A best practice approach to salary bands: effective, fair, and easy to manage

Salary bands are foundational in compensation.

They’re how a compensation framework is put into practice to determine employee compensation and ensure internal pay equity.

They’re also tricky to get right and they can get very messy over time – we speak to people leaders all the time who cite salary bands as one of their most frustrating areas of work.

So what’s a best practice approach to ensure salary bands are well-designed, effective, fair, and easy to work with?

In this article we’ll cover:

• What is a salary band?
• Why are salary bands important?
• How are salary bands created?
• Example: creating salary bands for a software engineering department

What is a salary band?

A salary band is a range of salaries for a particular subset of employees, defining the minimum and maximum salary that a company will pay employees within that subset. 

Salary bands are a foundational part of any compensation framework. They enable people teams to make fair and consistent decisions about compensation – both for new hire salary offers and for salary raises during the performance review cycle.

They also make it easy to identify any discrepancies in pay across the company which may be causing issues with internal pay equity – highlighting any outliers who are being under- or overpaid, and highlighting any pay bias such as women consistently being paid less than men within a salary band, which is likely a key factor in the company's gender pay gap. 

Salary bands are made up of five parts:

• Band group
• Band level
• Band location
• Midpoint
• Range (minimum and maximum)

We'll look a little more closely at each of these five parts throughout the rest of this article.

Why are salary bands important?

Through salary bands, a range of salaries is determined for each group of employees within an organisation that perform equal work (or work of equal value).

There are many benefits to this.

Particularly, well-structured salary bands ensure that compensation decisions are always informed, consistent, fair, and equitable for your employees.

And, they also make it easier for the people and talent team to make those compensation decisions – like 'what salary do I offer a candidate for a new job position', for instance – because there's a clear structure to follow.

How are salary bands created?

When you create (or edit) your salary bands, you need to decide how you will approach each of the five salary bands components highlighted above.

Band group

The salary band group defines how a company 'groups' their employees together to create salary bands.

Typically, companies will have salary bands grouped by each department, as salary benchmarking data varies significantly across different job families e.g. commercial vs engineering. Within the band group is a set of salary bands which differ across job levels – as salaries increase with the level of seniority within a department.

Some companies choose to have separate salary band groups for every individual job position and level within a company – which is the best practice approach.

Some companies have only one salary band group for the entire company – but we would never recommend this, because there's so much variance in salary data that grouping all employees together inevitably means that some employees are not being fairly paid. 

Band level

The salary band level determines the job level which a specific salary band covers.

This is vital because benchmarking data shows that salaries vary across different levels of seniority, so job levels are a key input when building salary bands.

Within each band group, separate salary bands are built for each level of your level framework.

So, for instance, if you had department-level salary band groups then your software engineering bands might look something like this – with separate bands for each level shown on the left-hand side (P1, P2, P3, P4, P5, M1).

Band location

The salary band level determines the working location(s) which a specific salary band covers.

Like with job levels, this is important because salary benchmarking data shows that salaries also vary across different locations.

Therefore, if you hire employees across Europe (or beyond) you may decide to pay people differently based on their location, via a location-based pay strategy – especially if you have a hybrid or remote working model.

If this is the case, this also needs to be reflected in your salary bands, with each salary band group being duplicated across the locations that you differentiate pay for. 

In the above software engineering example, for instance, we can see the location is specified as UK. 

Midpoint

The salary band midpoint is the middle of the salary range for that band.

The midpoint should be the same as the company’s target percentile. This is typically pre-agreed within the overarching compensation philosophy. It might be the same for every salary band, or it might differ. For instance, some tech companies opt to target the 50th percentile for salaries in general, but the 75th percentile for engineering teams to ensure they can attract and retain top engineering talent.

A salary benchmarking tool like Ravio is then used to determine what the market salary is at that target percentile for the specified band level e.g. a P3 software engineer.

Range (minimum to maximum)

The range of a salary band is the minimum to the maximum salary that an employee within that salary band can be paid e.g. £40,000 - £50,000.

The range reflects the expected salary band progression for an employee who sits in that band, whilst they work their way through that salary band and towards being promoted to the next salary band level.

The range, therefore, will differ depending on a company's specific level framework and progression framework

But, typically a standard width for a salary band is around 15% either side of the midpoint.

That would indicate around a 5-10% annual salary increase and 3-4 years to be promoted to the next level (bearing in mind that not all employees will start at the band minimum salary and end up at the band maximum salary – these reflect the absolute minimum and maximum before there's concern about an employee's pay).

But, some companies might opt for a more narrow or wide band.

Any employees who sit outside of their salary band are known as salary band outliers, and this indicates that they are being either under- or overpaid compared to your company's compensation framework.

In Ravio's salary band tool, outliers are instantly identifiable, seen below: 

Example: creating salary bands for software engineering

Let’s say our company is creating a set of salary bands for our software engineering department – so we have a department-level band group.

We already have a clearly defined levelling framework, so we know which levels exist within our software engineering department.

Currently, we’re only hiring within the UK, so all of our software engineers are located here.

Our target percentile for software engineering is the 75th percentile, because we’re keen to attract top tech talent as per our compensation philosophy.

We use Ravio’s compensation benchmarks to determine the midpoints for our software engineering bands – for instance, the 75th percentile salary for a P3 software engineer in the UK is £70,600 (as of August 2023), so that’s the midpoint for the salary band at that level.

We want our salary bands to have a standard width, so we calculate the minimum salary at 20% less than the midpoint and the maximum salary at 20% more than the midpoint. So, for that P3 software engineer band, that looks like:

• Minimum – £56,480
• Midpoint – £70,600
• Maximum – £84,720

And the full set of salary bands for our software engineering department will look something like this:

Once we’ve plotted all of our existing employees into those salary bands, we’ll also be able to see whether they fit into the salary bands as we expect, or if we have any outliers who are being over or under paid against the band – and make adjustments as needed to address this.

From best practice to reality

That covers the basics on how salary bands are created in a best practice world.

In reality there are lots of trade offs that arise during the process of creating (or evaluating and improving existing) salary bands, including:

• Fair compensation vs complexity of salary band structure
• Competitive compensation vs payroll budget
• What do we do if bands show that we’re overpaying employees?

Which typically leads to a lot of additional nuanced questions arising along the way.