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?

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).

This ensures that compensation decisions are always informed, consistent, fair, and equitable.

What is a salary band?

Salary bands are made up of five parts:

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

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 band group is determined by the overall structure of your salary bands – whether you choose to have:

• A group of salary bands for every job position
• A group of salary bands for every department
• An overall group of salary bands for the entire company.

Many companies start with department-level salary bands and add in role-level bands as the company grows and scales – with salary bands for every job position as an aspirational goal.

We wouldn’t recommend creating salary bands at a company-level: there’s a lot of variance in compensation across different departments and job positions, so having an overall company-level group of salary bands typically means that some employees are under or over paid.

Band level

Salaries vary across different levels of seniority and salary bands are, of course, built to reflect this. So, a separate salary band is created for each level within the band group – based on your level framework.

Band location

Salaries also vary across different locations and so many companies choose to implement location-based pay to reflect this variance. In this case, salary bands also need to reflect this, with separate bands for each location that you vary pay by.

Midpoint

The midpoint is the salary at the company’s target percentile for that band – which has typically been pre-agreed within the overarching compensation philosophy e.g. opting to target the 75th percentile to access top talent.

Compensation benchmarks are used to determine what the salary is at that target percentile for the band level.

Range (minimum to maximum)

The range of a band – from the minimum to the maximum salary for that band – differs based on a company’s level and progression frameworks.

A standard width for a salary band is around 20% either side of the midpoint. That reflects a standard of 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.

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?

And so on.

We’ll be answering all of these questions in future blogs – make sure you’re subscribed to our newsletter to be notified once they’re published.