For decades, businesses used grade-based salary ranges to manage employee salaries.
As an administrative tool kept in a three-ring binder on our desks, grade-based salary ranges have been very handy. However, this type of salary structure is now antiquated and unnecessary. (I just heard the collective gasp of compensation professionals around the world). Indulge me for a moment….
Think about how much time you’ve spent analyzing and adjusting the factors of your salary ranges, midpoint progressions, the broadness of minimums and maximums and inflation increases. Consider all the time you’ve dedicated to slotting jobs based on internal equity and external market data. Does it still make sense to proceed down this path?
Today, we have access to incredible technology that can support us in more efficient ways. Technology provided by leading companies such as PayScale and eeStrategy allow us a more precise and transparent way of pricing and administering pay.
Furthermore, there is now an abundance of data you can leverage for job pricing. Yet, comp professionals still slot jobs into somewhat arbitrary midpoints. It’s not uncommon for us to slot jobs into a midpoint that is sometimes $2,000 or $3,000 higher or lower than the actual market 50th percentile (or whatever market percentile you target).
As an example, salary range “G” has a midpoint of $70,000. Salary range “H” has a midpoint of $77,000 (a nice 10 percent midpoint to midpoint progression). What happens when you price a key role in your organization and its market rate is $74,562? Where are you going to slot it?
I can hear it now, “Well, we like to lead the market so I would slot it in H (midpoint of $77,000).” So, if you have 100 people in this role and you are slotting it (and ultimately targeting the pay) at $77,000, then you are artificially increasing your payroll by $243,800 (($77,000 – $74,562) X 100). The employees are probably singing that great Dire Straits song “Money for Nothing,” but have you talked to your CFO about this?
On the flip side of that coin, what if you slot it into salary range “G” (midpoint of $70,000)? You are instantly underpaying each employee by $4,562. I’m guessing they may find another place to flip coins. There’s no way to explain to them that you are targeting a lower pay because you have a great midpoint progression in your grade-based salary ranges and you “have to slot their role somewhere.”
What if you could tell them exactly what the market number is ($74,562)?
Here’s the trick: you can. You can tell them the actual market number. You can even tell them they are at 85 percent of that number because they are still developing proficiency, or whatever the reason is. Everything you needed grade-based salary ranges for — like Compa-ratio, Minimums, Maximums, progression towards the market and beyond as they gain skills — can still be used.
What is Pinpoint Pricing?
I call the idea of creating a range for each position Pinpoint Pricing. Another term for this salary structure is “job-based ranges.” Today you have the tools to market price every single job in your organization with greater ease than ever before. I encourage you to partner with managers of the business units or departments to market price the roles in their purview. This creates an incredible amount of buy-in and accuracy. With the backing of your managers, you’ll be fully prepared to communicate the market number with “pinpoint” accuracy.
Remove the shackles of your grade-based salary ranges. Stop spending valuable time adjusting and re-adjusting them. Instead, spend that time communicating with your employees about how you make pay decisions — they will appreciate having a better understanding of how they are valued within your company. Use the technology and data that is currently available to further progress this craft of ours — compensation — into the current time.
Now, if your midpoint progressions are more beautiful than the brush strokes of Leonardo da Vinci and you have a massive compensation team, I encourage you to continue to use grade-based salary ranges. If you’re tired of tinkering with grade-based salary ranges, and feel like you may be losing your company money due to the imprecise nature of slotting jobs, then I recommend you transition to pinpoint pricing.
To learn more about how Payformance Partners can help your organization develop or enhance your compensation programs, please contact us to discuss your specific needs and circumstances.
– Marc Mullis, Founder/CEO of Payformance Partners