A Step-by-Step Guide to Building Pay Bands
What is a Pay Band?
A Pay Band is the range of compensation that a company expects to pay someone within a Job Level. It is composed of a minimum, a midpoint (sometimes called “target”), and a maximum amount.
Pay Bands are also known as salary bands, salary ranges, or pay ranges.
Why are Pay Bands important?
Pay Bands are an essential part of a comprehensive compensation strategy. They ensure that your compensation is fair and competitive by getting everyone (from HR to hiring managers and executives) on the same page about pay.
Without Pay Bands, you risk basing your pay decisions on arbitrary or unfair criteria, such as the judgement of an individual manager. This inconsistent approach is subject to unconscious biases, which can erode trust and create pay inequity over time.
Your organization will use Pay Bands to:
- Guide decisions about salary increases and promotions
- Determine the right salary for new job offers
- Identify employees who are being underpaid or overpaid
- Make sure that you are paying fairly for similar jobs
- Be transparent about pay with candidates and employees, when appropriate
- Control your budget and plan for the future
How do you create Pay Bands?
Creating Pay Bands for the first time is a large undertaking that requires time, research, buy-in from stakeholders, and, sometimes, the budget to purchase salary surveys or engage an external consultant.
This guide will break this complicated process down into simple steps. This is not an exhaustive exploration of all your options and the salary numbers are for illustrative purposes only. Ultimately, you can tailor each of these steps to your organization's unique needs.
Step 1. Establish your compensation philosophy
A compensation philosophy is a statement that explains the “why” behind how your organization pays.
It is a joint effort between Leadership and HR, and serves at the source of truth for making pay decisions at your company.
One of the key pieces of your compensation philosophy is deciding how your company wants to set pay relative to other companies who are competing for talent in the same labor market.
To put it simply: when you are trying to retain employees and hire new ones, are you aiming to pay salaries that are more than, less than, or the same as your competitors?
Once you have aligned with your stakeholders on “why” you are positioning your compensation in a certain way relative to the market, creating your Pay Bands is “how” you will execute on this philosophy.
Step 2. Group your jobs into Job Functions
Review the current roles at your company and group the jobs into Job Functions (also called job families) that share similar attributes.
Jobs within the same Job Function often:
- Require similar knowledge, skills, or abilities
- Form a career path from the lowest to highest level of knowledge, skills, or abilities
- Have similar market pay conditions
At many companies, Job Function and Department are used to represent the same thing. There’s an Engineering Job Function for the Engineering Department and a Sales Job Function for the Sales Department.
But Job Functions don’t need to map exactly onto your Departments; they can be broader or narrower to reflect your organization’s unique needs.
The purpose of Job Functions to create groups of similar jobs with similar requirements and career progression. You can then begin to rank the jobs, research comparable roles, and ultimately build out your Pay Bands for each Job Function.
Step 3. Establish Job Levels within each Job Function
Analyze the jobs within each Job Function and rank them into a hierarchy from junior to senior. This will create your Job Levels. You can have as many or as few Levels as you need, and you can give them numbers for ease of reference, such as L1, L2, L3, and so on.
You can rank jobs based on the skills they require, years of experience, education, effort, working conditions, or relative value to the organization.
Job Levels are usually consistent across your organization, because they provide a shared set of expectations for the expertise required at that level. However, your Pay Bands for each Job Level will probably be quite different, because they vary based on how each Job Function is compensated.
For a deeper dive, read more about building your first Job Leveling framework.
Step 4. Gather market data from multiple sources
Now that you have decided how you want to pay relative to your market and organized all your jobs into a framework, it’s time to do some research. You will need to find out what other comparable companies are paying for similar jobs.
This process is called benchmarking, which means comparing your internal jobs to market data to determine the market pay for each job.
There are many sources of benchmarking data and most companies use multiple sources.
You can buy salary surveys from consulting firms or professional organizations. You can participate in a give-to-get survey, where you submit your own comp data in return for aggregated data from other companies. You can look up crowd-sourced data online. You can ask HR peers at other companies.
Your own recruiters or Talent Partners can also be a surprising source of benchmarking data: as they track the salary expectations of candidates, they keep a real-time pulse on the market. Like all self-reported data, salary expectation data can be inflated, but it may provide a very unique insight that is specific to your organization. However, at many companies, this data is not stored or centralized in a way that can be easily reported upon.
Benchmarking is a deep field, but here are some basics to keep in mind:
- Employer-sourced data is generally more reliable than self-reported employee data or crowd-sourced data
- The job titles in your benchmarking surveys will not match up exactly to the job titles within your company. Compare your internal job description to the survey's job description to make sure that you are comparing roles that are actually similar
- The market changes every day, but surveys only happen once or twice a year. So even the best survey data needs to be updated and aged annually or biannually
Once you’ve collected your sources, you can assemble the pieces of the puzzle to reveal your organization’s unique position in the market.
Market data is really cool. Market data is better than nothing. But market data does not at all speak to the uniqueness of your company. It doesn’t consider the fact that if you have a company that’s highly valued, you can reduce your equity ranges because each share is worth a lot more. It doesn’t speak to the fact that if you have a dwindling option pool and you want to create an ongoing retention strategy, you need to reduce your new hire ranges. The point of using market data is to see the culmination of what a bunch of other companies are doing. What you need to do is figure out how you can leverage it in your company to support your decisions.
Katelyn Dennis, Advanced-HR, speaking to Techstars
Step 5. Define your Pay Bands
At last, you’ve done all the prep work and it’s time for the payoff!
Establish the midpoint of your first Pay Band
To create your first Pay Band, choose one Job Level within one Job Function and start by establishing the midpoint (or target pay).
To choose your midpoint, you can use one good comparable benchmarking source, average all your market data, or create a weighted average formula. It all depends on where you want to establish your midpoint relative to the market. If your compensation philosophy is to lead the market (which means to pay salaries that are above average), you could set the midpoint at the 75th percentile compared to your data.
You can then calculate a minimum and maximum for your Pay Band. For example, the minimum of the Pay Band might be 20% lower than the midpoint, and the maximum might be 20% higher.
Despite the name, your midpoint does not have to be exactly in the middle. If your company prefers to hire more junior employees and invest a lot in their training, then you could structure your Pay Bands so that the midpoint (or in this case, more of a target) is much closer to the minimum of the range. This means that your employees may enter the Pay Band at a lower point, but they will have lots of room to grow (both from a career and salary perspective) before getting promoted to the next role.
How big should Pay Bands be?
The spread of your Pay Band (the percent difference between minimum and maximum) has an impact on your compensation structure.
A narrower spread (30% or lower) implies that most employees within the Pay Band will be paid a similar amount and that you expect that they will be promoted to a higher Job Level in order to make more money. In early career stages, Pay Bands are often more narrow because employees progress through them quickly.
In later career stages, it generally takes longer to get promoted to the next level. An employee in a senior role, such as Director, may spend 3 to 5 years in the same Pay Band. A broad spread (40% to 75%) implies that there is a great deal of discretion or salary increase potential within the Pay Band.
Now that you have built one Pay Band for one Job Level, you will do the same thing for each Job Level within that Job Function.
Where should the next Pay Band start?
Pay Bands usually overlap to enable employees to get compensation increases without necessarily getting promoted to the next level.
This gives managers more flexibility to retain and reward employees. If you have a high performing Level 1 individual contributor, who is not yet ready for Level 2, the overlap allows a manager to give that employee a pay increase within their Level 1 Pay Band that is comparable to the starting salary of the Level 2 position.
There's no hard rule about how much overlap you should have, but be mindful of how deep you go into the next Pay Band (especially if it is narrow).
To recap: create a Pay Band by establishing a midpoint, then decide on the spread and set a minimum and maximum. When you’re creating the next Pay Band up, decide how much you want to overlap with the previous Pay Band.
Step 6. Assign your employees to their Pay Bands
Now that your pay structure has been built, you can populate it with employees. Assign each employee to their Pay Band and check how their compensation data lines up with the Pay Band.
In a perfect world, all the employees would fit snugly within their Pay Band. But in reality, when organizations begin to standardize their compensation, most find that they have inherited a number of inconsistencies. If you’re going through a merger or acquisition, you may also find inconsistencies when merging compensation policies together.
Outliers outside the Pay Band are called green-circled if they are below the minimum and red-circled if they are above the maximum.
If an employee is green-circled and not subject to any negative performance reviews, consider raising them up to at least the minimum of the Pay Band.
Red-circled employees are trickier. You can’t easily reduce pay for anyone nor is it recommended, so instead you’ll need to figure out how to develop these highly-compensated individuals towards promotion to the next Job Level.
It may take time and budget to remediate any issues, but is it necessary to ensure that you don’t risk pay equity issues and that all your employees are compensated fairly. And going forward, your Pay Bands will help ensure that you do not create new outliers over time. All of this sets the foundation for a strong recruitment and retention strategy when it comes to compensation.
Now that you’ve created your Pay Bands, you may want to share them within your organization.
The level of transparency will depend on your compensation philosophy, but you can communicate the importance of making pay decisions that are consistent and equitable over time.
Your managers are the frontline of your compensation strategy. Loop them in with a communication plan that explains the why and how behind your new Pay Bands. Equip them to navigate tricky conversations about pay. And help them to understand why it’s important to keep salary increases and new hires within the Pay Band going forward.
You may also want to build a process for revisiting your Pay Bands on a regular basis (perhaps annually or more often if you’re in a fast-growing market) to ensure that they are still aligned with your market and your compensation philosophy.
As your company grows, your Pay Bands will continue to be the foundation of a more equitable and mature compensation process that delivers value across your entire organization.