Dear Workforce How Should We Rein in Runaway Salaries

Dear Cost-conscious:

You’re on the right track in suggesting some movement of the salary “grades”–or ranges, as they’re sometimes called–will be necessary. Without moving salary grades, salary increases over time (even using your 2 percent to 3 percent across-the-board figure) will eventually push salaries toward the top of each grade. The key question, as you suggest, is this: How much do we move the grades to avoid this situation?

Raising the grades each year by one-half the amount of the across-the-board increase amount is not unreasonable as a general rule of thumb. I would, however, recommend an approach tied more closely to what is happening in the marketplace.

Over the last several years, salary increases have been averaging 3 percent to 4 percent on an annual basis, while salary grades have been increasing 2 percent to 3 percent a year. In other words, salary-grade movement has been about 70 percent that of the actual salary increases. These figures were secured through a review of several sources, including reports from World at Work, Hewitt Associates, Mercer HR Consulting, the Conference Board and the Economic Research Institute.

If you apply this marketplace statistic to your organization and you continue to award salary increases of 2 percent to 3 percent each year, then your salary grades should move up correspondingly, about 1.4 percent to 2.1 percent. This is not that much higher than your suggested increase, yet tying your approach to recent marketplace patterns provides you with a better rationale should you get questions from employees or management.

You should note that your annual salary increases are low relative to marketplace trends. Over time, this may begin to affect how competitive your salaries remain. Keep using published surveys to review this information on a regular basis. If you are not doing so already, try to get data specifically for nonprofit organizations, since this data will provide the best comparison to your organization.

SOURCE: John White, president, JD White & Associates, McLean, Virginia, April 28, 2005

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