Employee reward

Employee Reward Assignment

The aim of this essay is to discuss the advantages and disadvantages relating to broad-banding and grading pay structures. The first part of this paper will define broad-banding and grading pay structures. It will continue including various examples of both broad-branding and grading pay structures and also discussing the benefits and drawbacks of applying both structures within an organisation. The summary of the key findings will be included at the end of this paper in conclusion.

A pay structure outlines the various levels of pay for jobs or groups of job by reference to their relative internal value as recognized by job evaluation and to external relativities as recognized by market rate surveys. In Figure 1.0 is an example of a Pay-graded structure.

Example of a pay graded structure is shown in fig 1.0 (Google Images)

The pay structures in organisations must be suitable to the necessary characteristics and needs of the required organisation and employees to enable it to work and be successful and worthwhile.

The structures should make it attainable to achieve equity, operational flexibility and continuous development, steadiness and fairness in managing employee reward.

The main types of pay structures are narrow-graded,

Broad banded

, job family, individual job grade, pay curve, spot rate and pay spine.

Broad banding is the compression of a hierarchy of pay grades or salary ranges into a small number (typically four or five) of width bands. This was first introduced in organizations in the late 1980’s and early 1990’s (World at work, 2002).

The aim of breaking down the job clusters or levels of positions into a fewer number of width bands are to:

• Provide pay structures which fit flatter organisation structures,
• Allow processes initially created to withstand hierarchy and vertical movement to be replaced,
• Work upon other methods of payment that reflect a broader range of employee development and contribution, as well as increased levels of competence, skill acquisition, incessant learning, career development and flexibility, etc.

Each of the bands therefore spans the pay opportunities, which beforehand were covered by several pay ranges as illustrated in figure 2.0

Figure 2.0 Example of a broad-banded structure (Armstrong, 2002).

‘Broad banding is an attractive alternative to rigid, structured, specialized and hierarchical organizations.’ (Aon Consulting’s Forum, 2002). It differs from a conventional grading system due to the greater pay range within each band and the smaller number of bands.

Determining the width of the bands requires care to be taken because if a band tends to be too broad it runs the risk of giving impractical expectations to those near the bottom. In this case, some organisations have introduced bands within bands, which are known as ‘zoning’, and reason being is to contain expectations and make the structure more easily to understand and manage.

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The way Broad banding works is that, when job evaluation has been finalized, the artificial divisions, which normally differentiate between grades, are ignored. A group of titles such as manager, supervisor, operative, clerk are gathered into one large band. This then allows all employees in the organisation to fit into a salary structure, which may have as few as 5 broad bands as illustrated and mentioned above. Also, in Figure 3.0, is an example of a broad-banded salary structure.

Figure 3.0 Example of Broad-banded salary structure (Stredwick, 2005)

Adopting a broad banded structure concentrates on evaluating the individual, focusing on lateral career development and on competency growth rather than upward progression through a hierarchy.

In a 1994 survey by the American Compensation Association/Hewitt Associates examined why organizations had implemented broad banding, 71% of the participants reported supporting a flatter organization and nurturing a new organizational culture, 57% mentioned the promotion of a widely skilled work force and facilitation of career development, and 55% reported minimizing administrative effort and reducing job evaluations. (Peters, 1994).

Reasons as to why organizations adopt such an approach are; a de-emphasis on formal job evaluation systems can free up time for senior managers and compensation professionals to focus on critical business and people management issues. In addition to this, a broadband structure can support organizations with collaborative work styles that value process and results over control and status. (Aon Consulting’s Forum, 2002)

Pay Expert Michael Armstrong recommends 12 steps for developing and installing a broad banded pay structure in his publication ‘ Employee Reward’. A couple of examples of these steps are:

‘ Reach an agreement that it is the most appropriate pay structure for progression.’

‘Decide on the width of bands, the degree of overlap (if any), the anchor points and pay zones.’ (LGE)

Broad banded are most likely to be introduced to organisations, which are flexible, who do not operate with extended hierarchies and believe in continuous development.

Broad banding continues to be an approach that has a great interest to managers seeking to enhance organisational performance. During the 1990’s the number of companies implementing broad banding continued to increase from 10% of firms surveyed in 1993 to 23% in 1999. (HR Focus, 2000).

Broad banding started out in the USA. William Mercer carried out a study in 1997. One of the outcomes of the study was that of approx. 3000 US organisations it was found that close to 45% had either installed the broad banding approach or were considering to do so. (Armstrong, 2002)

Looking at the percentage, it is quite a large amount of organisations, which make broad banding look more attractive to other organisations that may be unsure about adopting this approach.

Broad banding started of slow in the UK but research carried by Watson Wyatt in 1996 showed that 20 per cent of the 346 firms surveyed had introduced the system. More than half of the remaining firms planned to introduce it in their organisations. (Armstrong, 2002)

Since then, there has been a considerable increase in the number of organisations with broad bands.

The CIPD 1999/2000 survey of 193 organisations (Armstrong and Brown, 2001) found that 60 per cent of them had broad banded structures with five or fewer bands. Broad banding has become the most popular approach to the design of pay structures.

In broad bands, pay is managed more flexibly than in a conventional graded structure and great is paid to market relativities. There are many advantages of adopting a broad banded structure as there are fewer number of bands which makes it easier to manage and an organisation operating with a small number of bands is able to address communication issues more effectively because it grades far more employees within the same pay category, greater width of bands, greater overlap between bands which means continuous development without being upgraded.

Although broad banding has come to the force, graded pay structures remain the most standard types in the private sector, however broad banded structures are replacing traditional graded structures.

‘ In a broadband structure, the range of pay in a band is significantly higher than in a conventional graded structure. The band width may be as much as 100 per cent or even more, and there may be only four or five bands in the structure’ (Perret, 2007)

As more employees will be grouped in the same band it can be used to reduce the status consciousness that is often found in a narrow banded pay structure. This in turn might help to focus employee attention to the external environment rather than internal equity.

Broad-banding has flatter organisational structures and also encourages flexibility dispensing the need for constant regarding and promotion, less competition compared to graded pay as there is competition trying to compete to the next level of the structure rather than working as a team.

‘In broad banded pay systems, employees are encouraged to pursue the development of job skills the need to achieve the next promotion.’ (Loma, 1999)

From research that was conducted it was found that in one large organization that had introduced broad banding, senior management reported that they received more thoughtful recommendations for promotions because managers did not need to promote people to get a raise simply because they were at the band ceiling. (Tyler, 1998)

There are rewards rather than attributes in broad-banding and also worker commitment is at its highest. In traditional pay grading structures there’s no prospects at getting to the top.

In a business environment where organisations want to respond flexibly to global developments and customer requirements, the inflexibility of a traditional scheme has far too many disadvantages. Promotions are now far fewer as organisations have de-layered, reducing greatly the number of management and supervisory positions.

Employees need to be far more flexible, willing to change their roles and learn more skills to meet the needs of the quickly changing their roles and learn more skills to meet the needs of the quickly changing national and international marketplace. The stiff, hierarchical grading structure is far less likely to match the quick-moving, responsive culture required in both manufacturing and service industries. They need to be able to adapt quickly to new changes being implemented.

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Despite the numerous advantages of the wider use of broad banding, at the close of the 90’s, a Wyatt survey of 1,300 companies found that less than one in 10 used broad bands. If one was to remove the larger companies from the survey (5000 employees or more), only 6% to 7% used this approach. (Stern & Associates, 2006)

A few companies find that it works for them, but most are redesigning their structures to allow pay ranges to reflect the market.

Conclusions

As with any compensation structure, broad banding must be suited to the strategy, culture and employee needs of the particular employer. In my opinion and after careful consideration on broad banded structures I feel a broadband structure is best adopted in a culture that is flexible and team-based or at least is moving quickly in that direction.

Companies should carefully weigh broad bandings pros and cons to ensure it fits with their organizational culture and business goals.

Despite all the advantages of the broad banded systems, broad bands are still viewed as a novel approach to pay, yet to be proven workable. While companies continue to move to broadband pay programs, anecdotal reports indicate that many early-adopters are returning to more traditional pay structures.

Clearly it is found that managers in organizations that have implemented broad banding believe they will have greater flexibility in directing the workforce if they can move people more readily in all directions within the organization without the constraints of narrowly defined jobs and restrictive pay grades/ranges.