Are you paying your employees properly? A simple question. Or not? How do you know what is fair?
Fairness has many sides to it. Your staff will get very irritated if you don’t get it right.
- Internal Equity – the relative worth of jobs within the organization.
- External Equity – how you pay relative to other organizations in your sector.
- Employee Equity – how you pay staff relative to each other based on seniority, performance etc.
- Pay Equity – equal pay for work of equal value between males and females.
- Administrative Efficiency – I’ll just say ‘Phoenix’ and leave it at that.
- Budgetary Management – Keeping your CFO happy.
Today, let’s look at Employee Equity. Are all your staff paid within the salary range?
You have gone thru an extensive, professional Job Evaluation exercise and classified your positions properly. You have built a set of salary ranges based on an internal regression; what your employees peers are paid (relative to each other). You have created an industry best practice salary range structure that provides a range Midpoint (the Job Rate), a Minimum of 80% of the midpoint and a Maximum of 120% of the midpoint.
Your staff may fall into three groups.
Unless you have serious performance issues with an employee, or they are an ‘underfill’ promotion for development reasons, or you have budget issues, no employee should be paid less than the Minimum. All your green circles should have their salary raised to the Minimum immediately.
Ideally, no employee is paid above your salary range maximum. But few scenarios are ideal. You may have long term staff, superstars, hot market skill shortage issues, the President’s nephew (just kidding) or other reasons for paying above the maximum. But it is not ideal.
It is not the employee’s fault that you are over-paying them. Under no circumstances should their salary be reduced. Your choices are:
- Freeze their salary until the salary range Maximum catches up to them in the future. This is generally viewed as punitive and very few companies do it.
- Slow down their rate of increase. E.g. give them 2% when others get 4%. Also viewed as punitive.
- Provide their future salary increases as a lump sum cash payment, so you don’t compound the problem over time. This is quite common – unless it has pension (best year’s earnings) implications.
- Do nothing. Continue to give them regular increases, but make it know to the incumbent / HR / and their Dept Heads that when the incumbent leaves the position it will be filled within the proper salary range.
- This is the most common approach.
We call this reconciliation. In an ideal world; you hire near the low end of the salary range and you progress people thru the range over time based on years’ experience and performance. So, in that ideal world, everyone’s compa-ratio is an accurate reflection of their job and career. Few organizations are that perfect.
Given that reality, which is common; you will be doing a great job of Salary Administration if everyone is paid (somewhere) within the range. And you are knowingly managing your red and green circles.
Tim McConnell, MPA, SPHR
Compensation – Organization Design – HR Strategy