The WorldatWork Handbook of Compensation, Benefits & Total Rewards advocated 3 approaches.
The first approach to developing mid-points is the present value-future value formula, which may be used to determine the percentage between midpoints, assuming the highest and lowest midpoints and the number of grades is known. The following formula may be used or the calculations may be performed on a business or scientific calculator.
Suppose a company wishes to develop a pay structure with 6 grades that has a highest mid-point of $77,820 and a lowest midpoint of $46,620. Using the above formula, the mid-point progression is calculated to be 12.5%. The resulting pay structure will look like this.
There are two other approaches to developing mid-points and the resulting mid-point progression.
The second approach is to use the average of the market pay rate for different jobs within benchmark-job groupings. The resulting midpoint progression would have varying percentage differences between mid-points (inconsistent mid-point differentials), which reflect the market more closely than constant differences.
An organization’s pay structure need not have a constant percentage progression. It may remain uneven without being smoothed. In such instances, it should be recognized that promotional increases may be uneven and sometimes difficult to administer because of the following reasons:
- If the percentage difference between mid-points is too high, the result could be costly promotional increases.
- If the percentage difference is relatively low, the result could be salary compression problems between supervisory and subordinate positions and difficulty in matching promotions with appropriate compensatory rewards.
The third approach to developing mid-points in a pay structure is the use of regression analysis. The advantage of this approach is it helps align market rates more closely with company policy. Regression analysis works well when job evaluation points are used develop pay structures.