Step Rate Pay Scales


Step it up

In a previous position as an HR director, I was tasked with developing a sustainable pay system for a large hourly workforce within a production-oriented environment—lots off manual labor at multiple positions, many requiring similar experience and skill sets.

In the know

The production department was utilizing a pay for knowledge system where new employees were each assigned to run a specific piece of equipment, all at the same starting rate. As time passed, employees were trained on additional pieces of equipment and, once they became proficient, were given an increase, gaining a dollar per hour for each piece of equipment they mastered. A simple plan but with complications, for example, not every employee received an opportunity to learn all the different pieces of equipment. Also, not every employee had the ability to master the nuances of each workstation as easily as others making the transition between workstations cumbersome.

Alleviating the bottlenecks became a priority and, out of necessity, a solution was born that, unfortunately, brought its own set of issues. Faster learners were allowed access to more equipment in a shorter time frame—a bit like speedier golfers being allowed to “play through.” As a result, employees hired on the same day for the same pay would progress through the program at different rates with some garnering pay increases at a much faster pace. Cue the employee relation issues.

A step in the right direction

The parent company, also an organization with a large hourly workforce, had a step rate scale already in place and, being familiar with it, I thought converting to such a plan would go a long way towards eliminating employee relation issues and make it easier for the production area supervisors to manage pay increases.

I liked the idea of a step rate scale but was concerned whether it would really alleviate employee concerns. One of the complaints production employees had was that the opportunity to master multiple pieces of equipment was based more on how much supervisors “liked” them than how fast or well they learned to run the equipment. With that in mind, I developed a step rate scale with a variable element that, though it allowed for some management subjectivity, helped level the playing field for the hourly production workers.

The hourly job grade scale addressed longevity as well as merit and COLA, included 10 job grades, and spanned 10 steps. Because it required the entry of only a few numbers, it was easy to update annually, maintaining market competitiveness.

That was then, this is now

Hourly_Job_Grade_ScaleTo make the hourly job grade scale useful to multiple employers, I’ve tweaked it to encompass 15 job grades with three levels each, spanning 15 years (steps). Above is an image of part of the scale showing the data entry panel and part of the first job grade. You can view the scale in its entirety at Compensation.BLR.com.

Initially, the user determines the base rate for the scale. It can be the federal or state minimum wage or it can be the lowest rate an organization pays for its lowest position. Next, the user assigns a grade level differentiation, usually 1-3 percentage points. Adding COLA to the mix further increases the grade differential. The user also defines the longevity and merit increase rates. Last, but certainly not least, positions are assigned to grades within the structure.

Step rate best practices

World at Work (WAW) explains a step rate scale as either automatic or variable, with an automatic step rate having 5-7 steps that are a few percentage points apart, including a specific time schedule, and being updated to maintain market competitiveness. A variable step rate has many of the same elements but provides a way to reward employee performance and/or skill acquisition by achieving multiple steps within a varying time frame.

Automatic step rates are best used for routine jobs with limited performance variability and where performance is not usually measured. They can work well for organizations with a desire to reward longevity, such as in the public sector or where collective bargaining agreements apply. Variable step rates are best used where a step rate is appropriate (in repetitive jobs) but where performance-based differences are applicable and can be measured.

Disadvantages to an automatic step rate scale include the inability to acknowledge progress in skill attainment (pay for knowledge) and differences in individual performance. The disadvantages for a variable step rate scale include few increase amount or timing options and justified performance assessments by supervisors.

Utilizing a step rate scale isn’t in the best interest of every employer but it can be a solution if you find yourself trying to manage pay practices for an organization with a large hourly workforce.

It’s important to remember that the selection of a pay plan affects the future of the organization so requires strategic thinking—considering the bigger picture. What do you want the step pay plan to accomplish? Is it needed to resolve a problem? Is it needed to corral labor cost? How will it impact the culture of your organization?

In general, a structured pay system is designed to reward employees for seniority or longevity in a position, constructive behavior, their knowledge and skill, competent performance of their duties, and/or profitable results. The challenge for compensation managers is to develop a pay plan that effectively rewards employee knowledge and behavior in support of the organization’s short-term objectives and long-term goals as well as its culture.

It’s important to get management buy-in for any new compensation plan. Giving careful consideration to how the plan may impact overall organizational strategy helps make sure management team members will embrace and support your objectives for the plan. So, take time on the front end of the plan design process to engage them in conversation about their departmental goals and objectives. A well thought out pay plan should make their jobs easier and not become a burden to management or a hindrance to employee performance.

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