HomeBusiness DigestSalary range: All you need to know

Salary range: All you need to know

MEMORY NGUWI
A SALARY range represents the scale within which an employer is willing to pay an employee.

It represents the value an employer is willing to pay to a group of jobs as defined by the job grade.

The employer, in others words, is not willing to pay less than the range minimum and not willing to pay more than the range maximum.

The reason for grouping pay into ranges for a particular grade is to ensure the jobs of equal value to the organisation are paid within the same salary range.

Salary ranges are used when designing a pay or salary structure.

A salary range can be viewed as the differences in pay between the maximum and minimum salary in a job grade.

The purpose of a salary range in a pay structure is to give an organisation scope to vary salaries of employees in the same grade based on other factors such as performance, experience and educational qualifications.

Creating a pay structure with no credible salary range can lead to pay compression, likely leading to employee equity complaints.

It is important to note that salary ranges in a pay structure start when an organisation embarks on a job evaluation. Job evaluation puts jobs in grades. The grades group jobs of equal value to the organisation.

While the jobs in the same grade are of equal value to the organisation, the individuals in those jobs do not bring equal value to the organisation, hence the need for salary ranges to accommodate these differences.

Jobs fetch different salaries on the job market.

An internal grading system and pay ranges allow the organisation to recognise internal jobs that vary in market salaries but belong to the same grade.

How to establish salary ranges
The salary ranges are required in a salary structure because it is impossible to establish a salary for each job evaluation point in an organisation. This has led to the development of pay structures.

Salary ranges are usually established as part of developing a salary/pay structure. Salary ranges for a pay structure can range from as low as 15% to as high as 60%.

The salary ranges are much higher when a pay structure has broad banding parameters.

As indicated earlier, the salary range gives the organisation scope to remunerate employees who are in the same job differently based on various considerations. The calculation of salary ranges in a pay structure is not complicated.

It is essential to note that to calculate a salary range in a pay structure, you need to have the salary midpoint.

A salary midpoint represents the grade’s most competitive market position. Thich control point could be the median market salary or the 75th percentile.

The choice of the midpoint depends on what the organisation can afford and sustain. You get a pay spine if you draw the line through all the midpoints in a pay structure. The pay spine again is the most competitive pay in a pay structure.

It is common to have all pay grades with the same salary range in practice. There is no justification for similar salary ranges for all grades. Instead, the correct way is for salary ranges to vary based on the type of jobs in each grade. A grade with highly skilled and in-demand jobs should have winder ranges than lower-level unskilled jobs. However, we note that most organisations use the same range for all grades for convenience.

The minimum salary in a salary range is the entry-level salary for jobs in a particular grade. This signifies the minimum pay that an organisation is willing to pay for an entry role in each grade.

In practice, less experienced employees and new employees are paid close to the minimum of the grade. It is a way to control costs as well. It does not make sense for any organisation to pay a premium salary for a less experienced employee.

There is a midpoint within the salary range, which is the control point. The midpoint represents a competitive market position for the organisation. Pay your top performers around the midpoint of the salary range.

The maximum has no particular significance except to act as a control point. In practice, no employee should be paid close to the maximum pay for the grade. An employee who has moved fast enough to reach the maximum of a grade is probably worth much more, and therefore their role deserves to be elevated to a higher grade where they can earn higher pay.

Salary ranges can also be used when an organisation is developing and utilising a merit table.

A merit table uses an individual salary’s position within a pay range (i.e. compa-ratio), and their performance to determine how much an employee can get in the form of merit adjustment.

The amount to be shared is often a function of the merit budget. The logic in the merit table is that employees on a lower comp-ratio and higher performance rating should get a higher increase than an employee on a higher compa-ration with higher performance.

The reasoning in this statement is that an employee on a higher compa-ratio and a higher performance is already being remunerated competitively than the other employee on a lower compa-ratio. The calculation of the compa-ratio in merit increases is therefore vital.

Salary range midpoint
The salary range midpoint represents the most competitive pay for a grade. This is only valid if the pay structure was designed using market salary information comparisons. In such a case, an organisation can decide to make the median of the market or the 75th percentile of the market’s reference point.

The salary range midpoint, the progression of grade midpoint salaries from one adjacent grade to the other, can range between 5% to as high as 40%. A high salary range midpoint is found in very competitive roles or grades. Lower-level grades tend to have lower progression.

The formula for calculating the midpoint of a salary range is as follows:
Before calculating the salary range for your pay structure, you need to decide what range spread you will use in your pay structure. For example, if you choose the range to be 60%, you need the formula to convert this into grade salary ranges. The formula should help you calculate the salary range minimum and salary range maximum.

The formula for calculating range spread is Maximum minus minimum expressed as a percentage. As an example taking the figures in Table 1.

($2 292 – $1 432)/2 292 *100 = 60%

Salary Range Calculator
Salary Range Minimum = grade salary range midpoint/1+ half of the range(30%).

Using the midpoint for grade 5 in Table 1 Salary Range Minimum= $ 1 862/1,30

$1 432

Salary Range Maximum = minimum* 1+ range(60%)

Using the midpoint for grade 5 in Table 1 Salary Range Maximum = $1 862*1,60

$2 292

Salary Range penetration
A salary range penetration looks at how far an individual salary has penetrated the salary range. Unlike compa-ratio, where the reference point is the midpoint of the salary range, salary range penetration looks at the progress towards reaching the salary range maximum in a particular grade.

Range penetration = (individual salary – grade minimum salary)/grade maximum salary – grade minimum salary) * 100.

The range penetration ranges from 1% to 100%. The higher the range penetration, the higher the individual’s salary in relation to the grade. If we take the grade salary range below for an employee in grade 5 earning $1 658, the range penetration is calculated as follows:

Range penetration = ($1 658- $1 235)/($2 123- $1 235) * 100 = 48%. This range penetration is low as the individual has not even reached the salary range.

Grade Minimum Midpoint Maximum Salary Range

5 $1 235 $1 862 $2 123 72%

Employees paid outside the salary range
For various reasons, you may find some of your employees being paid outside the salary range for the grade. This happens when a new job evaluation system is introduced in an organisation. Make every effort to move all the employees paid below the minimum of the grade salary range to the minimum of the grade.

You can do very little for employees already paid above the maximum of the salary range as you cannot reduce their salaries. The best way to control their salary movement is not to give them anything when making salary adjustments for other employees until they fall within the grade salary range over time. With more frequent adjustments impacting the salary structure, they will be within the salary range.

When HR professionals understand how useful salary ranges are to remuneration management, they can add value. Therefore, organisations should use the various salary range options outlined in this article to manage remuneration.

  • Nguwi is an Occupational Psychologist, Data Scientist, Speaker, & Managing Consultant- Industrial Psychology Consultants (Pvt) Ltd, a management and human resources consulting firm. https://www.thehumancapitalhub.com email: mnguwi@ipcconsultants.com or visit our website at www.ipcconsultants.com

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