Other compensation trends

How employers pay employees has been evolving. Today’s shift towards competency based pay is just one example. Overall there is less emphasis on basing pay on seniority, and more on the employee’s contribution performance and value to the business less emphasis on the job’s duties and more on the person’s skills and competencies and on how his or her contribution fits with he firm’s overall strategic needs; finally there’s less emphasis on narrowly defined pay ranges and jobs, and more on broader jobs and pay ranges. This section looks at four important trends: broad banding, comparable worth, board over sight of executive pay, and automating compensation administration.

Broad banding

Most firms end up with pay plans that slot jobs into classes of grades each with its own vertical pay rate range. For example the US government’s pay plan consists of 18 main grades (GS – 1 to GS – 18) each with its own pay range. For an employee whose job falls in one of these grades, the pay range for that grade dictates his or her minimum and maximum salary.

The question in how wide should the salary grades is in terms of the number of job evaluation points they include? (For example might the US government want to collapse its 18 salary grades into six or seven broader bands?) There is a downside to having (say 18) narrow grades. For instance if you want someone whose job is in grade 2 to fill in for time in a job that happens to be in grade 1, it’s difficult to reassign that person without lowering his or her salary. Similarly if you want the person to learn about a job that happens to be in grade 3, the employee might object to the reassignment without a corresponding raise to grade 3 pay. Traditional grade pay plans thus breed inflexibility.

Broad banding

Consolidating salary grades and ranges into just a few wide levels or bands each of which contains a relatively wide range of jobs and salary levels.

That is why some firms are broad banding their pay plans. Broad banding means collapsing salary grades into just a few wide levels or bands each of which contains a relatively wide range of jobs and salary levels. Figure illustrates this. In this case the company’s previous six pay grades are consolidated into two broad bands.

A company may create broad bands for all its jobs, or for specific group such as managers or professionals. The pay rate range of each broad band is relatively large, since it ranges from the minimum pay of the lowest grade the firm merged into the broad band up to the maximum pay of the highest merged grade. Thus, for example instead of having 10 salary grades, each of which contains a salary range of $15,000 the firm might collapse the 10 grades into three broad bands, each with a set of jobs such that the difference between the lowest and highest paid jobs might be $40,000 or more. For the jobs that fall in this broad band there is therefore a much wider range of pay rates. You can move employees from job to job within the broad band more easily without worrying about the employees moving outside the relatively narrow rate range associated with a traditional narrow pay grade. Broad banding therefore breeds flexibility.

A survey of 783 employers found that about 15% were using broad banding. One British company does so to support its strategy of cutting costs and flattening and downsizing the organization. The flattening meant fewer job titles, each of which had broader responsibilities and broad banding made it easier to get employees to assume their new broader roles. Dow Jones & Company implemented broad banding for its 1,000 IT professionals several years ago.

Note that even with competence / skill based pay and brood banding 60% to 70% pf US firms use quantitative point and factor comparison plans to create pay structures. Job evaluation’s relative ease of use and familiarity are probably the main reasons. And neither skill based pay nor broad banding eliminates the need for evaluating the worth of one job relative to others.

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