Wage bands

Dos & don'ts

Employees strongly contribute to create the value and success of a company. Therefore, every success-oriented company should strive for a fair and equitable wage system, which serves as the basis to motivate and retain all employees in line with the central corporate goals.

As compensation and benefits experts, the consultants of klingler consultants have daily insight into compensation systems of many companies and organisations. This shows that pay discrimination which can be explained exclusively on the basis of gender ist rather rare. In practice, pay discrimination tends to rather be due a remuneration system in which age or seniority are an important driver for remuneration.

The following practices are still often observed although they are not recommendable:

Seniority-based remuneration system
Due to rapid technological change and the associated shorter usability of knowledge, a seniority-based approach seems increasingly questionable in today’s world. Moreover, on closer inspection it bears numerous risks: By linking the age or length of service to remuneration, there is a risk of discrimination against younger employees. Discrimination against women is then almost inevitably also a consequence: the latter are still confronted much more frequently than men with longer career interruptions (e.g. due to absences during childcare), or they only work part-time after pregnancy. For women, this means that, compared to their male colleagues, they often do not receive the pay they would be entitled to according to their skills and competences until years later.

Complex, unclear remuneration system
In addition to too large margins of discretion for managers when hiring and a lack of principles in wage setting, a remuneration system that is not transparent and therefore allows arbitrary or even abusive decisions is another major factor for wage injustice.

Rigid automatisms in wage development
A complex remuneration system with rigid automatisms based on age, hierarchical level or length of service with the company can hold a lot of potential for conflict with regard to fair remuneration

Lack of a functional landscape
As long as companies do not have a functional landscape tailored to their organisation and the economic sector with which individual functions are defined, including terminology, clear job titles for the individual positions and the necessary function titles, the function profiles for all functions, which describe target requirements, main tasks, reporting guidelines and competences in detail, it is hardly possible to speak of wage justice.

Principles of modern remunerations systems
The functional structure as an elementary basis

For successful personnel management it is important to have a clear understanding of the relevant functions of the respective company. For this purpose, a functional evaluation is usually carried out. As a standardised set of rules, a function evaluation creates comparability between functions and organisational units according to a uniform, comprehensible standard. This creates a common basis for various personnel policy decisions.

Particularly, but not exclusively, in family businesses, the challenge with regard to function structure is that this has grown historically and that individual functions are strongly based on the personal abilities of the respective job holders. With regard to remuneration, however, it is essential to achieve comparability across the organisation and to critically question established structures.

This is the only way to create transparency in tasks and qualifications and a comparison with the requirements of the respective function by means of a stringent function structure. As a management instrument, a clear functional landscape forms the prerequisite groundwork for factbased discussions and sustainable decisions on remuneration issues.

Functional wage bands for internal fairness
On the basis of the functional landscape developed in the course of the function evaluation, the requirements and competencies needed for each function are clearly defined.

Employees can now be assigned to the functions, which are clearly differentiated in terms of tasks, responsibilities, technical and professional knowledge and experience relevant to the job (= so-called target profile). A specific salary range with a minimum and maximum can then be worked out for each function or function family, taking into account the current remuneration situation of the employees as well as external market conditions.

Once the salary bands have been defined, the skills and competencies of the respective employee (regardless of gender and age) are compared with the target profile of the function. This enables a systematic assessment of the employee’s degree of fulfilment (competence match). Based on the employee’s degree of fulfilment, a comprehensible and fair positioning in the salary band can now be made all while not forgetting to proceed to carry out internal market comparisons (peer comparisons).

In summary, functional wage bands offer the following advantages:

  1. They protect new, ignorant employees with too low pay demands, guarantee a certain consistency per function and define clear upper limits.
  2. In the medium and long term, they ensure internal wage fairness.
  3. This prevents possible employee dissatisfaction – which can occur when major differences within a function or between comparable functions become apparent – and also helps to prevent the risk of a loss of job satisfaction. Functional pay bands thus also serve to minimise risks for the company.
  4. Functions critical to success can be identified and the competencies relevant to the company can be developed in a targeted manner.
  5. Employees can be shown comprehensible development perspectives within the company organisation. In this way, they are bound to the company in the long term.
  6. Finally, by setting salary bands that stand up to internal and external comparison and allow salary development based on the degree of competence fulfilment, the available resources can be used as needed and internal (remuneration) fairness can be promoted in the long term.

Author: Urs Klingler