I have 5 other articles “ Features of a Pay Grade Structure”, “Rules of Thumb in Establishing Pay Grades”, “Grade structure design considerations” , “Different Approaches in Establishing Pay Grade Sizes.” and “Job Classification System Versus Points Factor System” that provide the foundation knowledge for this article. This article show what are the options in job grade design options.
The purpose of establishing job grades is to give logical structure to the salary or wage system.
The source for this article is “Job Evaluation – Traditional Approaches and Emerging Technology written by Fred Eargle.”
There are 3 considerations: Points spread (whether equal or unequal), money spread (whether equal or percent), overlap (whether yes or no).
In the graphs below, the money spread would be on the Y axis and the points spread on the X axis.
Option 1: Single Rate
In this option, only one wage rate is assigned to each job grade. It is usually called the flat rate or standard rate. Very often, it is the average or mid-point rate of the marketplace. It provides no opportunity for progression within the grade.
In this option, the superior performers may feel an injustice when they receive the same pay as a less proficient worker. This concept is frequently applied to incentive jobs. It assumes that all workers are equally proficient. The more efficient ones may have the opportunity of earning more pay through incentive earnings.
It is frequently utilized in industries where rates are negotiated with unions, in small organizations, or in companies using skilled craft workers. To deal with the lack of progression opportunity within the grade, organizations using this approach frequently have closely related classes of jobs which offer some promotional opportunities.
Option 2: Equal Points Spread, Equal Money Spread, No Overlap (Butt-to-Butt)
In this option, each grade has the same number of points and an equivalent money spread from minimum to maximum. The maximum of a lower grade is the minimum of the minimum of the next higher grade. There is no overlap of wages between grades.
All employees (regardless of skills or tenure) will receive the same rate of pay when reaching the maximum of the grade. Workers reaching the maximum of the grade will not exceed the starting or minimum rate of the next highest grade. If the number of in-grade steps is limited, it may not permit sufficient recognition and pay opportunities for those employees with long service.
Down-grading (for example transfer to a job in a lower grade), for whatever reason, will result in considerable wage reduction because of no over-lap with the preceding grade. This no overlap design is used in a pay system that has a steep wage curve,that is a high proportion of money in relation to points.
Option 3: Equal Points Spread, Equal Money Spread, Overlap
In this option, each grade encompasses the same number of points and equivalent money spread from minimum to maximum. However, the maximum wage for each job grade is no longer the minimum for the next higher grade but is higher (an overlap). This means that the more skilled and tenured employees at the top of the lower grade has the opportunity to earn more than the entry level of the next higher grade. This provides them both income and psychological advantages. This practice would result in a flat wage curve, a low proportion of money in relation to points.
Option 4: Equal Points Spread, Percent Money Spread, Overlap
In this option, the money spread of each job grade is larger than the preceding job grade by a percentage factor. This percentage money spread makes the paying of the more difficult or highly skilled jobs more realistic. This helps in retaining people in these jobs. The overlap is utilized to provide the more experienced employees on lower rated jobs with an opportunity for earning more than beginning employees on higher rated jobs.
Overlap between the grades may be consistent (one or more steps), or increase in number (one or two at lower grades, increasing to three or more) with the higher grades.
Option 5: Unequal Points Spread, Equal Money Spread, Overlap
In this option, the point spread of each subsequent grade is larger than the preceding one. The width of the grades may be uniform, or generally increase as grades increase. It is not unusual to have a grade range of 50 to 100 percent. The grades may take advantage of natural groupings if desired, or arbitrarily assigned. Overlap is usually provided. Overlap is usually provided.
The rationale behind this option is that in most organization, it is easy to distinguish between differences in lower rated jobs, and to identify the job grades. However, at the upper end of the grade scale, it becomes more difficult to do so. This is because the responsibilities may be more functional, overlapping and require greater flexibility and unique capabilities are not easily defined. This is taken in account by increasing the point spread with succeeding grades.
This concept can be used for:
Broad-banding: One reason broad-banding came about in the 1990s was as a result of company downsizing, where the remaining employees held wider responsibilities and wider decision making power.
Empowered teams: Work requirements vary widely over a short period and it is difficult to categorize a job neatly into a pay grade. Therefore, there is a need to broaden certain pay grades to properly compensate staff for the expanded responsibility and accountability.
Option 6: Unequal Points Spread, Percent Money Spread, Overlap
In this option, we combine the features of several of the other options previously described. In organizations where turnover is low and promotions difficult to obtain, highly skilled personnel or personnel in more difficult jobs are retained through “promotion within the grade”. This is achieved by increasing the money spread for each succeeding grade by a percentage factor. This will results in causing the ceiling (top rate or grade maximum) for each succeeding job grade to become increasing greater than the preceding one. Overlap is also used.
This option also provide the opportunity for establishing job grades around “natural groupings” thus it facilitates categorizing jobs that share similarities and reduces the frequency of border-line jobs.
Option 5 and 6 shows that the system of paying people based on a hierarchy of jobs (job based pay) may sound good in concept but is actually a quick fix. In real life it would seem more practical to pay base on abilities, capacities (person based pay) and what the person is required to do. This truth is more pronounced when the business operates in a volatile business environment.