Effective Compensation, Incorporated

Abstract: With the increased focus on quality and efficiency, many organizations are seeking new ways to administer their compensation programs. One concept, broad banding, is receiving significant attention. This white paper presents an overview of what broad banding is, why firms find it attractive, and what key issues should be considered before an organization implements a broad banding program.

Broad Banding Defined

Broad banding refers to the use of fewer and wider salary ranges than is traditional in salary administration. Organizations using broad banding practices typically have only one-third as many salary grades as do firms using traditional pay practices. This normally translates to seven to fifteen grades for their entire workforce, from entry-level clerk to the CEO. Broad banding applications vary significantly: Some organizations include all of the positions in the company, while others limit its use to narrower categories, such as professionals or executives.

Traditional salary ranges have maximums that exceed their minimums by about 35% for non-exempt jobs and by about 50% for exempt and management jobs. With broad banding, the ranges are often 100% to 150% in width. Firms using the Hay system in its pure form may have different salary ranges for every point level, which may mean several hundred different salary ranges. Most firms have fewer ranges, which typically have midpoints that are 7-15% apart. For a large organization, this may mean twenty-five to forty salary grades.

Why Firms Use Broad Banding

Frequently the initial motivation is to simplify the compensation administration process. After some investigation and thought, the reasons that ultimately lead to the adoption of the program normally involve some culture, motivation, and career planning issues.

The features that attract firms to broad banding include:

Efficiency: Initially, organizations start to look at broad banding as a way to simplify their salary administration process. By having fewer grades, they expect to spend less time evaluating jobs and defending grade placement decisions.

Flexibility: As firms investigate the issues involved in broad banding, they realize that having fewer grades enhances the ability of the organization to transfer employees between jobs. Since fewer grades exist, employees are less likely to view the transfer as a demotion (instead of going from grade 32 to grade 31, the move is within Band G). The increased flexibility that the organization gains is useful, particularly when it is going through rapid change or downsizing.

With fewer grades, a number of issues come to the surface. The organization can either ignore them or create processes to handle them. We review a few of the more common issues below:

Position Levels: With fewer grades, it is common for several levels within the same job family (such as accounting or engineering) to be placed into the same band. This can have significant implications for hiring and performance standards. The organization needs to consider whether it should combine or redefine the jobs. In practice, we find that the differentiating factors in many job levels are not material and have only been created to justify the grade levels.

Some companies that use broad banding have elected not to consolidate the jobs that have been placed into one grade, but to allow each local manager to decide whether the jobs better serve the corporate purpose as they were before or by being consolidated. This may allow for in-grade personal growth recognition, with or without monetary reenforcement.

A related issue for many firms is whether to have formal job descriptions or to rely on a less structured set of job level guidelines.

Titles: Some broad banding companies adopt strict guidelines on titling, requiring that only one title be used within a job family per salary grade. Others have gone even further, doing away with job titles and using a term, such as "Associate," for all employees in certain grades. Others ignore the issue and allow local managers the autonomy to handle titles as they deem appropriate. While this issue is not limited to the adoption of a broad banding program, it almost inevitably arises when a broad banding program is adopted. Broad banding can provide an opportunity to diminish status differences and lay the foundation for a more participative organization culture.

The decision about how to handle titles must be made in the context of the organization's culture and experience. To remove a long-sought, hard-won title from an employee can have negative consequences. Diluting the value of the title by granting it to a broader group of employees can also be viewed negatively.

Career Ladders: A natural outgrowth of the preceding two issues is the modification of career ladders. With broad banding, it will be more likely that an employee would spend his/her entire career in only one or two salary grades. This means that the organization needs to consider other means to provide employees recognition and a sense that they are progressing professionally. Where promotional opportunities do exist, it will be important for the logic for band differences to be carefully considered and accepted by those who are affected.

Where organizations desire dual career ladders that allow for senior professionals to attain the same salary levels and status as some levels of management, broad banding can facilitate the cultural acceptance of the placement of both these positions in the same band.

Perquisites: Many organizations use salary grades as a basis for differentiating which employees are eligible for a wide range of benefits and perquisites. These can range from incentive program eligibility to the size of the employee's cubicle or office. Eliminating a large number of grades may be uncomfortable for organizations that have incorporated significant eligibility differences based on a traditional grade structure. Others may see the transition to a new system as an ideal opportunity to review the value and relevance of many of these practices.

The employee relations opportunities that broad banding offers represent the often-neglected consequences of many traditional compensation programs. Organizations often fail to consider the structural implications that exist merely because the system has enough grades to allow more levels, and therefore unintentionally encourages more levels. Prudently limiting the number of grades or bands can encourage a leaner, flatter organization. Adopting a system with too few bands may stifle vertical growth where it is desired. Where properly implemented, broad banding can decrease the emphasis on racing up the corporate ladder and focus on "getting the job done."

Compensation Issues

The adoption of a broad banding system provides an opportunity to reconsider a number of compensation practices. The issues discussed below normally receive a significant amount of attention:

Job Evaluation: With fewer grades, the pressures that justify complex, time-consuming point-factor job evaluation approaches are greatly diminished. The use of fewer ranges results in a process that is often much easier to administer and explain to employees and supervisors.

Market pricing and factor comparison approaches become much more viable. While this may place more pressure on the compensation staff to identify relevant competitive data, the additional surveying time is usually less than the time saved by more efficient job-grading processes.

Salary Increase Guidelines: The use of broader ranges is a major source of top management concern about potential abuse by local managers. The concern is that all employees will migrate to the top of the broader ranges and the company may end up paying premium salaries. This concern is eliminated through the use of traditional salary budgets and merit guidelines that limit the ability of managers to raise all salaries. Many broad banding firms avoid the use of the midpoint as a control point since it is misleading as a market indicator. Prudent central review of pay practices prevents discrimination that negatively affects protected classes of employees.

It is possible to adopt broad banding salary guidelines that are as stringent as those used with traditional ranges. More typically, however, organizations that adopt broad banding practices desire to take advantage of the opportunity to give local management more control so that they feel (and are) more responsible for the program. This change requires thoughtful communication and training efforts so that each business unit has the ability to make informed, prudent decisions.

Merit Budgets: If the organization desires to maintain competitive salaries, yet is granting significantly fewer promotions than traditional firms, it must calculate and compensate for the competitive shortfall. This normally requires a merit increase budget that is about one-half percent larger than would have been required in a traditional system. This is not an additional cost, but a shifting of funds from promotions to merit.

Salary Increase Forms: A variety of alternative pay practices can be used effectively with the wider salary ranges of a broad banding program. These include:

-- Lateral Adjustments: Where increased horizontal flexibility is identified as part of the basis for adopting a broad banding program, organizations may focus on encouraging employees to accept horizontal transfers. Encouragement is often needed due to the perceived risk of lower performance in new areas and the impact of the change on a planned career direction. The encouragement often includes both financial and other support, such as training and limited guarantees to return to their original job if the transfer is not successful.

The value to the company for horizontal transfers may vary from enhancing cross department understanding to increasing employee flexibility to employee/career development. Some firms reward these transfers with increases that vary based on the extent of the change required (e.g., moving from accounting to sales warrants a larger increase than moving from auditing to accounting), while others base the increase on the number of transfers. The nature of the increases considered should align with the organization's culture.

-- Skill-Based Pay: With the broader ranges, the range can be segmented based on the array of skills that an employee possesses. For lower level employees this may relate to specific skills that can be measured. For higher level employees it may relate to competencies that allow the employee to be effective in a broader range of circumstances.

Geographic Differentials: Firms that have employees in a number of locations with markedly different cost-of- living or wage practices can use broad banding to provide local managers with increased flexibility to relate to their local market pressures. Some firms provide guidelines encouraging high wage areas to use the upper portion of the range, while encouraging low wage areas to do the reverse. Broad banding helps move the decision of how to respond to local influences to the business unit that is directly impacted.

ECI's Views

Broad banding can help some organizations develop salary programs that align better with their organization's goals. Broad banding programs normally result in the compensation staff functioning more like consultants and less like regulators. As such, the program encourages local managers to take more responsibility for their employees' salaries.

Where it is adopted, broad banding will have a significant influence on employees. Organizations should proceed with care, thoughtfully considering how broad banding will impact all of its human resource programs. The program design should include input from a range of managers and employees outside of the human resource department to determine how they will react to the new system.

ECI believes that the firms that are the best candidates for a successful broad banding program will have most of the following characteristics:

participative management style, where local managers have the maturity and experience to work with the human resources staff to make prudent decisions,

strong performance pay orientation, which can be used as a basis for the increased performance emphasis that will exist in the broad banding program,

strong communications and training capabilities to facilitate both the initial program implementation and the ongoing need to assure that managers and employees understand the program,

positive employee development program that can work with employees to help them utilize the increased flexibility inherent in a broad banding program and understand how the new career ladder will work for them, and

service-oriented compensation staff that can work with management to facilitate accurate grade placement, identify competitive market information, and assist with intelligent salary planning.

Even if broad banding is not appropriate for your organization, the process of thinking through the issues that broad banding raises may be helpful in refining your current salary administration and related human resource programs.

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This white paper is designed to provide an overview of the key issues involved in broad banding.

Effective Compensation, Incorporated is an independent consulting firm, providing a full range of compensation-related services on a cost-effective basis. We assist organizations in becoming more effective through improving their employee cultures. If you are interested in learning more about how ECI can assist you with performance-oriented pay or other compensation-related issues, please contact: