Salary ranges are the cornerstone of compensation management. Whether you’re new to the compensation landscape or a seasoned Total Rewards veteran, it can be helpful to revisit the details about salary ranges and why they’re so important.
In this article, we’ll delve into the concept of salary ranges, factors to consider when building them, the salary benchmarking review process, and more. If you're an employer looking to build or update your salary bands, this guide will equip you with the knowledge you need.
What is a Salary Range?
A salary range represents the minimum and maximum amount of money an employer is willing to pay for a specific job role. This band is determined based on factors such as the job's function, level, and location. By defining salary ranges, organizations establish a framework for fair and transparent compensation, control labor costs, and effectively compete for talent in their industry.
The terms salary range and salary band are typically used to mean the same thing. However, salary range is the term that’s most often used on job descriptions to provide pay transparency to candidates, particularly in locations where pay transparency laws are in effect. For instance, let’s say you’re planning to hire a mid-level Product Manager in New York City. A salary range example might look like $153,000 - $187,000 (using the 50th percentile as a midpoint).
While it seems straightforward, a salary range can be a tough thing to get right. You need to understand both the jobs at your company, as well as the market rate for those jobs. Plus, the labor market is constantly shifting, and the demand for various roles are not always in sync.
What is a good salary range?
A “good” salary range should be competitive with the market and aligned with the organization’s comp philosophy and budget. Drawing on multiple data sources for market data is a best practice for comp leaders to make sure that salary ranges are accurate and fair, and will attract top talent.
It’s also best practice to not make salary bands too wide. Remember the early days of pay transparency laws when certain job postings went viral, like the one with a salary range of $0 - $2 million? Salary ranges should reflect what you reasonably expect to pay for a given role. It’s better for the candidate experience, and it makes comp conversations easier when all parties are aligned on expectations.
What Factors Determine Salary Ranges?
Building accurate and competitive salary ranges requires some understanding of both the role the salary range will be used for, and the company at large. Consider the following factors during the process:
1. Information about the Job
Department: What type of work an employee does influences the salary range. For instance, most companies would pay an accounting manager differently than a product design manager, even if they were at the same level in the same location. Consider the nature of the work performed by each department when determining salary ranges.
Level: Evaluate the skill level and experience required for the position. A senior developer with a decade of experience will likely earn more than a junior developer with only a couple of years of experience.
Location: Take into account the cost of labor and talent demand in specific geographic areas. For instance, a software engineer in New York City or San Francisco may command higher salaries compared to those in Tampa, Florida.
Related Guide: How to Choose the Right Location-Based Compensation Strategy
2. Information about your Company
Compensation philosophy: Your organization's approach to pay, considering factors such as culture, goals, and strategy, will drive what your salary ranges ultimately look like. Some companies may offer above-market rates to attract and retain top talent, while others may compensate below market rates but provide additional benefits like stock options or flexible work arrangements. Creating a compensation philosophy provides a foundation for organizing your approach to compensation and aligning it with your company's objectives.
Industry: Each industry has its own pay scales and norms. For example, software and technology companies generally offer higher compensation compared to retail or hospitality businesses, while finance companies may have a significant amount of compensation in end of year bonuses rather than in salaries.
Related Guide: How to Launch Your Compensation Strategy
How Do You Determine Your Salary Ranges?
Considering all the factors that determine salary ranges is just one step of the process of building salary ranges or bands. Let’s walk through the rest, step by step, beginning with benchmarking.
Conduct a Salary Benchmarking Review
A salary benchmarking review serves as an essential early step in establishing accurate salary ranges. This process involves finding salary benchmarks that shed light on how your industry pays people. Follow these steps to conduct a salary benchmarking review effectively:
1. Define your departments and levels: Identify the specific departments or job families and levels for which you need to gather salary data. This involves taking a look at all the roles you have at your company and assigning each a job family, level, and location.
2. Collect salary data: Gather reliable and relevant compensation data for those job families, levels, and locations from various sources, including:
- Real-Time Data: Pave's free benchmarking tool provides salary information based on job title, location, and more in real-time. Click here for access to Pave's salary benchmarking tool.
- Offer Data: Offer data gives you visibility into the salaries that candidates are accepting, which can give you an eye into where comp is trending for certain roles. Pave’s Premium Data includes Offer Insights to bring you this data.
- Annual Compensation Surveys: Survey data can provide salary information for a wide variety of roles and industries, though it is typically only gathered once per year.
- Your Team: Consult with your recruiting and talent team to understand candidates' salary expectations.
- Your Network: Network with industry contacts who can share insights and provide salary ranges specific to your field.
Note that you don’t have to (and frankly shouldn’t) limit yourself to using one data source. Bringing together data from multiple sources can help you build a more comprehensive understanding of market rates, especially for roles with which you may be less familiar.
Build & Use Your Salary Ranges
Once you’ve conducted a salary benchmarking review, you’re ready to build your salary ranges. Follow these steps to create effective salary ranges:
1. Build your salary ranges
Utilize the salary benchmarking data you collected, focusing on job families, levels, and locations. Start with the Market Data percentile that best reflects your compensation philosophy as the midpoint, and add or subtract a percentage (typically between 5-20%) to establish minimum and maximum values. For example, if the Market Data X-percentile for a role is $75,000, you would set that as the midpoint. Using a 20% range would make the minimum $60,000 and the maximum $90,000 for the salary range.
Then, feel free to tweak the salary ranges to fit your business – like most things in compensation, building salary ranges is both an art and a science. Some things you may want to consider:
- Ensure that higher levels have higher salary ranges than lower levels.
- Ensure that adjacent levels overlap (or almost overlap) at the min and max (i.e. the max of the salary range for your manager level should be close to the minimum of the salary range for the senior manager level).
- Ensure that ranges for the same level in similar job families are close to each other.
2. Analyze the data
Once you have baseline salary ranges, compare your current team's salaries to the new salary ranges. Look for any discrepancies or trends that indicate whether your pay is too high or too low. Adjust your minimum and/or maximum values accordingly, and create new ranges for new positions as needed.
3. Ensure fairness and equity
If you consistently find that certain employees are paid lower than their range, consider implementing "market-based compensation changes" to bring their salaries to the minimum of their respective bands. Salary bands serve as a useful tool to promote fair and equitable pay across groups.
4. Review and update
Salary benchmarking is an ongoing process. Regularly monitor market changes and periodically update your salary ranges to remain competitive and maintain fairness in compensation. For many compensation leaders and teams, this means conducting annual or semiannual review cycles, often before the merit cycles.
The Importance of Salary Ranges
Establishing appropriate salary ranges is vital for effective compensation management. By understanding the concept of salary ranges, considering relevant factors, conducting a salary benchmarking review, and building accurate salary bands, organizations can attract and retain top talent, promote fairness and equity, and control labor costs.
Use the insights and practical steps outlined in this guide to create a competitive and transparent pay structure that aligns with your organization's goals and values. If you’re ready to start building salary ranges, explore Pave’s Market Data and sign up for free.
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