How To Create Your Pay Ranges

How To Create Your Pay Ranges

A look at two common approaches to building pay bands

I talk a lot about the complexities of compensation management and headcount planning. And—if you’re not a first time reader—hopefully you know that while I acknowledge how tricky it can be, I also like to break things down and make them more manageable (like with my Onion Approach to pay transparency). Creating pay ranges is possibly one of the most complicated pieces of any pay strategy, so I want to take a look at two common approaches to setting pay bands and how CandorIQ can help you with any approach you and your org decide to take.

Quick note: For the sake of this guide, I’ll be using the terms pay band and pay range interchangeably. When using either, I simply mean a predetermined range for compensation based on someone’s title, industry, geo, and/or experience.

A high level overview of building pay bands

When building pay bands for your org, you should always first consider your company’s overall compensation philosophy. This philosophy will likely take into account several factors including compensation types, alignment with market, with business goals, job levels, types of roles and tracks, and market percentile.

Two of those factors are particularly important for navigating the approaches I’ll dive into below: job levels (or the hierarchy of roles) and market percentiles (the value that represents the percentage of workers who earn less than that amount).

Approach 1: Range First

The first approach is commonly called Range First, basically you set a range within the percentiles based on a minimum and maximum, and then you create a target based on that average. 

For example: If you want your range to be between 25th and 75th percentile, you would set your range minimum to the value in the 25th percentile and your maximum to the value in the 75th percentile. If the job level you’re looking at is $110,000 at the 25th and $130,000 at the 75th, your target would be the average of the two: $120,000. 

This approach is good for pay strategies that consider market percentiles to be the most important factor.

Approach 2: Target First

Another common approach is sort of the opposite, this is known as Target First. In this approach, you align on what your preferred target compensation is, and then set a percentage minimum and maximum around that target to determine your range.

For example: If you want to target $120,000 for a job level and you want to stay within 20% on either side of that target for your minimum and maximum, your range would be $96,000–$144,000.

This approach is good for pay strategies that consider compensation amount to be the most important factor.

Other Considerations

Broadband vs. Narrowband

Broadbanding involves creating fewer—but wider—pay bands that encompass a broader range of job levels and salaries. 

Why do this? It’s easier to manage; less focus on job titles, more on performance

Narrowbanding involves creating more—but narrower—pay bands, each with a more limited range of job levels and salaries.

Why do this? Reduce pay compression, create clearer job progression

Pay Progression

Whether you choose to take a Range First or Target First approach—or maybe even a different approach altogether—once you’ve built your band ranges, you want to make sure your pay progression (or the difference in pay between levels) makes sense. You’ll want to consider if there are any massive jumps between levels and, on the flip side of that, make sure there isn’t too much overlap.

There’s no one right way to create your pay bands, and they don’t have to be set in stone. In fact, as your company grows, your pay strategy should evolve as well. Within CandorIQ, you can automatically take either approach to build out pay bands leveraging global compensation data and your org’s equity data. Or, if you have something else in mind, you can completely customize your company’s pay structure within the platform as well. Regardless of your approach, our team is here to help. Let us know if you’d like to learn more!