Pay bands, while not necessary, can be a critical part of a compensation strategy, experts say. Used effectively, such structures can help employers maintain competitive salaries, track pay equity, improve retention and increase employee engagement.
What is a salary band?
A salary band is a pay range with upper and lower limits of compensation for a specific job title. The terms salary band, pay band and pay range have slightly nuanced differences but are often used interchangeably, explained Kathleen Caminiti, a partner at Fisher Phillips. But in all cases, they look at the knowledge, skills, responsibilities and other objective criteria needed in a job, she said; "Having a salary band gives a pay structure that is useful in allowing individuals to know where they stand."
An employer might, for example, group accounting, management and legal together as a business function and look at technical positions separately, Caminiti said. A salary range for the business function might span from B1 for an entry-level position to B6 for the job requiring the most experience, she explained. Within each band there is a minimum, median and maximum salary range.
To develop salary bands and ranges, HR professionals generally consider market data and the company's compensation philosophy, Shelly Holt, chief people officer, PayScale, told HR Dive via email. That compensation philosophy may drive decisions to pay above, at or below the median for specific jobs. "Companies use pay ranges to manage compensation decisions, such as making job offers, market adjustments, and merit pay increases," she said.
Why adopt bands?
The advantages of such ranges are flexibility, precision and transparency, Holt said; "With pay ranges, it becomes more likely that you are paying fairly to the market value of a position and not according to whim or favoritism."
Pay ranges also help companies maintain internal pay equity — something states are increasingly concerned about, Caminiti said. Many have banned questions about candidates' pay history and some, like Colorado, have passed legislation requiring that salary ranges be included on job postings. As this trend is likely to spread, companies can prepare by having pay ranges established, she said.
Pay bands can also help with career development, retention and engagement, Holt added. "A compensation structure is required before organizations can be communicative and transparent about pay, which is where the ROI is really seen," she said. "Employees want to know that they are valued and how to increase their value over time."
Bands — and communication with employees about them — also can increase employee engagement, Holt said, noting that previous PayScale research revealed that many employees believe they're underpaid when they're not. But when an employer ties its compensation strategy to its talent strategy and communicates that with employees, engagement can benefit. And when employees are engaged and educated about the company's strategy for pay increases and promotions, "it leads to an ROI on both employee loyalty and business outcomes," she said.
When and how to start
Although salary bands and ranges are beneficial, they are not required by law, and not all companies have them. "It takes time, expertise, and data to create a compensation structure with pay ranges for every job as well as resources to manage the process," Holt said.
Startups may not have that structure, at least initially, Caminiti said. In some small organizations, people may have multiple roles, such as the finance person who also handles HR and real estate. "As a company matures, you see salary bands come into play more," she said.
How do you know it's time to develop pay bands? If an employer is seeing low candidate acceptance rates or increased attrition rates, it may need to update market data or review compensation structure and compensation strategy, Holt said.
Although each company's process will differ, the first step is to "define a holistic compensation strategy and structure for the entire company," she said. Align the compensation philosophy to behaviors that should be rewarded. "Most organizations begin this by obtaining market data, preferably from multiple sources and benchmarking jobs to that data."
The next step is to establish labor markets in which the company will compete for talent, Holt said. Keep in mind that the job location can be relevant. For example, salary ranges in California and New York may be higher than other locations; however, that could change with more employees working remotely.
Holt said that most organizations have their HR department partner with business leaders and executives or work with consultants. When a company considers establishing salary bands, it is critical to align the organization's approach to attracting talent with their business strategy, Caminiti said. "If the goal is to be a market leader that attracts high-quality talent, but the pay philosophy tied to the talent strategy does not support this, it will be a challenge to attract top talent."