This is the last of our three part series on learning how to assess if your salary is too low.
Part one of the series asks you to define what your job scope or duties are and to learn about how your company assesses a position’s relative worth. Knowing these two factors will give you insight into what type of roles, skills and abilities are important in your company. To increase pay, you may have to hone your skills in one of those areas to achieve advancement.
The second article addresses how important it is to know the business stage or cycle your company is operating in because it will reflect different pay philosophies and their ability to pay competitively. If a company is starting out, expecting a high wage is unrealistic; however, opportunity for growth in the coming years may be worth the sweat equity.
Let us see how developing pay structures benefit from good external benchmark data and a well-defined compensation strategy. As companies define their salary structures, there are choices on which method to use; the option they choose is solely their choice.
Setting pay grades or ranges of pay levels. This is one of the more common ways to establish a salary structure. It involves setting up ranges of pay for a given position. They may be called pay grades or ranges.
For example, the position of an IT Manager may have a pay range from $50,000-$65,000. A range is comprised of a bottom and top salary for what a company is willing to pay for a position. This does not mean everyone is paid $65,000; it only defines what salary range is acceptable for this position. Most ranges use a market data approach to help determine the spread.
Once a bottom and a top point of the range are established, managers often look at the spread in increments of 25%. Paying at the midpoint or “market price” generally defines what it takes for a company to remain competitive.
Companies who establish pay philosophies may say something like:
X Company will make every effort to pay at 50% or market price of the salary range.
Sometimes a company states numbers lower or higher than the 50%. If a company’s philosophy is to pay below the 50%, their benefits are usually exceptional and make up the difference.
If your pay is around market price, it is expected that you have all the skills and capabilities with solid performance over time. Individuals who are paid below the market price may be new in their position or do not have the experience to perform at the operating standard. Employees whose pay is above market price demonstrate exemplary skills and performance for their doing their job.
Once someone hits the midpoint or market price, it is common for companies to slow down or reduce the level of increases. This may seem unfair if you are performing better than others are. The reasons why are:
- You are already receiving a premium for your above average contribution.
- If you continue to receive pay increases at the current percentage rate, you will bump up against the top of the range very quickly.
When you hit the top of the salary range, it is customary to suspend future increases until the range adjusts for additional movement. I know it sounds limiting.
The design is intentional – to either induce you to accept additional responsibility, which promotes you into the next pay range, or to keep your salary in check and avoid unnecessary costs into the product. Rarely does a company need to pay for that level of skill to get the job done and the customer does not want to pay for it either.
The IT Manager we talked about earlier may be a part of a larger organization where there are many positions or levels. If a company uses the term “level”, there is a good reason why. They have organized a number of similarly situated positions who have an equivalent job worth, simplifying the salary structure.
The organization may overlap the levels or position ranges or they may be distinct. In the example of the Compensation Structure for an IT Department, different positions have overlapping salary ranges. The gray cylinders represent the spread or range of the position.
It is possible in this compensation structure for a seasoned IT Manager and first time IT Director to have about the same pay level. The good news for the IT Director is he or she has more opportunities for salary growth.
Establishing one rate of pay for a position.
A company that requires a single level of skill to perform a task and the employee’s speed is limited by equipment speed, such as assembly lines in a manufacturing operations, will use single rates of pay.
In a production environment, the assembly workers, machinists and skilled trades will have varying levels of pay. The only way to increase your salary is to be promoted into a higher paying job.
The rate of pay takes in account the skill necessary to do the job (not the employee’s individual contribution or performance) and what the local market says is necessary to attract, motivate and retain talent. If a company is experiencing an inability to attract people, the compensation should be addressed as a potential problem.
Creating a base pay level with a variable pay component. This option is common in sales and inside sales organizations. Another area is in production departments when the company wants to offer an incentive to increase throughput, providing there are no constraints.
There are two components to this structure: base pay (refer to the discussion on pay grades or standard rates of pay) and variable pay. Because variable pay is a component of your salary, base pay is usually below market price. The combination of base pay and variable pay will often exceed market pay, especially for the over achievers.
The amount of pay termed “at risk” or variable depends on the kind of work the employee is doing. For example, if a sales person is selling commodity items, the variable pay component will be higher and base pay lower. If the sales person is selling something that requires a long lead-time to close a deal, the base pay is higher and the variable pay is lower.
Establishing pay is part art and science. The decisions to place someone in a salary range is subjective and depends on the information and experience the manager has about the employee. Our focus has been on skills, abilities and productivity. There are many other factors companies include to determine range placement such as work ethic, attitude and likelihood for advancement. This is part of the art.