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Scope
Regulatory citations
- None
Key definitions
- Broadbanding: When similar positions are grouped within a band based upon their function. It combines pay grades together to decrease the quantity of job groups.
- Compa-ratios: A ration-based comparison of the salary to the market area.
Summary of requirements
The Fair Labor Standards Act (FLSA) requires employers to:
- Compensate their non-exempt employees at least the minimum wage, and
- Pay them overtime at 1 and 1/2 their regular pay for more than 40 hours of work per week.
However, compensation involves more than just these two rather simple rules. Organizations need to determine their compensation structure and policies. These, of course, should be in line with the organization’s goals.
Compensation includes more than the financial returns that employees receive for the services they provide. Compensation also includes returns such as the required and voluntary benefits, perks, bonuses, incentive pay, and paid leave. Benefits are covered in more depth elsewhere, so the focus here will be on the financial returns—pay structure, systems, and policies.
Some industries have customary pay practices and levels. This may make some pay or salary level evaluations easier. However, organizations still benefit from evaluating their pay structures based on information gathered from external sources (how much employees in local equivalent positions are compensated, for example) and internal sources (such as how competitive the organization wishes to be with their pay or salary levels). Other criteria may come into play as well.
Once this information is determined, jobs can be organized into groups—for example, executive, administrative, technical, professional, staff, line supervisors, and so on, depending upon the industry. These may also depend upon such factors as the size of the organization, the difference between the highest salary level and the lowest salary level, and the organizational structure (are there many supervisors or are there very few?). It may also depend upon the status of the organization. A new company may have more vigorous promotion act than an older and more stable company.
Pay ranges. Once the job groups are identified, the pay ranges can be examined. The minimum places the smallest value on the position, and the maximum is used to control the salary. Organizations may look at what is customary in the area, or perhaps they can use compa-ratios to help determine how actual pay levels compare to those in the market, as long as it is known that the pay ranges are based on the market average. If an employee is paid higher than the midpoint of the pay range, the employee receives a competitive wage in that market.
Broadbanding. Other methods can be used to work out pay levels. One is broadbanding. It was common in highly technical positions. It may also be used when many job groups or pay grades exist. For example, instead of having jobs identified as associate supervisor, technical supervisor, and lead supervisor, each with their own pay range, they are banded together with a pay range for supervisors.
Other things to consider are the systems to be used. How will the base pay be handled? Will there be a single or a flat-rate system? Will employees get raises based upon merit? Will there be raises based upon performance? What about time-based systems?
Again, some positions have customary pay or salary structures. Some organizations increase pay on certain schedules. For example, every year they raise employees’ pay by a certain percent. Sometimes the percent raised may fluctuate based upon performance. For example, an organization may decide to provide all employees a 2.5 percent raise every year. From that level, more can be added for good performance. Just how much more can be added would need to be determined.
Some organizations may have levels of pay to which employees advance, and in some cases employees may skip levels, if their performance warrants such a skip.
An organization may compensate employees on a piece-rate system, meaning they get paid based upon how many units produced (units can be anything from customers serviced, items created, or phone calls made). These employees have a pay structure based on productivity, whereby the employees are paid a base salary and receive extra depending upon how many units they produced during that pay period. Other such pay adjustments may include cost of living raises or increases for seniority.
Some structures are based upon employees’ knowledge or competency. This is common for people such as professors or scientists. As their knowledge or competency increases, so do their salary levels.
Pay ranges help to categorize jobs and control costs, but sometimes an employee may end up being compensated outside the range. If an employee is paid higher than the maximum of a pay range, it is known as a red circle rate, and if an employee is paid lower than the minimum of a pay range, it is known as a green circle rate. Organizations should consider adjusting the salary level of these employees to bring them into the pay range. For example, an employee may have been promoted from an electronic technician to a supervisor. The employee’s pay was below that of the minimum range for supervisors, a green circle rate, so to compensate for the promotion, the employee’s pay should be adjusted to be within the pay range of supervisors.
When the differences in employees’ pay rates within a range do not vary much, it is known as pay compression. There may be someone with seven years’ experience who is paid $15.50/hr working with someone who has only 2 years’ experience who is paid $15.00/hr. This can result from raising starting salaries without adjusting those of current employees. There may be other causes as well. In this situation, pay adjustments should be considered.
Given the variety of jobs that must be compensated, employees in the same job may be compensated differently for many reasons. One employee may work overtime, or work a different shift and receive higher wages because of a shift differential. An employee may receive emergency pay for being called in to work when not scheduled. Some employees may receive hazard pay for performing particularly dangerous tasks, or employees may be compensated just for being ready to be called in to work (on-call).
Other elements that may influence pay rates include geographic area — employees in Chicago, Illinois, may be paid at a higher rate for employees in Beaumont, Texas, simply because the cost of living is higher in Chicago.
Incentive pay. Organizations may also wish to provide financial incentives to their employees. These may be commissions, bonuses, gainsharing, or profit sharing, to name a few. These types of pay should be carefully planned to be in line with the organizational goals. Tax implications and current organizational and market conditions should also be considered.
Recordkeeping. The Department of Labor’s Wage and Hour Division requires employers to:
- Keep records in regard to wages and hours worked.
- Maintain records for employees who are subject to minimum wage or overtime provisions of the FLSA containing the following information:
- Name
- Address
- Date of birth (if under 19)
- Sex and occupation in which employed
- Time and day workweek begins
- Rate of pay
- Hours worked each workday and total each work week
- Total daily or weekly straight time earnings or wages
- Total premium pay for overtime hours
- Total additions or deductions from wages paid
- Total wages paid each pay period
- Date of payment and the pay period covered
- Retain records for for at least three years.