The meeting focused on step five of building a compensation plan, specifically the process of developing a base pay structure that aligns internal job evaluations with external market data.
Methods for constructing pay grades and pay ranges were discussed, including calculation techniques, rationale, and examples.
Strategies for managing employee pay that falls outside established ranges ("red circle" and "green circle") were also reviewed.
Attendees were encouraged to apply these methods in their organizations and to continue with subsequent steps in compensation planning.
Action Items
Attendees: Apply the four-step process to create or update base pay structures within your own organizations.
Continue to step six of the compensation plan process once base pay structures are established.
Building the Base Pay Structure
The base pay structure is created by merging internal job evaluation points with external market pay rates, resulting in a pay line used to establish pay grades and salary ranges.
A scatter plot and regression analysis (market line) visually represent the relationship between job values (evaluation points) and market pay, setting the basis for pay policy.
Pay grades are clusters of jobs with similar value, each sharing the same pay range (minimum, midpoint, maximum).
Pay ranges are typically divided into thirds or quartiles, with the spread (difference between minimum and maximum) varying from 25% to 60% depending on organizational needs and job level.
The process for establishing grades and ranges includes:
Creating pay grades by clustering similar jobs,
Calculating midpoints using market averages,
Determining range widths to fit company policy and employee longevity,
Calculating minimum and maximum values based on the midpoint and chosen spread.
Pay Grade and Range Methodologies
When determining the number of pay grades, balance sufficient differentiation between job difficulties against ease of administration; 11–17 grades is common.
The midpoint for each grade should closely match the market average for clustered jobs within that grade.
Lower pay grades tend to have smaller range spreads; higher grades may have broader ranges to reflect greater discretion and performance differences.
Examples provided for calculating minimum and maximum:
Minimum = Midpoint / (1 + ½ Range Spread)
Maximum = Minimum × (1 + Range Spread)
Managing Red and Green Circled Employees
"Red circled" employees are paid above the maximum for their grade; pay is generally frozen until ranges adjust.
"Green circled" employees are paid below the minimum; recommended to bring their pay up to the minimum through expedited or more frequent increases.
Implementing these policies helps ensure equity and appropriate alignment with pay structures.
Decisions
Use combined job evaluation and market analysis to set pay structures — This methodology was recommended as the most effective for balancing internal alignment and external competitiveness.
Prefer pay grades over individual job ranges — Rationale: pay grades are easier to administer and enhance internal alignment.
Open Questions / Follow-Ups
Confirm organizational buy-in for number of pay grades and range widths before implementation.
Assess and update current lists of red and green circled employees and plan adjustment actions accordingly.
Proceed to next steps of compensation plan development after base structure creation.