How do you balance internal and external factors when setting pay grades and bands?

1 Internal Factors

Internal factors are the elements that relate to your organization's mission, vision, values, culture, structure, and strategy. They include your pay philosophy, pay policy, job analysis, job evaluation, and internal equity. Your pay philosophy defines the principles and goals that guide your pay decisions, such as whether you want to pay above, at, or below the market average, or whether you want to emphasize base pay, variable pay, or benefits. Your pay policy outlines the rules and procedures for implementing your pay philosophy, such as how often you review and adjust pay, how you communicate pay information, and how you handle pay exceptions. Your job analysis describes the duties, responsibilities, skills, knowledge, and competencies required for each job in your organization. Your job evaluation measures the relative worth of each job based on a set of criteria, such as skill level, complexity, impact, and autonomy. Your internal equity ensures that employees are paid fairly and consistently based on their job evaluation results and performance.

2 External Factors

External factors are the elements that relate to the labor market, the industry, the economy, and the legal environment. They include your market analysis, market positioning, and external equity. Your market analysis collects and compares data on the pay rates and practices of your competitors and peers in the relevant labor market. You can use various sources of data, such as surveys, reports, websites, or consultants, to conduct your market analysis. Your market positioning determines where you want to place your pay grades and bands relative to the market data, such as at the median, the 75th percentile, or the 25th percentile. Your market positioning reflects your pay competitiveness and attractiveness to potential and current employees. Your external equity ensures that your pay grades and bands are aligned with the market conditions and expectations, as well as with the legal requirements and regulations, such as minimum wage laws, equal pay laws, or tax laws.

3 Pay Grades

Pay grades are the categories or levels that group jobs of similar worth or value within your organization. They help to simplify and standardize your pay structure and administration. To create pay grades, you need to use both your job evaluation results and your market data. You can use different methods to assign jobs to pay grades, such as point factor, ranking, classification, or factor comparison. The number and width of your pay grades depend on the size, diversity, and complexity of your organization and its jobs. Generally, you want to have enough pay grades to accommodate the range of jobs and pay levels in your organization, but not too many to create confusion or overlap. You also want to have pay grades that are wide enough to allow for flexibility and progression, but not too wide to create inequity or compression.

4 Pay Bands

Pay bands are the ranges of pay that are attached to each pay grade. They indicate the minimum, midpoint, and maximum pay rates for each pay grade. They help to establish the parameters and guidelines for setting and adjusting individual pay rates within your organization. To create pay bands, you need to use both your market positioning and your pay policy. You can use different methods to determine the width and shape of your pay bands, such as percentage, range spread, compa-ratio, or quartile. The width and shape of your pay bands depend on your pay philosophy and policy, as well as on the market volatility and variability. Generally, you want to have pay bands that are narrow enough to maintain internal and external equity, but wide enough to accommodate individual differences and performance. You also want to have pay bands that are consistent with your pay strategy and objectives, such as rewarding skills, experience, or results.

5 Balancing Factors

Balancing internal and external factors when setting pay grades and bands is a dynamic and ongoing process that requires regular monitoring and evaluation. To do this effectively, you should define your pay strategy and objectives, conduct a comprehensive job analysis and job evaluation, carry out a thorough market analysis for your target labor market, determine your market positioning, create the pay grades and bands based on the job evaluation results and market positioning, communicate the pay grades and bands clearly to employees and stakeholders, and review and adjust them periodically. By doing this, you can create a pay structure that supports your organization's goals and values, while motivating and retaining employees.