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By Katelyn Lopez
Katelyn is VP Customer Success of Comprehensive, a compensation platform for automating compensation reviews, communicating compensation with employees, managing pay ranges, and benchmarking.
A clear process for salary ranges can support compensation management and help ensure your organization remains competitive and legally compliant. However, it’s understandable that many questions may arise for the HR professionals tasked with designing and implementing them. This guide explores the importance of salary ranges and offers technical guidance to support their creation for your organization.
Let's start with a few definitions to understand how salary ranges affect compensation. Though pay sometimes encompasses more than just base salary (i.e., variable compensation), the terms pay and salary are often interchangeable:
Salary ranges: Salary ranges (or pay ranges) are the ranges companies use to decide how much to pay employees based on their role or job level. These are sometimes also referred to as salary bands (or pay bands). Salary ranges typically have three points:
Salary grade: A salary grade (or pay grade) is a level within a compensation system that groups jobs of similar value or responsibilities together. Each salary grade is assigned a range of pay, with a minimum and maximum salary employees can earn while in that grade.
Salary structure: A salary structure (or pay structure) is an organized framework that outlines the different levels of pay within an organization. It defines how salary grades are set and adjusted based on factors like job roles, experience, skills, performance, and market conditions.
Understanding the variations within your salary ranges will help guide individual compensation decisions and inform the foundation for broader compensation structures.
Did you know that clear compensation guidelines can encourage a motivated and satisfied workforce and help your business manage expenses effectively? That’s why salary ranges (aka pay bands) — which are essential to attracting and retaining talent, ensuring fairness, controlling costs, and complying with legal requirements — should be an essential part of your organization's compensation philosophy (don’t worry, we’ll get to that concept next).
A company’s pay (or compensation) philosophy is a framework that formally outlines its approach to employee pay and benefits, aligning with organizational goals, values, and competitive strategy. For most businesses, this helps guide how they approach and communicate about compensation.
Your pay philosophy should reflect your organization’s position on paying, relative to the market. Businesses typically fall into one of three categories:
Your pay philosophy influences where you set salary ranges relative to. For example, a lead strategy might involve setting salary targets at the 75th percentile of the market to ensure your offers are among the most attractive. Ultimately, your company goals and financial health will determine your strategies.
Read on for four steps to create your organization's salary ranges.
Conducting a thorough job analysis is the first phase in creating salary ranges for each individual role.
As part of the job analysis, you’ll need to identify what roles you have at your company and the accompanying responsibilities and required qualifications. Then, you can create detailed job descriptions. (Don’t worry; undertaking a project to define these makes it much easier when you have new openings, not to mention matching your employees to the market).
Next, group similar jobs into job families (for example, Full-Stack Software Engineer and Back-End Software Engineer might be grouped into a single Software Engineering job family). Organizing roles with similar value, complexity, or responsibilities makes it easier to compare salary ranges and helps establish consistency in compensation. Additionally, it can simplify salary structure administration and ensure internal equity.
Gathering market data is the next step in determining your company's salary ranges. After all, you want to know how you stack up against other organizations!
Benchmarking involves comparing your internal salary data to what other companies pay for similar roles. When benchmarking, consider factors such as industry, location, and company size — this data should reflect what the talent pool expects. Compensation benchmarking software can help simplify this process. Comprehensive offers robust benchmarking tools, including data from industry leaders like Mercer, to help with pay comparison and ensure competitive salary ranges.
Aligning your internal roles with external market data helps you achieve accurate job matching. This ensures that your salary structures are competitive, equitable, and reflective of the current market landscape, ultimately supporting better talent retention and recruitment.
Focus on the similarity in duties and responsibilities and adjust for job scope, skills, and requirements.
Once you’ve done your research, and grouped your jobs, it’s time to build your salary ranges.
It’s best practice to ensure that roles with similar responsibilities have similar pay structures. To accomplish this, first define salary grades based on families and levels. Then, assign salary ranges to each grade.
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Setting midpoints and range spreads should be part of building your salary ranges. You can determine the midpoint using benchmarking data and your compensation philosophy. It’s helpful to note that your midpoint does not need to be the market midpoint. For example, you could aim to match the 60th percentile of the market if that matches your philosophy to slightly lead the market.
You’ll also want to calculate the spread, also known as the difference between the minimum and maximum. For example:
Remember to review state laws on pay transparency. For many states, salary ranges are published in your job postings, so you must be careful about how you construct them.
Once salary ranges are established, assign each role to a salary grade. Review current employee salaries to ensure they fall within the new ranges, and look out for potential underpayment or overpayment issues.
You may discover that you need to address pay inequity. Once you build ranges, chances are you will have to make market adjustments to some employees. Understanding that there may be budget considerations, it’s a good idea to plan for salary adjustments whether you make them immediately or take a phased approach.
Remember when we talked about communicating your compensation philosophy earlier? Salary ranges — especially changes to them — are high on the list of conversations workers expect to have with their supervisors. While you don’t have to share pay range or salary structure changes with employees immediately, it’s good practice to include this communication as part of your compensation review cycle.
You’ll want to determine the level of transparency and the factors determining their placement within the range. Providing managers with the training and documentation, as well as guidance for hiring and promotions, can empower them to communicate compensation topics effectively, including salary structure.
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When creating salary ranges, choosing the right strategy will help align with your company’s goals and culture. Two primary considerations are the structure of your salary bands (i.e. salary ranges) and the method of categorizing jobs within those bands.
Do you want fewer salary grades with wider salary ranges, or do you prefer to dig down into your data and variants?
This guide assumes a narrow-band approach, which provides a clear structure (and is typically easier to manage), especially for companies wanting tighter control over payroll expenses. However, broadband can be a viable option for organizations looking to reduce the frequency of promotions or reclassification efforts.
When structuring salary ranges, most organizations follow one of two approaches:
This guide takes a grade-based approach, which balances the need for structure with the flexibility to accommodate various roles within the same pay grade. However, if your organization has highly specialized positions that don’t fit neatly into broad grades, a job-based approach might make more sense.
When deciding between approaches, consider the following elements to help your strategy align with your company’s needs and objectives:
As you develop and refine your organization’s salary ranges, keeping midpoint progression, overlap between levels, and consistency with market data in mind to avoid pitfalls is important.
First, you’ll want to ensure that as you move up in levels, the midpoint for each salary range increases consistently and reflects the increasing value and responsibility associated with higher-level roles. Discrepancies in midpoint progression can lead to compensation gaps that are difficult to justify — and may cause dissatisfaction among employees.
The next thing to remember is that overlap between salary ranges at different levels is natural and can be beneficial — it can encourage smoother transitions between roles. However, review the extent of this overlap to ensure it makes sense for your organization. If one level’s salary range significantly overlaps with the next, it might indicate a need to adjust the ranges or rethink the level definitions.
Finally, your salary ranges should generally align with your chosen market midpoint. While certain levels may have valid reasons to deviate slightly from the market, significant discrepancies can create issues with internal equity and market competitiveness. Regularly benchmarking your salary ranges against market data can help you maintain alignment and avoid potential pitfalls.
By carefully considering these factors, you can create a compensation strategy that supports your organization’s goals, motivates your employees, and ensures fair and equitable pay practices.
Think once you’ve established your salary ranges that the work is done? Think again. Unfortunately, salary ranges aren’t static; they need to be reviewed regularly to remain aligned with market conditions and company needs. Many organizations opt for an annual compensation review cycle, and build reviewing salary ranges into this process.
Luckily, compensation solutions make it straightforward to monitor pay equity, identify outliers and trends, and adjust your salary ranges as necessary. Comprehensive offers benefits, including robust benchmarking data across multiple industries and locations, and integrates with existing HR systems to provide a seamless experience for managers, executives, and even employees.
Ready to ditch the spreadsheets? Reach out to Comprehensive today!
