From reference points to bands 

Which is best for my organization?

When managing pay with market reference points or spot rates, there’s one primary consideration – you must love to benchmark jobs! The premise of this type of system is that you will practically match every job in your organization to market data that will allow you to develop a market reference point, +/- a percentage to allow for varying experience and performance. Within this approach, each job range is discrete, independent, and there is no clear or predetermined progression between ranges or within job families. Though less frequently used, this type of system can work well for jobs that are hard to fill, are in high demand, and are evolving, all of which are factors that cause the market rates associated with the jobs to fluctuate. However, that brings about another issue – in this type of system, you need to update all of the market reference points annually, if not more frequently. This type of system requires a significant amount of market data and solid understanding of a wide variety of jobs. However, the results of this approach provide specific pay guidance that can be very beneficial, even necessary, in certain types of organizations.

For those of us who have grown up in compensation over the past 20+ years, the definition of a traditional pay structure used today may vary from the “textbook definition” we used to know. To most, though, it is defined as a collection of ranges, each with minimum, midpoint, and maximum pay guidelines. The range spread (i.e., the percent difference from minimum to maximum) typically is from 40% to 60% wide. The midpoint progression (i.e., the percent difference between the midpoint in a range and the midpoint associated with a range one level higher) typically is 10% to 20%, with the wider percentages being used for the higher valued jobs in the organization. Some have come to expect even a traditional structure to be somewhat more varied in range spread distribution, perhaps with ranges going from 30% to 100%, in order to accommodate the full organization, from the entry-level jobs up through executive-level positions. A traditional structure tends to have 10 to 30 ranges with jobs aligned to each in a hierarchical manner. You would not typically have overlap of jobs within a career path in one range.

This type of structure largely supports pay progression through the attainment of jobs in higher pay ranges. Flatter organizations that are encouraging skill development more broadly or are using more flexible approaches to work (e.g., agile) may not find the best support from a traditional pay structure. Note that traditional pay structures – and the construct of having a hierarchy for ranges of all with a pattern of progressing midpoints – can be used to manage salaried or hourly pay. For hourly pay, the approach is less common. When used, however, one typically sees lower range spreads and midpoint progressions.

Broad bands, or a banded pay structure, is best suited to an organization looking to emphasize career development for roles that change less frequently and/or provide varying levels of contribution to the organization. Promotions tend to be tied to a major role change, rather than doing more of the same type of work, perhaps a little differently. The bands, or ranges, are typically 100% to 200% wide and are often organized by career level (e.g., professional, manager, executive). Broad bands allow for the greatest level of flexibility in managing pay, which has plusses and minuses. Organizations can experience challenges with broad bands because of the flexibility. Managers will always play a role in making pay management decisions, and asking them to function with such broad guardrails can cause frustration. Managers typically want to understand what the “market rate” is for a job and that is not readily apparent in a banded pay structure. This leads us to the next type of pay structure, bands with market reference points.
Originally born out of a need for pay decision makers (i.e., supervisors and managers) to be given guidance and more tools to use when considering pay changes for their employees, organizations that implemented banded pay structures often now use “reference points” or mini-ranges within the bands. These ranges or reference points provide a clear view as to where individual jobs actually align along the pay band. For example, Senior Accountant may be a job that’s assigned to a professional pay band that has a minimum of $70,000 and a maximum of $140,000. The current employee, let’s call her Jean, makes $80,000. When Jean’s manager is considering whether Jean is eligible for a raise, he or she needs to understand how Jean’s pay compares to the competitive market rate. It’s helpful for Jean’s manager to know that the market reference point for this Senior Accountant job is $85,000, which represents the rate of fully proficient employee, with solid performance on the job. Now Jean’s manager can decide, based on Jean’s performance and how her pay compares to the market, whether a pay raise is warranted. While communicated differently, there is a limited number of practical differences between this approach and traditional pay structures. 

Managing pay for other employees

Of course, there are many other measures of alignment that you can use to understand whether your pay structure is the best fit for your organization. Reach out to Mercer with any concerns. We’re happy to help!

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