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Second generation salary bands the way forward

While broadbanded salary bands addressed the lack of flexibility inherent in traditional pay structures, early examples still had problems of their own. Concerns over cost control as salaries gradually edged up along wide bands paved the way for a new generation of banded salary systems.

Based on an examination of the operation of a number of these “next-generation salary systems” in 16 large US organisations, a recent article in WorldatWork Journal charts their development and explains their advantages over previous systems.

Broadbanding replaced inflexible arrangements

Prior to broadbanding, the model of salary management was almost universal in the United States - a series of overlapping grades and ranges, with a job evaluation system to assign jobs to grades. This system allowed centralised control but also made it impossible to respond easily to an organisation’s changing needs.

Broadbanding was seen by its supporters as a way of providing greater flexibility and a move away from simply concentrating on internal relativities towards looking at external market pressures. It was also viewed as less bureaucratic, requiring a smaller amount of administration and reducing the importance of job hierarchy. In turn, a broadbanded system could reduce resistance to reorganisations, downsizing and delayering.

In addition, there have been a number of associated changes, says Howard Risher, the report’s author, with less focus on internal salary relationships and more on market pricing. Also, the day-to-day responsibility for salary management has been passed to line managers with compensation professionals becoming more likely to be in the role of information providers. 

Problems with early broadbanding systems

Despite replacing pay structures that were inflexible, the early broadbanded systems had problems of their own. In particular, with such wide bands, Risher says, the scope for salary progression was great.

Added to the fact that many line managers were often keen to reward their employees, in many cases, salaries progressed to levels that were impossible to justify.

In addition, single or wide bands tend to give employees the impression that their salary will steadily progress to the top of the band while providing no upper limits on managers’ decisions. Also, they downplay the importance of promotions.

New models developed

In response to such problems, the US study says new banded salary systems have been developed that give employers better control then previous systems whereby:

  • employers have created separate banded structures for broad occupations, using market data specific to the job families, or

  • they have a single set of bands but define job-specific “ranges” within the bands based on survey data.

Job family and job specific approaches

Both approaches, the report says, provide the ability to respond to changing market conditions and with shifts in the supply and demand for particular professions they allow the flexibility to respond to high demand for a particular occupation without pressure to treat everyone the same.

Instead of single bands for particular occupations, these new generation systems incorporate a series of narrower bands recognising different career stages while contributing to better salary management. If market data showed a narrow range of pay for that occupation or job family, then the band would be narrow and vice-versa. This means no longer putting jobs in very wide, arbitrarily-defined bands.

Most occupational career ladders now have three or four levels with the top one being reserved for true “experts”. It is also common, says the report, to pay such experts on a dual career ladder enabling them to receive similar rewards to managers. All other staff would be covered by the three other bands.

In the case of the second approach, job-specific ranges, salaries are centred on the market average or a market reference point. Making the salary band equal to 20% of this level produces a market-specific range. This means that jobs in different families at the same career stage could be paid using different ranges in order to reflect their particular local market.

In the same way, in large countries, such as the USA, different bands could also reflect different locations. This approach allows global companies to ”use the bands to signify a job’s status in the company, regardless of country, but pay within bands can be defined with local currencies and local market rates”.

Advantages of new approaches

Using either of the two-banded salary approaches, argues the report, allows companies to better focus on salary costs compared with very wide banded systems. This can be achieved with the use of the merit matrix as a control mechanism ensuring all managers conform to an agreed corporate policy providing greater control.

The banded models provide flexibility with carefully tailored salary bands suited to each organisation’s particular needs. In addition, from an employee perspective, they allow a stronger focus on career development with the opportunity for promotion and its associated motivational effects.

A final word

“When one looks across the organisations that have installed banded pay systems, it is the variations on the basic concept that stand out. No two systems look alike. That is in decided contrast to traditional salary structures, where the only difference is sometimes the percentage increase between midpoints. The parameters of banded systems can be very different. Banding gives employers the flexibility to define a salary system specific to their needs.” - Howard Risher. WorldatWork Journal, first quarter 2007.

Want to know more?

Title: "Second-generation banded salary systems”, by Howard Risher, WorldatWork Journal, first quarter 2007.

Availability: Contact WorldatWork, 14040 N. Northsight Blvd, Scottsdale, Arizona, USA AZ 85260, tel: 001 480 951 9191 or email: worldatworkjournal@worldatwork.org.

WorldatWork, formerly the American Compensation Association, is one of the HR professions oldest and most distinguished bodies. Founded in 1955, it "provides practitioners with knowledge leadership to effectively implement total rewards – compensation, benefits, work-life, performance and recognition, development and career opportunities – by connecting employee engagement to business performance”. WorldatWork is a not-for-profit association with a membership of more than 30,000 human resource professionals, consultants, educators and others, in 30 countries. For further details visit www.worldatwork.org.

Date 12/04/2007

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