Value Oriented Salary Band Structure Design SAND2017-10005 C Value Oriented Salary Band Structure Design Thor D. Osborn, Sandia National Laboratories September 13th, 2017

Introduction Salary band structures are typically used by organizations to simplify salary structure and create clear delineations between jobs or levels of the same job A fixed-increment geometric progression has been recommended for salary band structure design The geometric progression is typically fit to market estimates without consideration of the population of job-holders at each job and level Main premise: Superior salary band structures may be designed by considering job-level populations and allowing for varying band-to-band midpoint increments Secondary premise: Best choice of loss function for optimizing salary band structure for organizational performance may be an asymmetric intermediary outcome, such as employee turnover

Mathematics of Salary Band Structure Design Term Definitions: Band Assignment (Fixed Increment): Elemental Loss: Constraints: N.B. First active increment is Band Midpoints: or

Range Dispersion vs. Median Salary Range is determined for each Standard Occupation Classification (SOC) code Salaries for jobs in the lower two median annual salary deciles tend to be much less dispersed Dispersion profile supports use of band structure with geometrically smaller steps in the lower ranges

Optimization of Band Structure Parameters Black dots indicate minimum aggregate loss (best fit) by Band Count For a given aggregate loss, fewer bands can be used by choosing appropriate ε Placing structure in an aggregate loss plateau should improve stability when updating Variable-increment design approach yields superior fit relative to fixed-increment.

Fitting Improvement vs. Band Count

Separation Rate Model Development Internal Relative Salary does not have a significant effect on separation probability Negative Rectified Internal Relative Salary – the absolute value of Internal Relative Salary where less than zero – does have a significant effect Aligns with work of Card, et al., “Inequality at work: the effect of peer salaries on job satisfaction” p=0.27

Separation Rate Model Performance

Modeled Separation Rate Contours and Scatterplot

Separation Rate vs. Band Structure Estimated as limiting cases by re-centering salary distributions by SOC on salary band structure midpoints Simulates long-term impact of band structure assuming organizational salaries become normalized to structure Salary band structure design parameters have minimal impact on Separation Rate Difference of 0.07% across the range of structure designs No apparent trend with respect to design parameters

Consideration of Organizational Longevity Turnover increases as proportion of population with very low years of service increases Rates are not substantially impacted by salary band structure design parameters regardless of modeled organizational longevity Organizational longevity impact estimated by pro rata reduction of years of service in actual population. Age of organization assumed equal to maximum years of service of employees.

Sensitivity of Turnover to Salary Sensitivity of retention to blanket percentage increases to all employees. Use of untargeted salary increases as a retention aid is prohibitively expensive.

Concluding Remarks Main premise is satisfied: the variable increment approach yields superior results Secondary premise remains equivocal – employee turnover is relatively immune to band structure design, and impacts of salary on turnover are significant but modest in the aggregate Use of untargeted salary policy to impact turnover is prohibitively expensive for most organizations Firms seeking to improve may be better served by focusing on other antecedents to turnover such as employee-supervisor relationship, advancement opportunities, personal development, etc.