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Need a Change Jump on the Banding Wagon

Not just the latest buzzword or a trendy compensation strategy, banding can speed up a company's reaction time, encourage employees' sense of teamwork and allow experimentation in pay. Yet it is not right for all companies, nor is it a quick-fix solution.

January 1, 1994
Related Topics: Compensation Design and Communication
To keep up in the fast-paced blur of business today, companies all over America are shedding unnecessary bureaucratic layers to emerge lean, mean and ready to pounce on any good opportunity that comes their way. Yet the first time they need to react lightening-quick, they find themselves shackled by the same sluggish hierarchical attitudes and policies that were holding them back in the first place.

Companies may ritually drop words such as teamwork, empowerment and job flexibility, but if they don't embody these concepts in the form of new strategies, they are left with a work force that reflects none of these things. Employees are too busy reaching for the next rung of the corporate ladder to lend a hand to their peers. Managers cling to tokens of control such as salary-range points and job boundaries. And the companies remain entrenched in the same rut of paperwork, procedure and politics.

To solve these problems, organizational developers increasingly turn to banding—a system that replaces traditional, narrowly defined positions with broader categories, or bands, of related jobs. Gone are the frequent, small promotions, each position isolated from the next by a new title and range of control, a few extra perks and a modest pay boost. Employees in a banded pay system can stretch their understanding and abilities within a relatively wide range of positions. From time to time, they pick up added responsibilities and win increased compensation. With their focus no longer tilted to the top of the company hierarchy, employees can see their peers as equals rather than competitors and their work as a series of challenges rather than roadblocks to be overcome on the way up.

In addition, banding allows managers the opportunity to focus on new forms of compensation, abandoning the "system says" mentality of salary control points and job grading for more people-based systems, such as skill-based pay. The broader job categories give even large companies the flexibility to reassign their human resources when they need to be reassigned, not when the paperwork is complete. Corporate restructurings are less disruptive to employees, and easier for the personnel department to process, now relieved of the burden of rewriting and evaluating hundreds of jobs.

But banding is not a quick-fix to be plugged in without careful consideration, and it is not right for all companies. Managers must be trained to deal with banding's broader salary ranges and fewer control points. Workers may resist the change as just another HR experiment or a management scheme to take away their security blankets. And morale may suffer as employees at all levels struggle to adjust to the absence of frequent, if small, symbols of their increased value.

Nonetheless, many well-known companies—Northern Telecom, General Electric, Data General, Aetna, Duke Power, Chrysler, Pennzoil and Harley Davidson, to name a few—have adopted banding. And others have dabbled in banding, long before the idea became prevalent. "We banded well before banding," recalls one HR executive. "We just didn't label it."

Banding helps an organization initiate and respond to internal changes more quickly.
One of businesses' major interests today is to flatten the organization. Along with this change must come a new job-grading structure. Traditional grading systems were designed to support a vertical, hierarchical organizational order. But if the layers disappear—as they are at many organizations today—then traditional (micro) grades lose their utility. In fact, retaining more management grades than there are levels could confound the organization's efforts to keep the extra layers from reappearing. A grade that has been vacated as a result of delayering is like a front-row parking space at a crowded mall: It won't be long before somebody parks there.

If your leadership team is serious about reducing the number of management levels, then banding is a possible solution. As a form of organizational change and not simply a new compensation system, banding is particularly attractive to evolving organizations. After tripling its sales volume in seven years, Marysville, Ohio-based The Scotts Company, a lawn and garden products supplier, began to break down its hierarchy to ensure that its divisions remained highly responsive to customer needs. "To facilitate our flattened organization," says Bob Stern, Scotts' vice president of HR, "we needed a job structure that was consistent with our broad organizational structure. Banding was a good marriage."

Senior management at Norand, a Cedar Rapids, Iowa-based maker of portable, computerized data management systems, saw things very much the same way. Tremendous growth led to tremendous change in the way that Norand's employees performed their jobs. Less hierarchical than ever before, Norand needed to become "incredibly nimble," says Michael Wakefield, the company's director of HR. But Norand's old job-grade pay system was, in Wakefield's words, "incompatible for our new environment." A banding program, combined with competency-based pay, proved to be the best option, and the company is currently in the midst of implementation.

By doing away with the job grading system, banding also can allow a company to respond more quickly to internal changes. As organizations flatten in response to a more competitive marketplace, frequent organizational changes— affecting people, structures, reporting relationships, and entities—occur. During a restructuring, roles and responsibilities are shuffled, and job holders often end up in essentially new jobs. The inevitable question then becomes, "Is the new job bigger or smaller than the old one?" The HR department is accountable for resizing jobs, and even moderate changes in duties can yield a change in grade within a traditional structure's narrow lines of demarcation. Unfortunately, after downsizing and retrenchment, jobs often get smaller, warranting a reduction in grade level. But that rarely happens, since leaders are unlikely to call for demotions in the downsizing postmortem. By the same token, grade increases as a consequence of restructuring are equally uncommon, even when individuals land bigger jobs as part of a mandated work system redesign.

Banding permits moderate changes in job boundaries without as many job recalculations. Like traffic in a six-lane highway instead of a two-lane road, bands hold a greater number and variety of jobs. By keeping levels essentially stable even as job size and scope are expanded or contracted, banding actually facilitates organizational change by allowing a company to respond more quickly to competitive pressures.

There is, of course, the risk that employees will see banding as just another HR initiative. And for employees already bombarded with change, there's a real danger there. Says Scotts' Stern, "A concern we had as we moved into banding was the ability of our people to absorb a new way of looking at things." So Scotts is doing what many other companies are doing: It has gone ahead with its plan to implement banding, ensuring that key steps along the way are carefully communicated to all employees.

"Banding permits changes in job boundaries without as many job recalculations. It allows a company to respond more quickly to competitive pressures."

For example, it is important that employees understand exactly what banding involves and what the key organizational and business strategies are behind it. Employees whose jobs will be combined in the same band must know whether their salary levels will be impacted by the new system; specifically, if salaries above the new range maximum will be reduced to fit into the new salary range. Employees will also have questions about the changes in their jobs. Explain whether their positions will be reevaluated before being slotted into a band, or mapped using a conversion table.

Once banding is implemented, it can help speed up the job grading and evaluation function. Job analysis, job description, job evaluation, and related communication constitute a resource-intensive process. This process all too often fosters dysfunctional behaviors because managers and employees see it as little more than an organizational game—one in which HR plays the detective role in screening job descriptions to weed out the "puffed-up" claims that embellish real job duties and responsibilities.

Because there is a fine distinction between levels and job boundaries, managers, employees, and even HR professionals use guesswork and intuition to arrive at evaluation-point totals and corresponding grade levels. The sheer volume of reevaluation requests, imperfect information, and micro grades challenge even the most skilled and diligent analyst.

Most current job evaluation systems support a vertical structure with numerous grade levels. To maintain equitable internal grading relationships with so many choices, most companies use a combination of point-factor evaluation and market pricing.

Banding provides a unique alternative. Point-factor systems can be abandoned in favor of a simpler, easier-to-maintain system. Since there are far fewer decisions to make in a banded structure, leveling decisions are more obvious and straightforward. But since not all controversy and uncertainty is eliminated, we advocate the use of some defensible, objective, and consistent technique. For example, a classification and market-pricing approach is sufficient for predicting band level. In some environments, whole-job slotting will suffice.

Also remember, when it comes to pay legislation, the most relevant comparisons are still within a work group, not between functions or distant locations. Allowing managers to own a part of the job evaluation decision can actually increase the scrutiny on internal equity, especially if they are held accountable for decisions.

Banding encourages a team-oriented, versatile work force.
Traditional structures lend themselves to stratification, as people in higher grades can perceive themselves to be "more important" to the organization than those in lower grades. Such attitudes are unproductive and can become particularly problematic when formal and informal interactions become limited to people at the same tier and prevent effective information sharing, cooperation, and collaboration.

Instead of teamwork, an overly vertical structure causes competition, as employees race to climb to the top of the hierarchy. Not everyone can get there, so there must be winners and losers. For the winners, grades represent visible levels of achievement, titles of distinction, and a financial panacea; for the losers, they are demotivating labels.

But grades are not the only culprits. Other HR support systems-performance appraisal ratings, job posting/bidding procedures, and merit pay-drive similar behavior. Divisions and competition are reinforced informally as well. For example, it may be unusual for members of your organization to have lunch with others who are more than one grade below them. Similarly, if meetings are most often held within level, chances are your employees may find themselves unable to work together effectively. One of the key advantages of banding is that it creates a less level-conscious work force. While power, authority, and hierarchy will never disappear, the focus is more on similarities than differences in a flatter structure.

Through banding, companies have found that they can address the barriers to communication and teamwork. At Nashville, Tennessee-based Northern Telecom, banding was implemented first for non-exempt, self-directed work teams whose members were expected to work together to produce high-quality products. Because team members rotated their work, everyone needed to be able to perform each other's work interchangeably. Yet, before banding, team members occupied four different grades and titles. As part of the banding process, the four grades and titles were combined into one band and one generic title. The end result was team members who viewed one another as equals, a perception that better fit the reality of their work life.

A team-oriented mindset can lead to a flexible work force that is better suited to a complex, fast changing, and competitive business environment that demands that employees perform and lead like never before. Banding is a necessary factor in making this change: the diversity of experiences and broad business and market perspective required of today's leaders cannot be obtained by progressing up the "functional chimney or silo"—the narrow occupational job ladders that produce specialists. Banding dismantles the functional chimney, enabling workers to learn and earn more for taking non-traditional career turns, such as lateral development moves.

While specialists are rewarded for learning a little more about something they already know a lot about, lateral development job changes produce a breadth of knowledge and practical understanding, resulting in better prepared and informed human resources. Unfortunately, though, the career patterns within most organizations today are essentially one-dimensional: up the job function ladder and into management.

In contrast, in-level, or lateral, job moves can result in changes in function, role, business unit or internal organization unit. Banding breaks down the barriers to lateral movement and de-emphasizes vertical promotions, as there are fewer opportunities for vertical elevation and greater opportunities for horizontal movement. However, while there are fewer band-to-band promotions, those who do go up are more likely to be ready to take on increased responsibility, thanks to the breadth of knowledge and experience gained by horizontal job changes.

If leadership team members lack a broad business or organizational perspective, banding could prove instrumental in filling the development gap. It reduces obstacles to lateral moves, causing employees to transfer existing knowledge and acquire fresh experience. And the fact that banding often goes hand-in-hand with competency-based pay programs creates a manageable change strategy.

Banding provides a new approach to compensation.
In the absence of a banded pay system, narrow salary ranges and midpoint controls have been used to support the steep grading structure. In such systems, it is understandable why employees are rapidly promoted, as even high-performance employees typically receive reduced pay increases after they hit the midpoint (or middle) of their salary range. An increase in grade results in a lower range position and qualifies the employee for higher potential merit pay treatment. Too often, salary range control points, including minimums, midpoints, and maximums, yield an overly mechanical pay function. Instead of using judgment and exercising flexibility, many managers and HR professionals use these control points like a street light-low in range means "go" (green); middle of the range means "yield" (yellow); and high in the range means slow and stop (red). While traffic tickets are unusual, managers are strongly discouraged from deviating from these signals. Since organizational conformity is the tendency, most managers are only too anxious to follow the rules.

With salary ranges that are as much as twice the width of traditional ranges and generally without midpoints, banding broadens salary ranges and reduces the control-point myopia. Instead, more flexibility exists in a banded range to reward the right behaviors and achievements, making it more difficult to use the system to explain a manager's salary decision. Admittedly, pay treatment flexibility and increased managerial discretion increase the likelihood of internal pay differences. But if these differences are justified based on individual contributions or skills, pay equity can be preserved.

"Banding broadens salary ranges and reduces the control point myopia. More flexibility exists in a banded range to reward the right behaviors and achievements."

Some practitioners worry about a loss of control in banding, that managers will push the elevator button and take every employee to the top of the structure without regard to budget requirements. No need to worry. The same budgeting tools used with traditional systems—such as salary planning, forced performance distributions, and position-in-range control— can be employed to avoid overspending. At Northern Telecom, payroll increase budgets were underspent by approximately $2 million during the first year of banding (1991), even though the company insisted that the change would be payroll neutral. In this case, the surplus was explained by two factors that might easily be experienced by other firms: Managers stayed within their salary increase budgets, since fewer dollars were spent on promotions; and the dollars reallocated from the promotion to lateral pay budgets were way underspent. At Northern Telecom and other companies, employees need more than a financial reward to take an in-band job change, partly because that type of move is still counter-cultural.

Because banding indeed requires a change in employees' mindset, it may be necessary for HR to modify some current policies and attitudes to ensure the acceptance of the program. One such change is the deemphasis of upward promotions, with the focus switching to emphasize lateral moves. Specifically, there must be equal opportunity for pay increases regardless of an employee's upward or lateral movement. Celebrate lateral moves as the company would promotions, including general announcement letters or postings.

Another important factor in encouraging a work force to make lateral job moves is to eliminate all barriers to job posting at the same level. Employees should be aware of all opportunities, not just those above them. In addition, provide a safe harbor policy, a promise that if an employee's lateral move outside his or her area of expertise does not work out, he or she has the choice to return to the former position.

As for the less-rigid compensation system, there is good reason for line managers to avoid abusing the wider salary ranges. "Most managers know what is the right thing to do," says Mike Umphres, senior advisor for compensation at Northern Telecom. "Did managers take their employees to the top of the narrower salary [grade] ranges? No, so why would you be concerned about unjustifiably increasing employee salary levels in a banding structure? Besides, managers have departmental expense budgets that they must stay within."

Another technique that can help control potential abuse of salary ranges is the use of merit cash, or lump-sum payments in lieu of base salary increases. Merit cash is often used in conjunction with a position-in-range policy; that is, employees are awarded merit cash if performance warrants and they are high in the salary range.

Finally, it is up to managers to make the best decision for the individual. "I don't think overspending would happen at any corporation if a reasonable job has been done to train managers on the fundamentals," Umphres says.

"Organizations that wonder whether competency-based pay is necessary in order to gain greater flexibility and productivity might start with banding."

Because banding gives more flexibility in pay strategies, it also allows room for experimentation in compensation. For example, at Scotts, management is constantly looking for ways to manage compensation. Says Bob Stern, "Banding provides us with an opportunity to develop a more effective compensation structure and still allow for the personal growth and development of our people."

One possible compensation strategy that organizations may take a look at is competency-based pay. This system permits employees to progress through a broad set of defined skill blocks as they demonstrate their increased proficiency. No specific job is defined, but rather the boundaries generally encompass an entire work process or occupational stream.

Any change to this type of compensation requires a new structure for delivering pay. Narrow salary ranges and specific jobs and levels based on duties and responsibilities do not align with a focus on individual abilities. In a job-based pay system, job holders wait for promotional opportunities to open up. Contrast that with a person-based pay system, in which workers flow through continuous units of skill based on the ability to learn and demonstrate work-related skill, knowledge, and competencies, with eligibility for requisite training regulating the flow of employees.

Employees moving through the skill blocks receive pay increases but, generally, no title changes. The majority of person-based designs stimulate a breadth of skills and are introduced in high-involvement, high-performance work systems with more egalitarian cultures.

Banding is well aligned with this alternative reward system, as it provides broad salary range spreads but no midpoints, spans more than one traditional job level or classification, and requires more generic titles. Pay plan designers, in effect, must band in developing person-based structures.

Organizations that wonder whether competency-based pay is necessary to gain greater flexibility and productivity might start with banding. In certain environments, especially with low- to semi-skilled occupations, widening job boundaries as a part of banding might be sufficient for motivating employees to take on new skills and lateral assignments. In other situations, skill-based and lateral pay might be required. In either case, banding can be the first phase of a more comprehensive strategy, appending skill-based pay in a later phase, as needed.

Look before you leap.
As with any other new management framework, banding represents significant organizational change—and organizational change often produces concerns. At Scotts, the concerns were fundamental. Says Stern, "People are always apprehensive about changes in what they view as near and dear to them. Like their compensation."

"Banding certainly represents a paradigm shift," adds Norand's Wakefield. "With our banding and competency-based pay programs, we're saying to employees: 'We're no longer paying you for what your job is and what it's worth, but rather what you know and what you can do with that knowledge.' "

This atmosphere makes effective implementation and communication two keys to banding's success. Effective implementation involves adoption of a systemic approach to this organizational change. Attention must go beyond the mechanical implications on compensation. So many policies and programs are attached to grades and titles that other HR functions, such as training and development, communications and HRIS must change, along with the non-HR functions, such as legal and key line functions.

In addition, avoid making incremental changes in the overall design. When reinventing an entire work system, one quantum change provides a smoother transition than a series of jerky, stop-and-go policy redirections. Also, allowing line managers to present banding to their work groups drives home the idea that this it not just another HR experiment. However, HR should remain available to ensure that communications materials and terminologies are understood.

It's important to explain why the change is being implemented. The majority of companies that have converted to banding did so not to fix a compensation problem, but to improve overall organization effectiveness. In the process, they realized that the pay structures needed to be modified to reinforce the desired behaviors and results. This requires employees to understand the big picture—why their organization is expected to perform better because of the change.

In Wakefield's view, the propriety of banding comes down to a "fundamental equation." Says Wakefield, "From the business side, we spend tens of millions of dollars a year in cash compensation. Like any other investment, there's an internal rate of return that we must achieve on our compensation investment. And we feel that banding and competency-based pay can help us achieve that rate of return."

If your organization is like so many others, it's searching for ways to improve. As a Scotts Company plant manager put it, "People who perform narrow, specialized jobs find it much harder to imagine change." Little wonder that banding, while no panacea, is a proven means of aligning with new, and increasingly common, organizational change imperatives.

Personnel Journal, January 1994, Vol.73, No. 1, pp. 72-78.

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