In a competitive environment, attracting and retaining the best talent takes a well-defined, data-driven compensation strategy. Rewarding employees for the value they bring to your organization today, and continuing to compensate them fairly as they grow with the company, is critical to offer acceptance, employee satisfaction and ultimately, your company’s success.
Establishing pay bands and variable compensation programs are key to this process.
Pay Bands: What They Are and How They Are Determined
Pay bands, also known as salary bands, are the compensation ranges your organization pays employees for a specific position or job grade, ranked by their experience level and responsibilities. Each job grade’s pay band has a rate range, with a lower, middle and upper salary. It establishes what an employee with a specific job grade can be paid in that position, while still giving the employer the freedom to differentiate that salary, based on experience, individual performance and geography.
Pay band ranges are based on a blend of internal team metrics and external market metrics, both of which are crucial to their creation. The internal metrics ensure that the range of pay considers an employee’s experience level, education, organizational responsibility and growth potential. External metrics ensures the pay bands are in line with market rates in the same geographic region. That’s why it’s so important to use data sources that closely align with your organization’s size, job types and location, in addition to providing the most current data possible.
With data in hand, you’re ready to create to create your pay bands, following these five steps:
1. Determine your organization’s compensation philosophy:
- Paying higher than market average
- Paying market average
- Paying below market average
2. Analyze your job descriptions to get a clear understanding of your employees’ roles and responsibilities.
3. Group your jobs into job grades, based on job descriptions and responsibilities.
4. Establish ranges for each grade, including the lower, middle and upper bound pay.
5. Finalize the program, get approvals and buy in, and educate your managers on the structure and the strategy behind it.
Once your pay bands are in place, it’s essential to review these annually or semi-annually to ensure they still reflect what’s happening in the market, and that bands are adjusted as your job types, and their responsibilities, evolve and change.
Variable Compensation/Variable Pay: What It Is and How to Calculate It
Of course, there are other ways to compensate employees beyond their fixed pay.
Organizations are increasingly adding variable compensation or variable pay programs as a means of helping them compete for, retain and motivate top talent.
Variable pay is awarded to employees based on their contribution to the company’s growth and success. Typically, the employee must hit specific goals to earn the additional compensation, which can be awarded in one of these four forms:
Commission: Sales personnel are given a percentage of the revenue they bring in for the company, as part of an official compensation plan.
Profit sharing: Employees earn a portion of the company’s quarterly or annual profit in addition to their regular salary.
Bonus: Employees earn an extra lump sum payout, based on pre-established criteria, which could include company performance and/or that employee hitting specific metrics or completing a list of pre-established tasks.
Stock option: Employees are given the right, but not the obligation, to buy a certain number of shares of company stock at a set price within a certain timeframe.
It’s important to note that variable compensation is not an unexpected bonus but a formalized program that is well communicated to the employee as part of their total compensation package. In addition to driving loyalty, improving productivity, and aiding in retention, variable pay helps companies better align expenditure with income because the payout is awarded after the employee has generated or helped to generate revenue for the organization.
A Formalized Compensation Plan Gives You a Competitive Advantage
By making the time to formulate data-driven pay bands and variable compensation plans aligned to your talent strategy, you gain the ability to attract the right people with the right offers, and mitigate the risk of turnover and pay inequities.
Ultimately, you give your organization a competitive advantage.
