Base pay is an institutionalized sunk cost. Once committed, a company rarely pulls back on individual base pay. They may freeze it or slow its growth, but essentially it is there until the incumbent leaves, the function is eliminated, or the position is reorganized into something that is valued differently. The Bureau of Labor Statistics estimates that over 70% of cash compensation in the U.S. is dedicated to base pay. This percentage continues to grow as companies fail to meet variable compensation objectives due to economic conditions and/or poor plan design.

Given that base pay is playing a more dominant role in overall total compensation, it falls on organizations to maximize its use in:

• Salary Planning – using ranges and salary increase parameters controlled by salary position (zone control) to forecast projected costs by function, business unit and incumbent
• Putting Job and Salary Growth In Perspective for their Employees – using the horizontal and vertical framework of ranges to consider current and future growth possibilities
• Visibly Demonstrating an Organization’s Employee Commitment – using salary positioning on the ranges and pay practice outcomes to reinforce equal pay, job parity, and FLSA adherence as well as identifying possible ADA and age discrimination issues

Pay grades and their range structures exist to facilitate these few key value messages in a way that should avoid distraction from work objectives. Because of an over-emphasis on structural mechanics and confusing practices, that mission is rarely accomplished.

There are several keys to avoiding an improper emphasis and utilization of the pay grade tool:

• Staff and management alike must have a common understanding as to why grades and ranges are useful; how grades are arrived at, what they do and what they shouldn’t do
• The grade/range structure(s) should be rational to the marketplace and not just a product of arithmetic symmetry
• Pay grades and ranges values should integrate and compliment an organization’s total compensation philosophy and approach
• Pay grade administration should reflect the business emphasis and operating style of the company

Generating a Common Understanding

Grade criteria are most effective when they parallel the marketplace’s understanding of increased value job-to-job AND that criteria make sense internally and can be consistently applied.

Grade inflation, the constant pressure to increase the value of jobs, diminishes when there are fewer grade distinctions within which to make cuts. There is a great deal more fiddling in a 20 level structure than one that has only 10 levels.

Documenting jobs should reveal those compensable factors agreed upon that distinguishes one position from another in a way that is less excruciating than writing a Victor Hugo novel. But it has to capture those factors in a way that allows for the writer to illustrate through examples how the job is impacted by each factor.

The choice of vehicle and the determination of which factors are compensable always rests with the organization. It is an internal decision based on its knowledge of the marketplace, the priorities of the company and its operating culture.

Grade Ranges and the Marketplace

Range spreads that are equidistant from the midpoint only serve the arithmetic obsessions of its creators. Market forces don’t work that way. It doesn’t take 3 years for an entry clerical function to be mastered anymore than it takes 3 years to achieve journey level proficiency for a senior manager. Spreads should reflect realistic dynamics.

Total Compensation Integration

Base pay is typically one aspect of an incumbent’s total compensation package. The values derived for a position should not inadvertently double count the position’s worth by overstating base pay in relation to other cash compensation alternatives, such as bonus or incentives. Culling out market data that differentiates what is paid in base and variable is a product of experience and choosing the right resources. All market data should be triangulated with compensation intelligence derived from other trusted resources.

The Company Reflected in its Range Management

Horizontal movement within a range is a product of both performance management and using finite pay resources for the greatest impact. Salary increases should be dedicated for exemplary contributions and none given out for safe behavior. The definition of performance expectations is the purview of the company. Coaching and assessment is its responsibility. Horizontal and vertical advancement are the outcomes.

Keep It Clean, Clear, and in Perspective

Well managed grade and salary range administration promotes a transparent environment that employees can trust and be confident in. Systems that are rigidly constructed, cloaked in mystery, inconsistently applied, fraught with red circles and one-offs, breed cynicism and distrust. These attitudes affect retention, productivity and a sense of equity in the challenges facing an organization. But all that can be avoided if companies keep their processes uncluttered with false complexity and unrealistic procedures and adhere to open common sense approaches and practices.

Please join me March 6 for the BLR webinar, "Compensation: How to Effectively Manage Base Compensation with Pay Grades," and learn how to set up accurate, fair pay grades that form a solid foundation for your entire compensation program.

Dan Kleinman is the principal of Dan Kleinman Consulting, a California-based compensation and human resource consulting firm. For the past 18 years, he has served as an independent consultant for a broad spectrum of regional, national, and international companies, providing compensation, performance, organizational planning, and reward-system design services. Prior to consulting, he spent 20 years in the financial and telecommunication industries, where he managed compensation and benefits departments for Wells Fargo and for subsidiaries of Pacific Bell (now part of AT&T). His last assignment was serving as vice president and manager of compensation, benefits, human resources information systems, and payroll for Charles Schwab.