Companies need comprehensive benchmarking data to pay competitively, but in uncertain economic times, it is even more critical. Having actionable insights into pay ranges ensures you can best manage your cash and optimize your runway, while simultaneously navigating remote work, employee demand for clarity in pay practices, and the growing number of pay transparency laws.
Constructing pay ranges can help you approach today’s workplace with confidence, providing the necessary structure to bring your compensation philosophy to life.
In this guide, you will learn how pay ranges can help you build a robust and scalable compensation program that will attract and retain talent in alignment with your growth goals.
Defining the importance of pay ranges
Pay ranges—also called salary bands or comp bands—define the salary parameters for a role or group of roles in a company. Pay ranges are based on market data, desired market positioning, and your compensation philosophy.
Each pay range typically has a low point, a midpoint, and a high point. In addition, a single role can have multiple levels of progression, with a distinct pay range for each one. For example, the sales assistant, salesperson, and sales manager roles can each have a pay range within the sales function.
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:
Avoiding common pay range risks and mistakes
Without pay ranges, your pay practices can lack the necessary structure to create consistency and transparency—two key factors that are critical to a well-run compensation program. Several states, including California, Connecticut, and Maryland, require employers to provide compensation ranges upon candidate request.
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:
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:
Progressing from market pricing to pay ranges
When your company is in its infancy (i.e., less than 50 employees), salary ranges may not be necessary. After all, with a small workforce, you can probably obtain market compensation data for each role without using pay ranges.
However, as you grow, finding market data for every position in the company can become unwieldy, and you will need a strong framework to determine merit increases and promotions. At this point, you’re ready to progress to 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:
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.
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.
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.
Providing an example of pay ranges
Pay ranges can be different for every company. For example, you can create several pay grades with narrow pay ranges or have just a few broad pay grades with wider ranges. Regardless of the structure you select, it’s helpful to understand the characteristics 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.
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:
Creating pay ranges: key steps and considerations
Pay ranges are a critical component of a multistep process for compensation program design. But before you create pay ranges, you will need to take some critical steps to prepare.
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:
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.
Evaluating pay ranges
Pay ranges aren’t intended to remain static. To keep pay ranges relevant, it’s critical to periodically review them for accuracy and alignment to your target market compensation.
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:
Pay ranges represent a critical component of an effective compensation program. Moreover, they can help you build realistic, market-based compensation offers that help you attract and retain talent in today’s competitive landscape.
As you refine your compensation strategy, pay ranges offer the consistency and structure you need to scale. For more insights about building and using pay ranges in your company, access our guide by filling out the form below.