This article is Part 1 in a four-part series to help HR leaders prepare for pay transparency, whether legislation is active, pending, or simply on its way. To get all our tips in one place, download the full guide here, which we created with our partner, Charter.
The era of pay transparency is here. Are you ready?
On November 1, New York City will require salary information in all job postings, with California and Washington following on January 1. They join a growing list of states and localities that already have pay transparency laws in place, including Colorado, Jersey City, New Jersey, and Ithaca, New York. (Several others have less comprehensive salary-transparency requirements on the books.)
Why pay transparency matters for employers
Women continue to be paid $0.82 for every $1 earned by men. And data collected in 2021 as a result of previous pay transparency legislation reveals that women, Latino, and Black workers were overrepresented in the lowest pay bands.
Pay transparency is about closing the pay gap between genders and races, which has been wedged open for decades by secrecy and an imbalance of information. These laws are about ending pay based on biases, salary history, or a random number an employee throws out when pressed.
How will your company meet this moment?
About this pay transparency series – preparation for employers
Whether your aim is to comply with the law, or to meet employee and societal demands, you’ll find best practices to help set your company up for success.
Even if you’ve already completed some of these steps, it’s worth the effort to take a look at your processes through the lens of pay equity.
This series is broken down into four phases which build on each other, so we recommend going through the articles in order.
- Part 1: What does compensation look like at your organization?
- Part 2: How do you communicate your compensation philosophy to employees?
- Part 3: How do you talk about compensation throughout the recruiting process?
- Part 4: How do you sustain an equitable approach to compensation?
Prefer to see our tips all in one place? Download the full guide here, which we created with our partner, Charter.
This article, Part 1, breaks down the fundamentals to help you make sure your compensation strategy sets up a strong foundation for fair and equitable pay. Here are five steps for a data-driven approach.
Step 1: Conduct salary benchmarking
Compensation benchmarking is the process of comparing your roles to external salary data to learn what your peers are paying and where your company stands. For accurate benchmarks, reliable data is key.
(Benchmarking works best if you have a leveling framework in place. To learn how to create one, see the guide at the end of this section.)
How to identify good compensation data
Make sure your salary data set checks all of the following boxes:Is less than six months old. As 2022 proved, the market can change quickly. Old data can make you uncompetitive and puts you at risk of overpaying or underpaying.
Provided by employers, not employees. Employee-provided data—the kind typically found on free salary websites—is often inaccurate or inflated.
Verified by a third party. An added layer of verification ensures you’re working with clean and correct data.
Relevant to your company’s size, stage, and industry. Compare yourself to your peers. If you’re a growth-stage company, don’t use data that forces you to compare yourself to Google.
Compares jobs by responsibility, not by title. Even among similar job titles, responsibilities and competencies can vary depending on a company’s size and maturity.
Common mistakes and misconceptions
Are you inadvertently perpetuating pay inequities? Avoid:
- Asking your board and/or peers for advice.
- Basing compensation on an employee’s previous salary (not least because many states have laws on the books barring employers from asking for this information) or asking candidates for salary expectations.
- Googling numbers.
- Throwing out your highest number to compete with large public companies (unless you are one).
Step 2: Develop a compensation philosophy
A compensation philosophy is a concrete statement about how your company will pay and reward its employees. Here’s an example of a compensation philosophy statement:
“We pay all employees in the 50th percentile of the market relative to San Francisco, regardless of their location.”
4 areas that define your compensation philosophy
- Market position: Decide how you’ll target the market and at what percentiles you'll pay for different roles, to balance attracting top talent and managing your finances.
- Pay mix: How will you pay in terms of cash, equity, and variable incentives like bonuses and commissions? Will you give employees an annual raise based on cost of living adjustments or will you increase pay based on performance (or both)?
- Segmentation: Will you have a single pay strategy for your entire company, or will it vary by group (such as department or role)?
- Geographic strategy: Decide how you’ll pay employees in different locations. Also have a plan for how you’ll pay employees who move to another region, state, or country.
4 compensation philosophy best practices
- Be clear and consistent. Your compensation philosophy should help you answer a variety of questions throughout an employee’s life cycle. For instance, if any employee wants to move to another region or state, how will it affect their pay?
- Lead with data, not feelings. Compensation can be emotional because it’s tied to the health and quality of life of your employees and their families. Take a step back when you find yourself making decisions based on emotions. Gather data to ground them.
- Beware of exceptions. Anything related to compensation should apply to 80-90% of your organization.
- Reevaluate when necessary. When there’s a major change or milestone in your organization, review your compensation philosophy to see if it’s still relevant.
Step 3: Review or create salary bands
Salary bands, also known as pay ranges, define the minimum, midpoint, and maximum that someone can make for a particular job, including total cash, equity, and bonus.
When based on accurate, relevant compensation data, salary bands can help companies eliminate wage inequality and discrimination. Sharing bands in job posts ensures that employers and employees alike have the same information, leveling power imbalances and eliminating pay secrecy.
Salary bands aren’t a sliding scale
Lots of organizations that claim to have bands have simply selected the amount that they want to pay for a job and built a range around it. Unless salary bands function as containers that aggregate like-for-like jobs, they are inaccurate, perpetuating the very pay inconsistency they’re designed to solve.
5 steps to create salary bands the right way
- Complete market analysis and benchmarking.
- Set your pay targets and market positioning.
- Understand the costs and impact of your strategy.
- Create a compensation philosophy.
- Build salary bands for every role’s job level. (This requires a leveling framework. See sidebar at the end of this section.)
When to reevaluate your salary bands
Like most things compensation-related, pay ranges must be reviewed periodically to make sure they’re still relevant. In general:
- Check data for your hot jobs every six months.
- Redo your ranges every year.
- Age your pay ranges every other year by increasing the midpoint of all ranges by the same
- Review your roles and update as needed based on internal trends. An increase in offers at the top of a range, for example, may be an indication that you need to age your ranges sooner than planned.
- Revisit ranges during big company milestones like raising new rounds.
Step 4: Decide on your processes for promotions, merit increases, and bonuses
How will you promote and reward employees in a fair, consistent and equitable way?
Best practice #1: Create consistent guidelines and criteria.
When it comes to performance ratings and salary increases, clearly define the following:
- What determines eligibility for a salary increase?
- For merit increases or bonuses, what performance ratings are eligible?
- How will you determine the increase or bonus amount?
Best practice #2: Set a schedule for key processes that affect salary increases and bonuses.
Plan to conduct pay audits quarterly, to adjust salary bands once a year, and to offer merit increases—typically tied to performance-review cycles—up to twice a year.
How to create a job-leveling framework
Before you can create salary bands, you’ll need a job-leveling framework, otherwise known as career ladders. Job levels define the seniority, expectations, and responsibilities for a specific role. For example, engineer, senior engineer, and lead engineer are jobs within the same function that exist at different levels, each with its own criteria, responsibilities, and salary band.
Together, job levels and pay ranges show employees how their career and salaries can progress at a company, while making sure that that progression happens in an equitable way. A promotion from senior engineer to lead engineer, for example, would involve the same step up in level and salary band for all employees, ensuring that the title bump isn’t unfairly more lucrative for some than others.
4 steps to creating a job-leveling framework that’s tailored to your organization
Step 1: Meet with top execs and stakeholders.
To begin defining the competencies that separate levels within the framework, ask specific questions like, “What do top performers do that you wish applied to everyone in the organization? ”
It’s important here to note the difference between a competency and a quality. A competency, such as communication, can be measured objectively, while a quality, such as fairness, is subjective.
Step 2: Recommend competencies.
Propose competencies for every job level based on your conversations, taking into account business needs, strategy, and culture. You can have competencies that apply companywide, and others that are specific to certain roles or functions.
Step 3: Write descriptions for every job level.
Include how you’ll measure proficiency for each competency. Aim for a clear distinction and scale of complexity between levels, without getting so specific as to have a rigid checklist. No two levels should have the exact description.
Step 4: Apply pay ranges to each level.
If you've already completed benchmarking, decided what you can afford, and created a compensation philosophy, you can then create pay ranges and apply one to each level.
How to prevent pay inequity if you don’t have job levels
As the steps above show, developing a job-leveling framework can take some time. If you don’t have the resources to do so right now, or if you feel your company is too small to benefit, there are other ways you can prevent pay inequities related to career progression.
- Start having performance conversations outside of formal reviews. Talk to employees regularly about the expectations for their roles, what’s next for them, and what they need to do to get there. When it’s time for a performance review, you can continue the conversation and talk about the progression you’re seeing.
- Think about equal work for equal pay. Look at the compensation for people doing exactly the same job for the same team. Is there a pay gap? If so, try to learn if there’s a specific reason for it. For example, does one person have an advanced degree, while the other does not? If you can’t find a fair answer, make a salary adjustment as soon as you can.