Picture the scene…
You’re re-evaluating your company’s salary bands (perhaps as part of your annual compensation review) and you notice that you have employees whose salary sits outside of their salary band.
Maybe an employee is being overpaid compared to their expected salary range, or maybe they’re being underpaid.
It’s a sticky situation.
If an employee is being overpaid, reducing their salary to bring it within the salary band will seem unfair and will negatively impact their engagement and motivation – at worst, you risk losing that employee.
Plus, typically it’s legally prohibited to reduce their salary. But, if you leave their salary as it is, it perpetuates pay inequity within the team.
If an employee is underpaid, a significant increase of salary as a one-off could lead to heightened expectations about salary raises – which could impact their engagement and motivation later if a similar increase doesn’t happen again.
Plus, there’s obviously a cost implication of this for the company too.
So how do you address those salary band outliers?
We sat down with Isha Smith, Global Head of Rewards at music streaming company Soundcloud, to discuss.
Step 1: Investigate the issue
Before you can address salary band outliers, you first need to understand how they came about, because this will make a big difference to how you handle them.
For employees that are being paid above their salary band, it could be that they were hired with a higher than typical salary because they were an exceptional candidate or successfully negotiated their starting salary above the initial range.
Or, it may be due to atypical internal promotions and pay increases, for instance if the employee has performed exceptionally highly and so has had above an average promotion rate or pay increases.
Or (and this is very common in early stage start ups) there was no structure to salary ranges in place when those hires were onboarded, so their salaries are inconsistent.
Similarly, for employees being paid below band there are a variety of reasons for this.
It could be that their initial salary offer was lower than usual.
💡 It’s common for early hires in start ups to be given a lower salary
Early employees at start ups are often hired with an outsized equity package and a lower base salary in terms of cash.
So, if equity, bonuses, commission, or other forms of compensation are an important feature in your company’s compensation offering, it’s important to look at salary band outliers in the context of total compensation, rather than looking at base salaries in isolation.
Or, maybe their pay progression has been slower than normal due to underperformance or other factors, such as a career trajectory with sideways rather than upwards moves.
Or, perhaps they were hired into a junior position but the requirements of the role, and therefore the level it sits at within the organisation structure, grew much more quickly than the employee’s competencies and skillset (again, fairly common within the growth trajectory of a fast-paced start up), leaving their salary lower than the salary range for the new level of the role.
On a more general note, the job market can also be very volatile (particularly in the tech industry) with typical salaries rising and falling fairly quickly. This is another reason that starting salaries can vary, which can lead to salary band outliers – so it’s also important to reflect on whether market changes have impacted salary spread for your team.
These can all be legitimate reasons for salary band outliers to exist, but they can also highlight areas of improvement both for individual employees and for overall compensation and progression processes.
Salary band outliers can also point to systemic bias within your hiring and compensation or performance review processes. For instance, it may be that women are offered lower starting salaries or are less likely to receive promotions than men within an organisation – with your outliers commonly being women underpaid and men overpaid.
So, whatever the reason is, investigating and understanding why you have salary band outliers should always be the first step to addressing them.
Step 2: Leave or adjust
If there are legitimate and justifiable reasons that an employee is paid above or below their salary band, it might be the case that you decide to not to take any action immediately.
For instance, if it seems that an outlier has been caused by market fluctuations, it might make sense to wait and see whether further economic changes are afoot before adjusting an individual salary. That’s especially true if you have an annual salary review process which takes factors like inflationary pay rises into account – because this process might lead to an adjustment of the overall salary structure, which could bring the outlier back into their band anyway.
If you do decide to leave a salary band outlier as it is, it’s important to regularly monitor the situation to avoid worsening the spread of outliers over time.
On the other hand, if your investigation determines that action needs to be taken to bring the employee back within a salary band, then there’s still the question of what the right way to go about that is.
Here are some of the common solutions.
When employees are paid below band:
Wherever possible, the fairest approach is to issue a one-off salary increase as soon as possible, which brings the employee’s salary up to the lower threshold of the salary band.
If this isn’t possible due to budgeting issues, you could instead:
- Issue incremental pay increases e.g. every 6 months until their salary sits within the salary band
- Issue a one-off bonus in the short-term and seek to address the base salary issue when the next compensation or performance review comes around
- If performance is the issue, implement a development plan to help the employee meet expectations for their job position and level – meaning they are able to access performance-based pay increases.
When employees are paid above band:
- Ringfence the employee i.e. freeze their salary for a set period of time e.g. a year, to enable the market to catch up with their existing salary, or they’re promoted into a different salary band. Depending on the employee’s performance, you might decide to still allow the employee to access bonus payments during the time they are ringfenced.
- If outstanding performance has led to the employee being overpaid within their level, implement a development plan to help the employee access the next level of their role and bring them into the salary band up.
🤔 Ask a people leader: how do you handle communicating with the employee about freezing their pay?
Regardless of the action you decide to take to bring an employee back within a salary band, it’s always going to lead to a difficult conversation.
Particularly difficult is when you have to ringfence an employee and freeze their salary.
For Isha, pay equity data is vital for successful communication:
”Naturally everyone wants more pay in an ideal world – but we also recognise that we wouldn’t like it if our colleagues were paid very differently to us. So, I find that pay equity data to hand helps in these conversations, so that the employee is able to see the issue for themselves and understand why their salary is being frozen.”
Step 3: Look for patterns
The adjustments we’ve looked at so far are focused on fixing an individual outlier.
But salary band outliers are also important signals that something could be wrong at a more structural level in your company’s compensation approach:
Salary bands that are not fit for purpose
Too many salary band outliers cropping up too often may suggest that you need to revisit the setup of your salary bands to ensure you’re confident of the base structure.
Maybe you need to rework the range or width of your salary bands. Or, perhaps market salaries have shifted so much that you need to shift the minimum salary for bands up, or change the target percentile within your compensation philosophy. Or maybe you need to introduce more granular salary bands, for instance if you have roles within a band which actually have very different salaries.
Here’s how Isha views this:
“With salary bands there’s a balance at play between framework and flexibility. It’s fine to have exceptions – your hiring managers should have the flexibility to reward exceptional candidates and employees. But, you also need to be clear that they are exceptions, because otherwise the exceptions become the norm, and that’s where pay equity issues can arise.”
Systemic biases leading to issues with internal pay equity
Another reason that it’s important to look for patterns in your salary band outliers, rather than solely addressing outliers on an individual basis, is that they can also bring to light when there are underlying systemic biases operating within a company, which are causing some employees to be paid less than others based on factors like gender, ethnicity, sexuality etc.
If you do identify any issues with pay discrimination, this of course needs to be further investigated and addressed at a company-wide level – especially with new, stricter pay transparency and gender pay gap reporting legislation on the way.
Here’s how Isha views this:
“Introspection is crucial when it comes to salary band outliers. If you aren’t able to look inwards and really dig into why those pay discrepancies exist within your company’s salary structure, systemic biases and pay equity issues may never come to light.”
Is there an easy way to identify salary band outliers?
Of course, to address these salary band outliers you first need to be able to identify them.
With Ravio's salary bands tool that becomes simple.
Outliers are instantly visible within the platform, clearly highlighted in red:
And you can also easily see where all other employees sit within the band (the blue dots in the image above), so you can identify when employees are close to the top or bottom of their band to stop outliers forming in the first place.
Plus, with our ‘budget forecast’ feature you can find out how much it would cost the company to bring all underpaid employees within their salary band – at the click of a button.