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Consider offering creative incentives—and a bit of career counseling.
Just as there is a maximum amount that Stephen Curry can earn as a star point guard for the Golden State Warriors, there is a limit to how much Stephen Brown can make as Accountant I. That’s because both the National Basketball Association and the typical U.S. company put ceilings on the salaries they pay.
But while it’s safe to assume that Curry will be satisfied with his financial future even as he tops out of his range, Brown may be less enthused. Unless there’s an opening available for an Accountant II, there’s no obvious way for the second Stephen to continue to grow financially at his employer. That could lead him to feel stuck and, ultimately, to initiate his own trade—to another company.
Until there is more pressure to expand the money companies set aside to boost salaries, cost-of-living adjustments may not be enough to provide individuals like Brown with a significant pay increase. Of course, your organization needs to control salary growth, but don’t be penny-wise and pound-foolish by taking a rigid approach, losing top performers in the process, say compensation experts. Instead, address these situations with a mix of alternative reward solutions, proactive career discussions and, in some cases, evaluations of how closely pay is tied to the market.
This is especially critical today, as employees and job seekers have access to an unprecedented amount of pay-related information through social media and other online channels, and many are reading reports of companies raising pay in light of the corporate tax overhaul. An employer that appears to be limiting a worker’s earning power will likely struggle to hire and keep talented people, especially as the economy continues to perform well and the job market tightens. You need to be prepared to explain why a person’s pay may be limited after hitting the top of the pay range—and you must do it well.
“How employers handle these situations sends an important signal to employees,” says Joe Rice, a project manager with CBIZ Talent and Compensation Solutions, a benefits services provider in St. Louis. “It is not a bad thing for an employee to be at the maximum. They are probably a valued employee who has been with the organization a long time and may be a recognized expert in their area or field.”
Many managers are ‘coaching employees in building their capabilities and guiding career discussions.’Ilene Siscovick
What is bad, however, is if employees who have hit the ceiling feel unmotivated because their manager and HR never give their compensation a second thought after that point. How you manage these occasions will also depend on the market in which your business operates. At MBP, a 300-employee construction consulting firm based in Fairfax, Va., much of the company’s revenue comes from contracted projects with fixed fees. Once fees are set, there are limits to what the company can afford to pay the people assigned to the contracts. When someone approaches or hits the top of his or her pay range, the firm may have to rely on smaller-than-normal salary increases—usually limited to a cost-of-living increase plus a one-time bonus—until the contract is renegotiated. The practice of freezing employee base pay is commonly known as red-lining or red-circling.
In the meantime, Julie Detwiler, SHRM-SCP, MBP’s vice president of human resources, tries to find other perks to offer these workers, such as the option to telecommute one day a week, to help make up for a smaller-than-expected raise. She also talks to workers about what’s important to them and how they see their careers progressing.
For other organizations, when a person hits the ceiling, it presents an opportunity to determine whether the employee is still in the right position. “We ask whether they are ready to take on more responsibility and move into another role,” says Malika Terry, director of Americas compensation and benefits for InterContinental Hotels Group (IHG) in Atlanta. If they are, start that process. If they’re not, consider a lump-sum bonus in lieu of a pay increase, while looking for creative ways to help talented employees stay motivated.
“The key is that this is not one-size-fits-all,” Detwiler says. “There are a lot of different ways to approach it.”
No matter what your company does when someone’s pay is about to plateau, preparation is key. “It’s important to have conversations well in advance because the news will be both difficult to receive by the employee and difficult to deliver by the manager,” says Kimberly Horton, human resources manager at Landrum HR, a human resources services provider in Pensacola, Fla. “Employees will be wondering why they should bother trying anymore if they won’t be compensated for their efforts.”
For that reason, highlight what workers can do to change their compensation. Emphasize any possible earning opportunities that go beyond base pay, for example. “For positions with even the slightest sales component, there could be more of a shift toward incentives for meeting sales goals,” she says. This is also a good time to discuss ways people can add more value to the organization—for example, by developing new skills or training and mentoring colleagues.
When an employee approached Jonathan Marsh, owner of Home Helpers of Bradenton, a home health care agency in Bradenton, Fla., with frustrations about her compensation, Marsh explained that she had reached the top of her pay range, which was based on current industry pay surveys. He then turned the conversation to the agency’s incentive plan, which this employee had never participated in.
The company offers monthly payouts of up to 50 cents per hour based on achieving a number of metrics, such as clocking in and out on time, not leaving a shift early, and handing in electronic documentation on time. The agency e-mails staff regularly to show them where they stand against the incentive goals and sometimes makes exceptions for unavoidable absences.
“We focused on giving her the confidence that she could achieve these milestones each month,” Marsh says. “It was about putting her in control of her pay.”
That approach can work for other employers, too. Pay ranges are generally tied to the labor market, and available salary levels represent the maximum value of a given position. If workers want more pay, they need to develop the knowledge and skills necessary to move into another role or level. And managers, for their part, should support them in seeking out those opportunities—and making sure that prospects for growth exist within the company. “Many managers are becoming talent coaches within their organizations,” says Ilene Siscovick, a talent and career partner with Mercer in the New York City area. “That means coaching employees in building their capabilities and guiding career discussions.”
When workers are nearing the top of their pay level, talk to them about how to improve their value to the firm, advises Detwiler at MBP. The conversation can focus on what they can do to move into a new billable category with higher take-home pay, for example. “What can that individual do to make themselves more marketable—for example, by earning certifications that make them more attractive to clients?” Detwiler says. “That is not always in company hands; employees have to take control of their careers.”
Preparing for the Plateau
When a person’s pay approaches the top of the range, the ensuing discussion can make or break the employer-employee relationship. Here are some pointers for handling it with care:
Plan. Don’t have these conversations on the fly. “An employee hitting the top of the salary range doesn’t happen out of the blue,” says Julie Detwiler, vice president of human resources for construction management consulting firm MBP. “You have to know that it is happening, and you have to plan for it.”
Consider unique circumstances. Is the position for an individual contributor or are there multiple people in the same role? Was he or she a strategic hire who was intentionally brought on at a high salary? “If someone came in with a book of business or with unique skills, there will be a clear reason why they are at or above the top of the range,” Nygard says. “They may have special skills that are valuable to the organization that aren’t in the job description.” In these cases, you might opt to provide increases above the top of the pay level. “It is essential to do this sparingly and to document the reasons for it,” he says.
Craft a policy. In the wake of a merger or acquisition, develop a companywide plan to deal with pay issues. In many cases, the two companies involved find that their pay ranges do not match up, which can lead to individuals with compensation that is at or even well over the top of the designated maximum. When this happens, Malika Terry, director of Americas compensation and benefits for InterContinental Hotels Group, and her team hold individual meetings with all employees about their role in the new company and how that will impact their compensation. “We also hold virtual office hours so they can ask questions about pay, raises, the impact on their bonuses, et cetera,” she says.
When too many workers reach peak pay too quickly, it might be a symptom of a dysfunctional salary system. Although Terry and her staff at IHG review pay ranges annually, they conduct a closer analysis wherever they see a cluster of people at or nearing the upper limit. “We look at the market to make sure the position is in the right range and analyze the data to see if any adjustment or change is in order,” she says.
Pay positioning is also important to consider. In a less-competitive labor environment, you may be able to peg pay at the median of the market. However, if talent for some or all of your company’s positions has become scarcer, that level of compensation may no longer be enough to attract the employees you want. In such cases, managers may end up giving larger-than-normal increases just to keep good employees, even though the organization has not adjusted the salary structure and ranges to keep up with the competition.
‘Make pay ranges wide enough to accommodate different levels of experience and changes and growth in responsibilities.’Joe Rice
A better approach is to conduct regular benchmarking to see what pay each position can command, Detwiler says. When the competition for talent heats up and market-based pay rises, the company may need to adjust its positioning and salary ranges. It’s a good idea to track trends, including unemployment and quit rates, in the industry and in specific labor markets. “Make sure you are benchmarking because eventually it will catch up to you” if your pay isn’t keeping pace, she says. “People will be poached and tempted to explore the market and their worth.”
During this process, make sure current pay ranges are appropriate for specific positions. “If a pay range is 10 percent wide, it is easy for people to get above the range,” says Keith Weldon, global compensation manager for Black & Veatch, based in Overland Park, Kan. To avoid that, the engineering, construction and consulting firm designs its pay ranges much wider—from 50 percent to 100 percent. For example, a 50-percent-wide range might be between $50,000 to $75,000, while a span that is 100 percent wide would extend from $75,000 to $150,000.
The grades can be narrower for lower-level positions where incumbents tend to be early in their careers and more likely to be promoted faster. Wider ranges for mid- to late-career jobs will help you keep those employees on board because they don’t have to sacrifice competitive pay increases as they continue to deepen their experience and expertise in their current roles.
[SHRM members'-only toolkit: Introduction to the Human Resources Discipline of Compensation]
Sometimes you may need to look more closely at pay for jobs within your company that are particularly critical to your business. “Each structure has its own logic,” says David Nygard, managing director with business consultancy Hatch & Associates in New York City. “Some organizations pay a premium for research and development or accounting talent and use higher benchmarks for those jobs than for others.”
However, make sure the job and pay structure take relevant job variations into account. For example, a controller position in one division may be a traditional accounting-based role, while another controller supports the sales function. “These roles are in different entities and require different talent levels,” Nygard says, but a pay structure that keeps them at the same level and in the same job family doesn’t reflect that reality.
Similarly, if a long-tenured maintenance worker keeps essential business equipment running while simultaneously training other employees, that person probably has increased his or her market value. “This emphasizes the need to make pay ranges wide enough to accommodate different levels of experience and changes and growth in responsibilities,” Rice says.
New jobs that are deemed essential to an organization’s success also require careful handling, especially if you have to pay a premium to recruit for those positions. Ever since IHG made app and software development a strategic priority, Terry and her team have had to be thoughtful about managing compensation for these roles. “These are hot jobs,” she says. Her team must be vigilant about keeping pay levels current and, when necessary, must offer retention bonuses to make sure people stay on board, she says.
At Black & Veatch, Weldon and his team conduct an annual market equity review for each business and function. They analyze each person’s position in their pay range, job tenure and location. This exercise highlights anyone who is being paid either below the minimum for the range or above the maximum. These folks could be at risk of leaving the company if their compensation doesn’t represent their value to the organization or in the marketplace. “We share that with business leaders to determine why people are in that situation and the likelihood that a promotion will solve the problem,” Weldon says.
A Range of Options
Entry-level jobs that employees move through quickly
Mid-level positions in which employees continue their career progression but at a potentially slower pace
Higher-level, nonmanagerial jobs where one’s skills and knowledge can reach the highest levels and incumbents have the potential to become internal experts in their area
Many businesses are uncomfortable with increasing transparency about pay, but such candidness could make it easier to manage situations when employees reach the top of their pay ranges. As state and local governments pass laws preventing employers from asking about an applicant’s salary history, HR must make sure pay levels reflect the work being done in a specific role and are closely tied to the market. Then you can make a clear case to employees about why the pay range is what it is for specific jobs and skill sets.
At the same time, some companies that operate in jurisdictions that do not allow questions about a job candidate’s salary history, such as Massachusetts and New York City, are starting to consider eliminating pay ranges altogether. Instead, “these employers are simply paying what the market says the position is worth,” says Corinne Jones, president and senior HR consultant at CJC Human Resource Services in New York City.
[SHRM members'-only toolkit: Designing and Managing Incentive Compensation Programs]
Other pressures also demand that employers keep pay structures and ranges closely tied to the market. “This is the age of LinkedIn and Glassdoor,” Detwiler says. “People know what is going on out there, and they are talking to each other about what they expect and want.”
If you’re not meeting their expectations, you could find that your company has dropped the ball in the competition for the best talent.
Joanne Sammer is a New Jersey-based business and financial writer.
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