Tools for fair, competitive compensation
AS a manager or leader, ensuring your employees feel valued and compensated fairly is crucial for morale and retention.
Salary ranges, progression systems, and the strategic use of pay differentials are essential to creating a well-structured and equitable compensation plan.
Understanding salary ranges
Salary ranges establish the minimum and maximum pay levels for a grade within your organisation. The salary range is often expressed as a percentage.
It ranges from as little as 10% to as high as 80%. Narrow pay ranges create pay compression, which creates inequity. When setting pay ranges, experts in pay structure often take into account factors like:
Market data: Salary benchmarks within your industry.
Internal equity: Ensuring consistency among similar roles within the organisation. This is often anchored on the results of job evaluation.
Skill level and experience: The range accommodates varying levels of experience and skill required for the position.
Salary progression
There are two types of progressions. One is called grade progression, based on the percentage difference between midpoints of adjustment grades.
Often, it ranges between as low as 5% to as high as 60%. The same factors I mentioned regarding salary range affect grade progression.
Another form of progression refers to an employee's salary progression within a pay range, typically referred to as range penetration.
This movement is generally based on factors such as:
Performance: Merit-based increases for exceptional work.
Tenure: Recognizing experience and loyalty gained over time.
Skill development: Rewarding the acquisition of new skills or certifications.
What is salary notching?
Salary notching is a structured compensation method where a pay range for a specific job level or grade is divided into smaller increments called “notches”.
An employee's salary progresses through these notches based on factors like time in the position or performance.
Salary notching vs. merit tables
Organisations have various methods for structuring employee compensation. Two common approaches are salary notching and merit tables.
Both aim to provide a systematic framework for managing salaries, but they differ in their focus and level of flexibility.
Salary notching: A structured system
Salary notching establishes a clear structure for employee pay. Organisations define minimum and maximum salaries (forming a range) for each job role. This range is then divided into smaller increments called “notches,” often based on a set percentage increase (e.g., 5% per notch).
When hired or promoted, employees are placed at a specific notch within the range, considering factors like experience, qualifications, and internal pay equity.
Progressions through notches typically occur over time, tied to factors like length of service, positive performance evaluations, or other pre-defined criteria.
Once an employee reaches the top-notch in their range, additional compensation may come through bonuses, incentives, or recognition programmes.
Benefits of salary notching
Simplified administration: Salary notching provides a clear framework, streamlining the compensation process.
Cost control: By setting pre-defined ranges, organisations can better predict and manage salary budgets.
Challenges of salary notching
Limited flexibility: Salary notching may not fully reward exceptional performers or accommodate unique skillsets as effectively as other methods. Over time, this can lead to dissatisfaction among high performers.
Salary compression: Salary compression can occur when employees in different job levels reach the top of their ranges, potentially leading to similar pay across positions despite differing responsibilities.
Merit tables
Merit tables offer a more performance-focused approach to compensation. They consider an employee's performance rating alongside their position within the salary range (often expressed as a “compa-ratio”).
This approach emphasizes both individual performance and market competitiveness.
Salary increases are then determined based on the merit table, considering how well the employee performed relative to others in their role and how their current pay compares to market rates.
Key differences
Salary notching prioritises internal equity and administrative simplicity, with progressions often tied to time.
Merit tables, on the other hand, place a stronger emphasis on individual performance and aligning salaries with external market rates.
The right approach
The best compensation method depends on your organisation's specific priorities. If administrative ease and internal fairness are paramount, salary notching might be a good fit.
However, if rewarding top performers and maintaining market competitiveness are key objectives, merit tables offer a more flexible and performance-driven approach. Organisations can also consider hybrid models that incorporate elements of both systems, creating a balanced compensation strategy.
Conclusion
Salary differentials play a crucial role in fair and competitive compensation.
Methods like salary notching and merit tables offer distinct advantages.
Salary notching provides structure and transparency, while merit tables reward individual performance and align with market rates.
However, salary notching can be less flexible than merit tables, which may require careful administration to avoid subjective evaluations.
The optimal strategy depends on an organisation's specific needs, balancing fairness with focusing on individual performance and market competitiveness.
A well-implemented system fosters a motivated and productive workforce, benefiting the organisation.
Nguwi is an occupational psychologist, data scientist, speaker and managing consultant at Industrial Psychology Consultants (Pvt) Ltd, a management and HR consulting firm. https:// www.linkedin.com/in/memorynguwi/ Phone +263 24 248 1 946-48/ 2290 0276, cell number +263 772 356 361 or e-mail: mnguwi@ipcconsultants.com or visit ipcconsultants.com.