Understanding Salary Bands and Job Grades

6 min read
Oct 5, 2022 6:00:00 AM

At Compaas, we talk a lot about salary bands and job grades (or salary ranges and job levels). Not only in blog posts, but every single day. Salary bands and job grades are essential frameworks in any compensation strategy. We use them throughout our compensation management software to help companies dig into how they pay their employees.

What's the difference between job grades and salary bands?

Job grades clarify your expectations and help you make more strategic compensation decisions.

  • Workforce planning: Different employees have varying levels of responsibility, skill, and impact. Do you have the right mix for your goals?
  • Promotions: Is an individual employee exceeding expectations for their job grade? Is it time to consider a promotion?
  • Candidate profiles: Good hiring plans are backed by job grades. What kind of skills will your new hires need to bring to the team, and what impact should they make? What job grades should you target for those new hires?

Salary bands are key for planning and communication.

  • Candidate offers: Candidate offers are easier to create and more consistent.
  • Pay transparency: Salary bands prepare you to communicate pay ranges with candidates and employees, when appropriate (or required).
  • Pay equity: Salary bands are necessary for calculating compensation metrics like compa-ratio and range penetration, which can help you measure pay equity and understand appropriate adjustments.
  • Budgeting: Salary bands help you translate hiring and employee raise plans into budgets.

Here’s the basics on how they work together as the foundation of your compensation strategy.

Job grades

A job grade could have the name “job level” or even “job classification,” depending on the company. No matter which name you use, the concept is the same. A job grade is a method to decide the impact, seniority, and expectations for a specific role. In the best cases, a job grade will reflect knowledge, skills, and responsibility.

Think of it this way: when someone is early in their career, we sometimes think of them as “junior” employees. After gaining experience, they move into a “more senior” role with more responsibility.

Job grades to the rescue!

Let’s look at an engineering organization for an example. We must clarify expectations for a “junior engineer” vs. a “senior engineer.” Both are engineers, but their job demands are very different. We’ll define our Technology Job Function with six levels: T1-T6.

  • T1: Very early career. Learning technical and professional skills.
  • T2: Early career. Basic skills developed. Work contributes to success of team and product goals.
  • T3: Seasoned professional. Variety of technical skills developed. Strong problem solver. Key for success of team/product goals.
  • T4: Very senior. Can solve most problems or issues that arise. Uses experience to forward company goals/objectives.
  • T5: Exceptional. Considered an expert or thought leader within the company (and sometimes externally as well). Drives timeline, features, and development through broad influence.
  • T6: Luminary. Very rare! Central to the company’s success. Translates organizational strategic goals into department and team plans. Provides fundamental contributions to long-term company planning in area of expertise.

The same concept applies to each department within a company. What are the basic progressive steps along a professional career? How do they translate to the company’s expectations for employee success?

salary bands are based on job levels What career steps are you expecting your employees to take?

But isn’t a job grade the same as a job title?

Sometimes, but not always!

In some companies–and in government–job titles say a lot about  seniority levels. You would immediately know from the title “Staff Engineer” that an employee is an E5. This is common in companies where job levels are open, and any employee can discover another’s level.

Titles don’t always confer deeper meaning, though. In my career I’ve had some unusual job titles, which I generally chose for myself. They have ranged from Data Diva to Geek Wrangler, none of which reflected a job grade. In those companies, job levels were completely opaque. I didn’t even know my own job grade—though in retrospect, I realize that I did have one.

Finally, you can have both an internal title and an external title. A title may be nothing more than a handy label for people outside the company. I’ve worked with people who put “Vice President” on their business cards, even when we had no VP roles. Those titles fostered credibility, in roles where people might demand to speak with “someone in charge.”

Salary bands

Salary bands (or pay ranges) are how you define the target pay for employees within job grades. For each level, a company should decide the low-end and high-end of the pay that level will command. Salary bands help when making offers, retaining employees, and planning for future growth. (As a reminder, if you’re affected by pay transparency laws like CA AB-168, you must share pay ranges with candidates upon request, too.)

I’m going to make up some salary bands for the technical job grades we covered above, so you can see how it works. (I’m not using market data for these sample ranges, so don’t copy this for your company!)

  • T1: 60k-72k
  • T2: 68k-87k
  • T3: 85k-107k
  • T4: 98k-122k
  • T5: 115k-138k
  • T6: 130k-155k

I can’t tell you the best way to set your company salary bands. But I do have a few suggestions to get you started.

Multi-source your salary data

There are lots of great sources for market data for employee salaries. In our experience, smart companies set their salary bands from more than one data source. These include:

  • Salary survey data companies (like Radford/Willis Towers Watson and Mercer)
  • Self-reported sources (like Payscale and Comparably)
  • Company recruiters (Why did we lose that candidate?)
  • Compensation consultants

With more than one data source, you can tailor salary bands that reflect your company goals and focus.

Plan for salary bands to overlap

When your salary bands overlap (as they do in the example above), your company has more flexibility. Employees can receive merit raises without taking on promotions they’re not ready to tackle. Managers have the option to promote mid-cycle without throwing off financial plans. Employees have some runway to grow in their current level without a constant focus on promotions.

Does that mean we hire at the bottom of the range?

A wonderful thing about salary bands is that you have flexibility. You don’t have to hire people at the bottom of the salary band, and in fact I don’t recommend hiring at the dead-bottom of the range in most cases. When salary bands are fairly wide and overlap, the target ranges for new employees is often more narrow. Using the example above, the company may decide that new-hire salary targets for a T4 may be between 105k–112k.

You’ll also encounter some candidates who negotiate aggressively, pressing you to break out of the top of the new-hire salary targets. With hiring target salaries at a narrower range than salary bands, you again have flexibility. There’s some headroom to decide if this candidate is being offered the correct role, and how high you really want to go. Think hard about how you can make this candidate successful before you make that offer, however. Going to the top of the actual salary band can put you in a bad spot down the line—weighing a promotion to get the employee a higher salary, instead of focusing on performance and impact.

Remember your existing employees

Salary bands affect your existing employees, too! Once you have set your salary bands, you’ll want to take a hard look at how your employees measure up. At a minimum, you’ll need to take a look at compa-ratios, where individual employees fall within a salary band (a.k.a. range penetration), and manager distributions for your company. You can also expect to see some outliers once you dig into your employee compensation.

(If this analysis sounds like a lot of work, it doesn’t have to be. Compaas makes it easy—even including employee bonus and stock in the mix!)

Finally, revisit your salary bands 1-2x a year

You don’t want to change your salary bands all the time, but plan to revisit them at least once a year. This helps you keep up with what’s going on with the market, and make sure you don’t fall behind.

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