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Pay Matters: Answers to Common Pay Puzzlers

October 10, 2017

Compensation can be a very challenging area to navigate. Two of our compensation experts, Jennifer Blake and Joel Myers, have answered common pay questions they receive from our clients.

  • Why do we need pay grades?

Assuming an organization wishes to maintain a pay plan competitive with the outside market, some type of formal pay structure is essential. The pay structure should reflect the organization’s compensation philosophy, e.g., “to pay at the middle (or 50th percentile) of the market”. Once the organization identifies the midpoint for its jobs, it can establish minimum and maximum pay rates at equal distances from the midpoint. With market-based pay ranges in place, employers can make job offers and manage pay with confidence.

  • How do we compensate someone in a “unique” job?

​Many times this is the employee who is doing parts of a few different jobs. If this is the case, you may have market data for the different jobs, and you could average the market data to determine a pay point. Another approach is to pay the incumbent a pay rate competitive with the job with the highest market rate.

Some jobs are unique because they are new to the market and few qualified candidates are available. These jobs might be carved out of the organization’s compensation program and candidates paid at a special “market rate”. Over time, the market may correct itself and the organization might find they no longer need to pay employees a special rate. At this point, the “unique” job can be absorbed into the overall pay structure.

  • What can we do to catch-up our pay with the market?

​Companies under financial stress often freeze pay as a cost-cutting measure. But when times get better, how do you adjust salaries to remain market competitive? Your lowest paid employees will be affected the most by pay freezes and should be the first to feel relief. Therefore, once you know your overall salary increase budget, allocate what it will take to bring the pay of your entry-level employees up to market. Then work your way up, allocating increases to employees in each successive pay grade on a percentage basis. The increase percentages will likely decrease as you move up your pay scale. If you can’t afford to catch up all at once, develop a plan to apply salary adjustments incrementally over a set period of time.

  • What can we do with supervisors who make little more than their subordinates?

This is called compression. It occurs when there is a small difference in pay between employees but significant differences in their job and skill levels. To avoid compression, create pay ranges with noticeable differences between them, and make sure when employees are promoted they receive adequate pay increases. When hiring new employees, pay attention to the pay of employees already in the job. If you find you routinely must pay candidates more than your veteran employees, re-examine your pay range; it may need to be adjusted to reflect the current market.

  • Should we pay someone not to quit?

​It happens somewhere everyday: An employee walks into his manager’s office and resigns because he’s accepted a job offer with a 15% pay increase. The employee might mention he really doesn’t want to leave, but he just can’t stay in his job at his current rate of pay. Should you counter offer with a salary increase to entice the employee to stay? To help you decide, answer the following questions:

a.       Is this an employee you want to retain? Does he have an outstanding employment history?

b.      Is the pay increase reasonable considering what you know about the outside market and the pay of peers doing the same or similar work within your organization?

c.       Will a pay increase upset the pay relationship between this employee and his peer group inside your organization?

d.      What is the likelihood the employee will remain in your employment in the long run? If the real reason for changing jobs is the employee is bored or doesn’t like his supervisor, it’s likely he’ll quit again soon anyway, so increasing his salary likely won’t solve the long-term problem.