As I touched on recently, there are all manner of approaches to managing base pay but I wanted to write a bit about the differences between these two common approaches.
Global grading (also known as globally leveled, or sometimes just a “broad-banded” salary structure) generally refers to the approach where a single set of organizational grades runs through the organization and is used as a framework for all aspects of total rewards, including salary structure.
This usually takes the form of a relatively limited number of grades for the whole organization – typically no more than 10 or 11 at most.
These grades may align to career levels, so we know that all grade 5s, for example, are at a similar stage in their career, regardless of their profession allowing for a consistent career leveling framework to run through the organization.
Of course, we would expect differences in pay between disciplines which means that multiple salary structures are built depending on the different groups of employee. At its most simple, this might be two structures – technical and non-technical, but as companies grow, further stratification may be required and take the form of salary ranges by function. Below is an example of how this might look:
Traditional Salary Structure
I’ve always referred to this approach as a “traditional” salary structure but others might refer to it simply as a “salary structure” or have another name for it.
With this approach, we essentially take market data for the roles in our company, sort them from high to low, and then carve up those roles into similarly-paid groups. The average pay for each group then determines the midpoint for the salary band.
What this tends to result in is a larger number of grades with narrower ranges around them as the approach lends itself well to stronger market alignment. Example below:
As you can see, the immediate disadvantage is title misalignment which the global leveling approach addresses through multiple sets of midpoints.
So which is better? As is so often the case…drum roll…it depends!
Although at first glance the two approaches are very similar, they have distinct advantages and disadvantages which might not be apparent at the outset.
Generally speaking, global grading is well-suited to larger or growing organizations that operate across a number of locations and/or companies. The use of a single consistent set of grades, lends itself to a consistent total rewards strategy irrespective of location, and broader bands allows for flexibility, easy slotting of new jobs, and greater differentiation in pay. The grades essentially become the “spine” of the organization – the single source of truth around which other pay programs can be built.
The traditional salary structure, however, works well in single-location organizations, and organizations with very disparate roles, which is why it is still the favored approach among, for example, life science companies in the US or many cross-industry organizations operating from a central hub. For a given location, it is a relatively quick process to procure market data, and arrange from high to low. Where companies operate in multiple locations, the disadvantage is that this exercise needs to be repeated and the sequence of jobs may differ across locations and countries.
Practical challenges aside, the two approaches fit neatly into two different philosophies with respect to market pay:
- With global grading, the resulting broad bands, are well suited to pay-for-performance environments where merit increases differentiate high and low performers and the midpoint is a reference point, but not a target.
- With a traditional structure, the large number of grades tends to go hand-in-hand with narrow bands and suit companies that wish to align closely to the market with limited individual differentiation.
The key thing to remember is that no one approach will cure all ills. It is about picking an approach that suits your organization, solves the biggest issues, and then using clear, consistent communications to ensure they have used effectively. Whichever approach is selected, will leave shortcomings and the key is recognizing and addressing those shortcomings through effective governance and communication.
That’s all for this week, folks. Feel free to comment with specific questions below.