Total Compensation Program: Pay Grades, Ranges & Variable Pay
Total Compensation Program: Elements & Structure
Elements of a total compensation program: base pay and benefits; individual merit and incentives pay; team or group incentive rewards; organization-wide incentives; recognition programs.
Determining Internal Equity
For determining internal equity: job analysis, job description, job evaluation, job hierarchy and salary structure.
Midpoint and Pay Grade Formulas
Midpoint progression: (lower midpoint * percentage) + lower midpoint
Pay grade minimum: midpoint / (1 + (0.5 * desired range))
Pay grade maximum: minimum * (1 + desired range)
25th percentile: (Midpoint + pay grade minimum) / 2
75th percentile: (Midpoint + pay grade maximum) / 2
Pay Grades
Grades: Group job-evaluation data on a horizontal axis; all jobs considered substantially equal for pay purposes are placed in the same grade. Each pay grade has its own pay range and all jobs in a single grade have the same pay range. This enhances the ability to move people among jobs within a grade with no change in pay. The number of pay grades depends on the number of jobs, the organizational hierarchy and reporting relationships.
Ranges Support
Ranges support: Some flexibility within controls; relatively stable organization design; recognition via titles or career progression; midpoint controls and comparatives; controls designed into the system; give managers freedom within guidelines; up to 150 percent range-spread.
- Minimum: midpoint / (1 + 0.5 * spread)
- Maximum: minimum * (1 + range spread)
Bands Support
Bands support: Emphasis on flexibility within guidelines; suited for global organizations, cross-functional experience and lateral progression. Reference market rates, shadow ranges, and controls in budget. Few bands in the system; give managers freedom to manage pay; typical spreads of 100–400%.
Variable Pay Plans: Purposes
Variable pay plans — purposes: strengthen the performance culture; communicate the values of the organization; transmit business objectives and stimulate a sense of belonging and ownership. These plans focus efforts and link compensation to results. They also address an offsetting mentality such as: “now that I occupy the post, I can relax.”
Variable Remuneration Positive Effects
Variable remuneration processes have positive effects in: productivity and efficiency, financial outcomes, cost reduction, client satisfaction, and quality.
Types of Performance Pay
- Pay for individual performance: piecework rates, standard hour plans, merit pay, individual bonuses, sales commissions…
- Pay for group performance: gainsharing, bonuses, team awards.
- Pay for organizational performance: profit sharing, stock options and employee stock-ownership plans.
Balanced Scorecard
A balanced scorecard can be used as the basis for awarding incentive pay. It also helps employees understand and care about the organization’s goals.