What are salary bands & how to establish them? Complete HR guide
Salary bands define how much an employee should be paid based on their qualifications and experience, as well as the complexity and requirements of the role they fill. Pay bands are critical for business growth, as they can significantly impact a company's employee acquisition and retention efforts.
What is a salary band?
A salary band, also known as a compensation band or pay band, is a pay structure that defines the minimum and maximum salary range for a specific job category or level. It gathers similar positions under one "band," outlining how employees' earnings progress based on their qualifications, experience, and tenure.
Salary bands vary between industries, roles, and locations. Internal factors, such as company budget and employee responsibilities, along with external factors, like legal minimum wage, cost of living, and market pay trends, influence the creation of pay grades. As a result, companies must regularly evaluate established compensation bands and adjust them to reflect the changing job requirements and market conditions.
As a vital part of an organization's compensation strategy, salary bands are critical for attracting, developing, and keeping top talent. They not only illustrate salary increases but also clarify requirements for career progression.
Overall, pay grades ensure compensation equity and transparency within an organization, providing employees with guidelines for professional development.
Pay range vs. Salary bands
Some use "pay range" and "salary band" interchangeably. However, despite their similarities, these two terms refer to distinct pay approaches that, when combined, create an effective compensation plan.
As for similarities, pay ranges and salary bands define pay limits—the minimum and maximum amount an employer will offer for a specific role or groups of roles or levels of responsibilities.
They both outline the criteria for salary progression (and/or professional development). Finally, both approaches lead toward pay transparency and equity.
The differences between pay ranges and salary bands are in their scope and flexibility.
For instance, companies use pay ranges to establish the salary range for a specific job position. Salary bands, on the other hand, define a compensation range for multiple (but similar) job roles and levels. As a result, pay bands provide a higher level of flexibility, serving as a roadmap for salary increases within the same role/job level, as well as for career progression to a higher job level with corresponding pay.
Here's an example:
Let's say a company wants to hire a content writer and offers a yearly salary of between $50K and $60K for that position. The new hire's initial salary will probably depend on their previous experience. The pay increase, then, will depend on their performance and results and reflect the requirements of that unique role.
A scenario that includes salary bands is this: A company has established a salary band for similar roles at the same level: a junior content writer, content editor, and social media manager. Here, the pay ranges from $40K to $80K yearly, with lower job experience closer to 40K and higher closer to $80K.
In that salary band, each employee can advance in terms of their yearly earnings without moving to another position. Still, they can also progress professionally and move to another pay band.
As a junior content writer, an employee can receive a raise based on their performance but remain at the same job level. They can also transition to an upper level, i.e., senior content writer, and, of course, receive compensation that reflects senior content writers' skills and responsibilities.
Five benefits of salary bands
A well-thought-out pay structure positively affects business growth, enabling companies to attract and keep top talent. It also streamlines the finance department, recruiters, and HR work, improving payroll management.
Easier communication with applicants
Pre-established pay grades ease the interview process, as the interviewer can provide precise information regarding the salary ranges for job levels across various roles. Though salary bands don't eliminate the negotiation process, they speed up hiring. As a result, candidates learn upfront about what the company offers, helping both parties align expectations.
Reduced unconscious biases
As already explained, salary bands group similar job positions or levels, defining pay rates based on employees' responsibilities, qualifications, and experience. Employees' skills, knowledge, and tenure in the company place them in a specific band, not their personal attributes like nationality, gender, race, sexual orientation, religious beliefs, and other statuses.
Increased pay transparency and fairness
Compensation bands provide more organizational transparency, as employees are familiar with defined salary ranges for similar roles or levels. They also promote pay equity under one band. Understanding the pay structure enables employees to identify the criteria and timing for discussing the salary increase and allows management to handle it effectively.
Enhanced talent attraction
Creating salary bands requires employers to monitor the changing market salary trends. Companies that develop and maintain competitive compensation offers are better positioned to attract top talent and hire the best candidates.
Improved employee retention
Pay rates are not solely about monetary compensation; they also outline the requirements for career progression.
When employees feel they are fairly compensated for their work and see a clear path to advancement based on their performance, they are more likely to stay with the company long-term. This motivates them to be fully engaged and focused on achieving organizational or personal goals, whether through promotions or salary increases.
How to create salary bands
Now that we’ve established why job banding is important, it's time to elaborate on how to develop salary band structures and manage compensation effectively.
Step 1. Define and review your business' compensation philosophy
A compensation philosophy reflects the beliefs, resources, and methods a company uses to make pay decisions. Creating it requires thorough research, market data analysis, and regular reviews to understand how other companies in the industry create salary ranges.
Although companies can test different approaches, they must adhere to some ground rules to comply with their location's labor laws. One of the most important relates to minimum wage—the legally mandated base pay employees must receive as compensation for their work during their ordinary hours.
Once it meets legal requirements, a company can shape its unique approach to compensation. From there, your compensation philosophy should serve as the framework for all pay-related decisions, including pay grades and, within them, net pay and benefits.
Step 2. Classify job levels
Job evaluations are critical for establishing job levels, with interviews and employee surveys as valuable sources of insight. Each level outlines the qualifications, skills, experiences, and responsibilities required for employees to fit within a particular salary band. Typically, these levels are characterized as entry, mid-level, senior, management, and executive.
Each level and its corresponding comp band outline the employee's core responsibilities at that stage. For instance, entry- and mid-level roles usually focus on task execution, while management and executives are involved in strategic and decision-making processes.
Step 3. Study competitors' salary bands
Gathering and analyzing market data provides valuable insights into how competitors define salary ranges for various job levels. Monitoring what's happening in the industry prevents you from underpaying current employees and pushing away prospective candidates.
Companies can use official databases from agencies like the US Bureau of Labor Statistics (BLS), which provide free but often outdated information. Alternatively, companies may consider purchasing data from reliable vendors whose findings are based on multiple sources, like salary surveys.
Regularly reviewing data helps offer pay rates similar to or higher than competitors, which will keep you relevant as a potential employer. It also prevents excessive spending resulting from offering unsustainable pay rates, which could disrupt your financial stability.
Step 4. Establish salary bands
Once you assign a specific level to a group of roles with similar value and complexity, the next step is to define a salary structure for that level, outlining minimum and maximum pay for associated roles. The rule of thumb is that high-level roles have broader pay ranges, while lower-level roles are associated with narrower pay targets.
Defined salary bands enhance pay transparency, fostering employee trust. Simultaneously, designing pay grades based on market data helps you stay competitive and attract top talent.
Step 5. Determine compensation within salary bands
When an organization defines salary bands, the next step is to create separate compensation structures for each role within a band. How these structures will look depends on various factors.
Individual qualifications and performance are critical in defining employee pay, bringing employees who meet and exceed expectations closer to a higher end of a compensation band.
Also, an organization should refer to its compensation philosophy to determine whether it wants to provide compensation that exceeds or aligns with market standards.
Salary bands for remote workers
More and more people opt to work remotely. Such a working style expands job opportunities for digital nomads—-individuals who work while traveling or living in various locations—and enables employers to tap into the global talent pool.
Technological advances and the rise of employee management solutions have made finding, hiring, and paying independent contractors easier. However, companies must take into consideration a few factors to provide fair compensation to remote workers. Besides job qualifications and experience, employers must consider the cost of living and market conditions in the worker's location to create an adequate compensation structure.
Salary bands: Five examples
To illustrate the pay rates at different job levels, we have chosen software engineering, given the growing demand for skilled software engineers in both tech and non-tech industries. As many companies undergo digital transformation, they increasingly rely on digital solutions, data, and automation, driving the need for software engineers.
According to Salary.com, these are the salary ranges for various levels of software engineers based on their educational background, experience, and role requirements:
Level 1: Entry-level software engineer: $74,300-$89,300
Level 2: Mid-level software engineer: $92,506-$112,952
Level 3: Senior-level software engineer: $115,60-$138,254
Level 4: Principal engineer: $136,528-$162,037
Level 5: Distinguished Engineer: $159,605-$192,396
These figures reflect the pay bands in the US market. At the global level, salary bands associated with software engineering roles will also depend on the cost of living and market pay trends in the engineer's location.
Rippling: Fair salary bands to control your headcount costs
Rippling is an all-in-one platform with a wide range of features, enabling you to take full control of compensation management. For instance, its headcount planning feature allows you to define and track your headcount plan effectively.
No department should work in silos, as only unified teams drive growth. Rippling helps merge departmental plans into a single interface, increasing cross-team visibility and making it easier to establish headcount availability across the organization.
Managers can easily see their approved headcount, allowing them to align their hiring objectives with the organization's overall headcount plans. Finally, Rippling automatically updates headcount plans as new roles are defined, helping talent teams stay ahead of hiring needs and changes throughout the year.
When combined, headcount planning and compensation band features help you create and stick to an approved budget. Rippling's Compensation Bands tool enables you to develop and apply market-competitive and location-appropriate pay rates.
Through timesaving automation, this solution maps employees to the correct compensation bands based on their roles, ensuring fairness and alignment with market standards.
FAQs on salary bands
What should you do if salary bands overlap?
Reviewing the roles and criteria associated with a particular salary band is critical if salary bands overlap. These overlaps provide flexibility, enabling you to pay top performers in lower-level roles more or adjust compensation for low performers in high-level roles.
Regular job evaluation is critical, as it ensures fair pay and clarity while maintaining a positive employee attitude and staying relevant in the market.
Should you share salary bands with employees?
Yes, sharing salary bands promotes transparency and equity within a workplace, increasing employee trust. When employees understand what defines their pay, they are more likely to feel valued and motivated, especially when salary bands specify the requirements for career progression.
What are the disadvantages of using salary bands?
Employees who don't understand the rationale behind their salary band may feel undervalued and underpaid compared to their peers in the same band. Pay bands may also seem too strict, limiting employers' ability to reward outstanding employee performance adequately or adjust bands in response to market fluctuations.
Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.
