fiscal constraints
• Your organization’s culture
• The size of your HR department
• Your compensation philosophy    

 
According to Jennifer, "while similar in concept, compensation structures are uniquely different for each organization. What works successfully in one company may be disastrous in another. Your organization must balance the five items above to determine the best suited structure for achieving your unique organizational goals. Without some type of pay system, however, your organization may end up underpaying and overpaying some employees, sacrificing fiscal controls, losing your star employees, and rewarding behaviors or competencies that don't achieve organization's strategic goals." The up-front time and effort required to develop a pay structure will provide you and your organization with a positive return on investment in both the short - and long-terms.