How and Why Employers Should Establish Salary Ranges

Establishing salary ranges is the best way for employers to control payroll expenses and make sure to provide pay equity among the team.

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Payroll is by far the largest expense for most businesses and salary is one of the biggest factors in how potential employees choose which companies to apply for. Well compensated employees are also more likely to stick around; reducing turnover and the cost of hiring new workers. But not all employees should necessarily earn the same salary. For one thing, there are often many different types of positions within an organization that all require different skill levels and expertise. Establishing salary ranges is the best way for employers to control payroll expenses and make sure that they are providing pay equity among their team. Creating and following defined salary ranges is also an important way for a business to protect itself from a discrimination lawsuit over compensation.

How to Establish Salary Ranges

An HR expert should be consulted to work with executives for help defining your salary ranges but this article provides a basic overview of the process.

1. Define your compensation philosophy

Think about your philosophy and beliefs around compensation and create a formal statement that explains your company’s point of view on employee compensation. This is the first step to understand why you compensate employees the way you do. The statement you come up with can help attract and retain employees. Factors to consider when defining your philosophy are your financial position, market salary information, how hard it is to find qualified employees in your industry, and your business objectives. Some questions to answer are: Should employees with certain skills, experience, or training be paid more? Do you want to build a reputation as an employer with higher, lower or equal compensation to your competitors?

2. Analyze each job to create a job description

Do a job analysis for every position in your company. In this process you will document each aspect of the job, including:

  • What are the daily activities and responsibilities?
  • What skills, knowledge or qualifications are necessary?
  • Who does the worker report to?
  • How important is this job to other team members?
  • What type of hours are required?
  • What type of physical toll does the job take?
  • How difficult is it to perform the job?

There are several ways to perform this analysis, starting with having current employee(s) fill out a survey or sit for an interview to answer these questions. When the research is complete, it will be easier to create a well-defined job description for each position in your company.

3. Decide how to group jobs into different categories

Once you have completed writing job descriptions for each position in your company, it is time to see if it makes sense to group jobs together into specific categories or families. Some category examples are: skilled labor, management and executive. It may also make sense to create job families by country, region, or division.

4. Conduct market research

One of the most important factors when it comes to setting salary ranges is understanding what the market is paying for similar positions so you can offer competitive salaries. (Note: you may not be able to find identical comparisons so look for data on jobs that share major similarities). As a business owner, you can get this information by conducting market research. Generally speaking, the best way to do this is by buying salary data but it is also worth checking on free data from the U.S. Bureau of Labor Statistics (BLS) or from any professional organizations you belong to. Resist calling up your competitors to ask them directly for their compensation ranges as this can lead to a violation of antitrust laws.

5. Create pay grades

Create pay grades by grouping positions with similar worth. The two best ways to create pay grades are job evaluation data and market research data. There is no limit to the number of pay grades; a small startup may only have three or four grades, while a larger business may have 10 or more.

6. Rank order jobs

Next, you will come up with a list that ranks jobs in order of their relative worth and responsibility as they relate to other jobs in your organization. There are different methods for accomplishing this including the point-factor method, the ranking method, the classification/grading method, the factor comparison method, and the competitive market analysis method.

7. Create the salary range

It’s now time to create your salary ranges based on the market research you have conducted and the job categories, pay grades and rank orders you have established. For each pay grade, you will need to identify a minimum, mid-range and maximum pay point. While there is no strict rule for identifying salary ranges, many employers use the 50th percentile to identify the midpoint of a salary range and then develop the minimum and maximum pay points around that. It is common for pay grade ranges to overlap but each job category can have its own pay grades and pay ranges.

8. Compare your newly established salary ranges to current salaries

It is important to look at what you are currently paying employees and compare them to the newly established salary ranges that are based on current market research. It may be necessary to increase some salaries to get them in line with the salary ranges. Reducing salaries that are above the new salary ranges will be tricky and can damage employee morale.

Understand that you cannot complete this process once and expect it to remain relevant forever. Market forces will change every two to three years and cost of living easily changes from year to year. It is very important to adjust your salary ranges for these changes or risk losing out on the best employees to your competitors.

Partnering with Makai HR

Need HR help without an in-house team? We’ve got you covered through HR outsourcing! When you partner with Makai HR you can get on with the business you are trying to grow while we take care of your employee needs from payroll to taxes, health insurance/benefits and worker’s compensation. You also gain peace of mind that you are compliant with all of Hawaii’s employer laws (if you’ve ever looked you know that the list is very long and changes happen). When choosing a PEO to partner with, there are many things to consider including cost, services, and technology solutions.

With the cost of doing business in Hawaii at record highs, we know how important it is to keep labor costs in line with revenue. Our plans are priced competitively and include value-added services like time-in/time-out systems. Our three tiers of PEO service plans are tailored to the size of your business and specific needs. We offer a 100% paperless solution which means that your employees can manage their needs through a computer, tablet, or phone. We can truly improve your employees’ work benefits while freeing you up to run your business.

What are you waiting for? Companies that partner with a PEO benefit from 7-9% faster growth, 10-14% lower employee turnover; and they are 50% less likely to go out of business. Contact us today to get started!

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