Pay ranges: A quick-start guide for high-growth companies

The importance of pay ranges

At first glance, it may seem that pay ranges are old-fashioned or related to a highly structured or bureaucratic form of compensation management. On the contrary, pay ranges are modern compensation tools that offer freedom and flexibility in building a program that meets your needs.

A LinkedIn study of job descriptions revealed that candidates found the salary range the most appealing aspect of job postings. In many cases, the expected pay range influences whether candidates decide to apply.

Pay ranges offer benefits to both employees and employers. 

In addition to delivering the compensation transparency jobseekers and employees desire, pay ranges can also help you:

• Standardize compensation with a reliable framework for pay.
• Create equity and consistency among similar roles.
• Communicate career progression.
• Improve compensation administration and decision-making.
• Perform a deeper analysis of compensation market data.

In addition to the risk of non-compliance penalties, there are other consequences of not using pay ranges or not using them constructively. Those risks include:

• Inconsistent offers and pay, resulting in declined offers and higher employee turnover.
• Compensation that isn’t competitive, which can negatively affect your reputation among candidates and stakeholders.
• Over-dilution and excessive cash burn.
• Lack of a framework for quick, fair, and scalable hiring and promotion decisions.

When you’re managing a growing business, things can seem to be moving at the speed of light.

To maximize the effectiveness of your compensation program as your company grows, be sure to avoid the following mistakes associated with misuse of pay ranges:

• Using salary data from self-reported or stale market surveys that aren’t accurate or relevant.
  
• Using raw market data as pay ranges.
• Using data filters that don’t consider your company’s specific talent market.
• Not having a clear compensation philosophy that guides the structure of pay ranges.
• Making pay ranges too broad and creating job leveling issues.

3 signs your company may be ready to begin using pay ranges

As you hire more employees and they perform work at different levels within each function, you’ll need a way to define and differentiate their pay.

Here are three signs you’re ready to begin using pay ranges:

1. You make offers based on a candidate’s previous salary or salary history.

Not only is this practice a violation of several state salary history laws, but it can also lead to inconsistent offers and internal pay inequities.

2. Your pay decisions don’t align with your compensation philosophy.

When compensation decisions are made by exception or based on guesswork and gut feelings, you can quickly veer away from your compensation philosophy and goals for growth. Without pay ranges as your guide, you can inadvertently increase your spending and dilution faster than anticipated.

3. You don’t have a solid framework for making pay decisions quickly.

To compete for talent in today’s market, you need a compensation program that can help you make job offers and promotion decisions quickly. If you don’t use pay ranges, your pay decisions can feel rushed and haphazard.

Anatomy of a Pay Range

Whether you use a pay range for a single position or a group of positions, you need to define the low, mid, and high points. Furthermore, if you desire to pay at a specific market percentile (e.g., the 50th percentile), the midpoint will be anchored to your company’s target market position.

Example of a Pay Range

Individuals within a given pay range should be compensated in the quartile that most closely matches their skill level.

A pay range with four quartiles might define each quartile as follows:

• Quartile 1: Employees in this quartile have little or no direct or related prior experience.
• Quartile 2: Employees in this quartile possess base knowledge and skill requirements, but they are still learning. The top of this quartile represents the midpoint of the range.
• Quartile 3: Employees in this quartile independently exceed expectations in the core competencies of the position.
• Quartile 4: These employees are subject-matter experts with deep knowledge that extends beyond their primary responsibilities.

Steps to Create Pay Ranges

Guided by your compensation philosophy and analysis of market data, pay ranges can help you describe how employees will progress through each pay range to the next job level.

To begin using pay ranges, take the following actions first:

• Complete market analysis and benchmarking.
  
• Set pay targets and desired market positioning.
• Understand the cost and impact of your hiring strategy.
• Define and communicate your compensation philosophy.

Once you have taken these steps, you will be better equipped to build pay ranges and describe the criteria for employee movement within and between each range. When done right, you’ll have the freedom to give people raises without creating leveling equity issues.

As you define the criteria by which each employee will move through a given pay range, you should also consider the skills, experience, and knowledge employees need to progress. For example, employees at the lower end of a pay range may be new or entry-level with modest skill development. Employees at the higher end of the pay range may demonstrate more competence and be ready to take on more responsibilities.

When to Reevaluate Your Pay Ranges

As your organization grows and the external market changes, you’ll need to routinely assess each pay range. For example, you may need to add new levels within a single position or restructure ranges as the market pay for company positions changes over time.

Take the following steps to keep your pay ranges relevant and aligned with your overall compensation strategy:

• Check the market data for key positions at least every six months.
  
• Review and reset pay ranges annually.
• Age pay ranges biannually by increasing the midpoint of all ranges by the same percentage.
• Review company positions and update them as needed based on trends. For example, more offers at the top of a range may indicate a need to age your pay ranges more often.
• Revisit pay ranges after reaching notable company milestones, such as raising a new round of funding.