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Pay Bands 101 (Founders Series: Part 1)

Jen Dewar
Apr 24, 2019, 6:05:00 AM

Founders: we know you’re busy. But we also know you care about corporate governance and want to stay aligned with things that impact your business’ success. We created this series to help you understand compensation fundamentals, and why they’re important.

Employee compensation is your biggest operating expense, yet compensation decisions are often ad hoc. New hires may be offered a certain percentage over their last salary, which can perpetuate pay gaps and may even be illegal in your area. Current employees may receive a sizeable counteroffer when they threaten to leave for an opportunity with better compensation. Newer employees may earn current market rates, while tenured employees earn significantly less. These one-off decisions can damage your company’s ability to attract and retain talent—and may even land you in legal trouble. Enter: pay bands. Pay bands can help your organization make more strategic decisions around compensation, so you can manage your largest operating expense with care.

What are pay bands?

Pay bands refer to the target compensation range your organization will pay for a given position or job grade. They are also referred to as salary bands, pay ranges, and salary ranges.

In the example below, there are six job grades, and corresponding pay bands, for marketing employees. Entry-level employees—perhaps marketing assistants or coordinators—typically fall into the lowest pay band. Employees with greater seniority and impact—such as your marketing leadership—would fall into the higher pay bands. The pay bands take into account the low-end and high-end of the pay each level will command.

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Within each pay band, there is room for the employee to earn a higher salary, based on factors like performance and tenure. This allows you to reward—and retain—employees, even if they’re not quite ready for a promotion yet.

Why pay bands matter

Pay bands are a basic building block of your compensation strategy. They help with:

  • Talent acquisition: There’s a lot of competition for talent. Putting salary bands in place and keeping them updated can guide your compensation decisions so you can make competitive offers and get the talent your business needs to succeed. They can also help you scale, rather than having to make constant, one-off decisions that can cause pay inequities within your organization.
  • Employee retention: Underpaid employees can quickly learn what their peers are earning, both within your organization and elsewhere, and leave. Maintaining competitive pay bands and keeping employees in band will help with retention.
  • Pay equity: Pay inequities can damage your company’s reputation, and have a negative impact on recruiting and retention efforts. Salary bands help ensure that employees in similar roles are being paid within the same range, making it an important step toward pay equity. However, it’s also important to assess range penetration by employee to watch out for inequities, as people from underrepresented groups tend to earn less than some of their peers. Make sure compensation distribution within your ranges is aligned with factors like performance and tenure rather than ethnicity and gender.
  • Compliance: Pay equity isn’t just good business sense (and the right thing to do), it’s legally mandated in many countries. In the United States, compensation is regulated by the Fair Labor Standards Act, as well as other Federal and State legislation. Utilizing salary bands to make fair compensation decisions can help maintain compliance. It should also be noted that California AB-168 stipulates that you must be prepared to share the salary range for a role if a candidate requests it.
  • Forecasting: Finally, pay bands can help you plan for your company’s future with more predictability. Salary bands help organizations provide more accurate estimates for future hires and raises, giving you a better sense of your future budgeting needs and burn rate.

What to look for when planning, reviewing, and approving pay bands

If your company is like most organizations, the human resources team is responsible for creating pay bands in consultation with the leadership team. Here’s what you should look for when planning, reviewing, and approving your organization’s pay bands:

  • Multi-source salary data: It’s important to use data from several sources to determine your pay bands. These may include salary survey data companies like Radford and self-reported sources like Payscale. It’s also smart to use qualitative data from your own internal recruiters, as they have a good pulse on what it’s going to take to increase your offer acceptance rate.
  • A plan to lead, match, or lag the market: You can set your salary bands to lead, match, or lag the market, depending on your goals. You can even mix and match by department or job grade. Engineering talent is especially difficult to come by, so your salary bands might match or lead the market if you want to win great technical talent. But if your sales department has a solid training program and a merit-based bonus structure that attracts and retains talent, you may choose to lag or match the market.
  • Wide, overlapping pay bands: Wide pay bands give employees an opportunity to earn more over time by developing new skills and taking on more responsibilities, without necessarily requiring a promotion. Similarly, overlapping pay bands give you the opportunity to promote an employee without necessarily needing to increase their pay.
  • A plan to revisit pay bands: Build your pay bands with the understanding that you will need to revisit them once or twice a year, to keep up with market trends. This could very well mean that you’ll need to increase your current employee’s compensation in order to keep up with your new hire’s salary expectations. Just remember, this is more cost effective than turnover. Newer hires will expect market rates for salary anyway, and you’ll have the added expense of recruiting costs as well as opportunity costs associated with a vacant position.

Final thoughts

The care and thought you put into compensation
 can become your company’s competitive advantage. Salary bands are an essential building block to a strong compensation strategy that will attract and retain talent, guide pay equity, reduce liability, and help you plan for the future. If your organization doesn’t already have a formal strategy, there’s no better time than now to discuss this with your HR team. If you do, it can be helpful to check in with your leadership team to ensure it’s up-to-date. The market moves quickly, and there’s simply too much at stake to let your compensation plan become stale.

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