MHRM 6601 Week 4 Pay Structure Design Example

Eight Grades for Stone Arch Credit Union: Midpoints From the Market Line, Range Spread That Widens With Level, Steady Midpoint Progression and the Cost of Bringing Everyone Inside

Student Name

Walden University

MHRM 6601: Benefits, Compensation, and Resource Allocation

Instructor Name

Month Day, Year

Eight Grades for Stone Arch Credit Union: Midpoints From the Market Line, Range Spread That Widens With Level, Steady Midpoint Progression and the Cost of Bringing Everyone Inside

From Points to Grades

This paper turns the point-factor evaluation and market analysis from earlier weeks into a pay structure that payroll can use at Stone Arch, the cooperative lender whose pay the course has been rebuilding. Jobs were grouped into eight grades by their evaluated points, with grade boundaries drawn where natural gaps appeared in the scores. Grade 1 holds jobs below 350 points, such as teller and contact center representative; grade 8 holds jobs above 880, which at present means the branch manager. Each grade also contains non-benchmark jobs, such as loan processor and senior teller, slotted by their own point scores.

Setting Midpoints

The midpoint of each range was set from a market line: a curve fitted through the aged market medians of the eight benchmark jobs plotted against their points. A straight line overstated pay in the middle grades, where the market rises more slowly, so an exponential curve was used instead; it fit the benchmark data more closely (Milkovich et al., 2020). Midpoints were then smoothed so that each is about 11.5 percent above the one below. Steady progression matters because uneven gaps make some promotions worth far more than others for reasons nobody can explain. The smoothed midpoints stay within 2 percent of the market line in every grade, close enough that no grade is meaningfully above or below the market the board chose to match.

Range Spread

Range spread, the distance from minimum to maximum, is 30 percent in grades 1 to 3, 40 percent in grades 4 to 6 and 50 percent in grades 7 and 8. A teller reaches full competence in months; a mortgage originator or branch manager takes years, and the difference between an average and an excellent performer in those jobs is larger. Wider ranges give room to pay for that difference. Bloom (1999) found that large pay differences among people doing interdependent work can harm performance, which argues against very wide ranges in the branch grades, where tellers and representatives depend on each other.

The Structure

Adjacent ranges overlap, as they should in a structure this compressed: a strong performer in grade 4 can earn more than a new hire in grade 5. That overlap keeps a promotion from requiring an enormous raise and recognizes that experience in a lower job has value.

Table 1

Stone Arch Pay Structure, Effective January 1, 2027

Composite organization. Each minimum is the midpoint over 1 plus half the grade's spread; each maximum is the minimum times 1 plus the spread.

Who Falls Outside

Placing current employees in the new ranges shows fourteen people below their minimums and six above their maximums. The fourteen below are eleven tellers hired in the past two years at starting rates that lagged the market, averaging about $37,700, and three member service representatives averaging about $42,400. Bringing all fourteen to their minimums would cost about $38,000 a year. The six above are four consumer lenders, whose pay rose under a commission plan that ended years ago and now averages about $88,000, and two contact center representatives with long tenure, at about $54,000.

Recommendations for the Outliers

Raise the fourteen to their minimums on January 1. Being paid below the range for one's own job is the most visible kind of unfairness, and the cost is small. The six above their maximums should be red-circled: their pay stays where it is, and any increase comes as a one-time payment rather than an addition to base until the ranges catch up, so their pay is not pushed further outside the structure. Gerhart and Rynes (2003) note that cutting pay produces resentment far out of proportion to the savings, which is why red-circling is the standard approach.

Limits

The structure assumes the market line fitted to eight benchmarks describes all jobs; a job with an unusual market, such as an information security analyst, may need its own range. The ranges should be moved each year by the market movement, and the market analysis repeated every two years.

References

Bloom, M. (1999). The performance effects of pay dispersion on individuals and organizations. Academy of Management Journal, 42(1), 25-40. https://doi.org/10.2307/256872

Gerhart, B., & Rynes, S. L. (2003). Compensation: Theory, evidence, and strategic implications. Sage.

Milkovich, G. T., Newman, J. M., & Gerhart, B. (2020). Compensation (13th ed.). McGraw-Hill Education.