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What is a pay range, and why are they important?

| Feb 14, 2022 4:27:00 PM | By

In today’s dynamic labor market, employees are redefining what it means to thrive professionally – including when, where, and how they work.

 

Employees seek better pay, remote or flexible work arrangements, and demand an end to black box compensation practices that perpetuate pay inequities, especially for women and minorities. 


To demonstrate their dissatisfaction, workers are quitting in astounding numbers – a record 4.5 million Americans quit their jobs in November 2021. Meanwhile, 65% of employees are seeking new jobs.   

 

How can your company meet these shifts, support employees, stay competitive, and comply with increasing pay transparency legislation? Pay ranges.

 

Pay ranges provide a framework for compensation and support a well-rounded compensation intelligence practice. 

 

In this article you’ll learn what is a pay range, why your fast-growing company needs them, and the risks of comp without ranges.

 

What is a pay range?

Pay ranges (aka salary bands) set the salary boundaries for a role or group of roles — with a low, midpoint, and high amount. The midpoint is the anchor to your compensation philosophy, the formal document that explains how you’ll pay and reward your employees. For instance, if you intend to pay at the 75th percentile, the midpoint will reflect this.

 

A role can have several levels of progression (such as engineer, senior engineer, and lead engineer) with a pay range for each level. 

 

Pay ranges are based on market data, a company’s market positioning, and its compensation philosophy.

 

Below is an example of one way to structure a pay range for a group of roles. In the left-hand column, “IC” numbers are ranges for individual contributors, while “M” numbers are ranges for managers. This example shows how pay ranges clarify how a person’s compensation changes as they progress through the different levels of their role. 

Pay Ranges Examples

Why Pay Ranges Matter

Companies who focus on a specific pay target, or percentile of the market,  may think of pay ranges as old-fashioned. The opposite is true. With pay ranges, employers can confidently:

    • Standardize compensation to create pay equity. Instead of basing pay on variables like the candidate’s previous salary or what the candidate requests, pay ranges create a framework for pay.
    • Create equity among roles that are valued similarly in an organization but are treated differently in the market.
    • Become transparent about compensation without divulging individual salaries or personal information.
    • Clearly communicate career progression to job candidates and current employees.
    • Simplify administration, eliminate guesswork, and make quick pay-related decisions.
    • Makes sense of market data so you’re not acting on anomalies or raw market data jumps that don’t make sense when you look at a group or family of jobs.

Risks And Consequences Of A Comp Program Without Pay Ranges

A compensation program without pay ranges – or with poorly constructed pay ranges – puts an organization at risk for more than administrative headaches. 

 

Risks:

  • Inconsistent offers and pay 
  • Compensation that isn’t competitive
  • Over-dilution and excessive cash burn
  • No framework for quick, fair, and scalable hiring and promotion decisions

Consequences:

  • Declined offers
  • Employee churn 
  • Dissatisfied board
  • Poor reputation 
  • Negative media coverage

Pay Ranges Help Build A Culture of Trust 

Nothing is more crucial to a healthy employment relationship than how an employer compensates its employees. It’s not just about the value of the package; it’s about trusting that an employer compensates fairly. 

 

Pay ranges can help end compensation confusion by demonstrating that pay isn’t random, but is part of an employer’s compensation strategy. By creating clarity around compensation, pay ranges help employers and employees alike make better pay-related decisions. 

 

Want a deeper dive into pay ranges? Download our e-book, “Pay Ranges: A Quick-Start Guide For High-Growth Companies.

 

Attract and retain rockstar employees with pay ranges

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Carrie Tassin is Director of Compensation at OpenComp and has served at Kadiant, Stitch Fix, and Udemy in similar roles. She writes about pay ranges and compensating a remote team. Connect with her on LinkedIn here.