Constructing Salary Structures – The Mid-Point Progression Method

Introduction

Knowing how to use the mid-point progression method plays in an important in developing a salary structure.

Importance of the Mid-Point Pay

The mid-point is a key element used in both the construction of the salary structure as well as pay administration. It is used as the reference point set to be equal, lead or lag the market median or market average pay.

Compa-Ratio

Businesses track comparative salary ratios or compa-ratios because it is a tool for managing compensation costs. The compa-ratio is a statistical ratio between an individual employee’s base salary measured against the mid-point pay. The formula is base pay divided by mid-point. It can also be the statistical ratio between the market median pay and the mid-point pay. The formula is market median pay divided by mid-point. Compa-ratios can be calculated for individuals, groups of individuals and company as a whole.

Definition

Mid-point progression is also known as mid-point differential. It is the increase between the midpoints of different salary ranges in the salary structure.

Range overlap is the degree of overlaps between 2 adjacent ranges. It is determined by 2 variables – job grade’s pay range and the percentage differentials between midpoints. The greater the mid-point progression, the smaller the overlap will be.

Grouping Individual Jobs into Pay Grades

The mid-point progression method is just 1 method of grouping jobs (pay data) into a number of job grades. This is termed a pay structure. Imagine a graph with Y axis denoting pay, X axis denoting job evaluation points, and a straight line graph denoting the company’s pay policy. The pay policy line is cut into job grades by adopting a standard distance or percentage differentials in pay between adjacent mid-points.

The dividing line between grades is halfway between the two midpoints. Imagine the pay ranges being vertical blocks with the midpoint pay residing at the center.

This approach should not be confused with the continuum approach.

Formula for Calculating Mid-point Progression

The formula is:

(Midpoint of Lower Grade x Midpoint Differential) + Midpoint of Lower Grade = Midpoint of Next Grade

For example ($30,000 x 10%) + $30,000 = $33,000

Worksheet

When you are working out the details to create your salary structure, you will want to organize your pay information into an excel table with the following headings:

  • Job Grade
  • Minimum Pay
  • 25th Percentile
  • Midpoint
  • 75th Percentile
  • Maximum Pay
  • Midpoint Progression
  • Range Spread

How Much Distance Between Pay Grades (Midpoint Progression)?

For smaller midpoint progression, the advantages are the ranges and midpoints more closely represent the market prices of the jobs (market pay). The disadvantages are it is much harder to administer and there is little distinction between grades, hence harder to for internal equity. There may also be problems of salary compression.

For larger midpoint progression, the advantage is that it is easier to group jobs & segregate which jobs belong in each grade. The disadvantages will be that ranges or midpoints may stray from market pay and there may not be enough levels to accommodate all job family levels.

Hence a value somewhere in between works best.

More Than One Pay Structures

It is not unusual for large organizations to have at least 3 pay structures:

  • Blue collar manual labor; craft and trade staff.
  • Nonexempt white collar salaried staff.
  • Managerial, administrative and professional exempt staff.

Each pay structure is a job group.

Typical Midpoint Progression for Job Groups

If we divide up the jobs into job groups or categories, we will note that it is common for the mid-point differential percentages to increase as one move from lower-level jobs to higher level-jobs.

The reasons are, at the lower levels, the skills required to advance are less complex and are easier to acquire; one is able to advance to next level quickly; there are more positions available so job opportunities more available. At the higher levels

At the higher level jobs, the skills required to advance more complex & harder to obtain; job incumbents stay in job for longer period of time; advancement opportunities are less available.

The typical midpoint progression can be:

  • Non-exempt staff: 5% to 10%
  • Exempt and professional staff: 8% to 15%
  • Managers and Directors: 10 to 15%
  • Vice-President and Executive: 15% to 20%

Some recommend the guideline as 5% to 12% for clericals/production; 10% to 15% for paraprofessional, professional, management. Executive levels often range from 20% to 35%. The midpoint differential is typically 15% to 25% between supervision and their subordinates.

Midpoint Progression should be designed to provide midpoints that reflect market rate and minimum and maximums that are reasonably close to the minimum and maximum rates paid in the market.

Final Words

If you one of the lucky ones that works for an employer that can afford an external compensation and benefits consultant, you can make use of their regression analysis tool to construct the market pay line.

[print-me target=”#post-%ID%” title=”Print This Article”]

Advertisements