What we're talking about

As your business grows and takes on more employees, you need to get strategic about compensation. Labor is, after all, normally the highest cost for any business. One logical option is to bring in salary bands – ie, decide upon a set number of pay grades that have minimum and maximum rates. For example, a small business might have bands and salaries as follows: graduate ($30K to $40K), junior ($40K to $50K), mid-level ($50K to $60K), management ($60K to $70K) and senior ($80K+). 

When determining the differences between bands, businesses use criteria like years of experience, qualifications and skills, budget, job requirements and market rates specific to work type and location. Employees are assigned a band when they start, with the idea that, as they progress, they'll climb up that specific band before (all being well) ascending to the next one. 

Why it's important 

This is a pay structure that enables pay equity and allows for transparency and consistency. It gives you flexibility when it comes to working out what to pay someone, while giving those looking at openings (and current employees) the info they need on how much you pay and how pay progression works at your company. That can, in turn, boost retention. It also helps you budget better when it comes to making new hires, or thinking about future raises for your existing team.   

However, to do it right, you will need to commit time, effort and – if you’re seeking external expertise – cash. Salary bands have to be well-designed, and you (or department managers) need to be empowered with regards to how they work. It's also best to start as soon as possible; changing your pay system once you've grown to a substantial size can be pretty complicated.

Things to note 

It all starts with a compensation philosophy. Before you start dealing with technicalities, you need an overarching approach to pay: what you're paying people, and how (salary, equity, perks or bonuses). Your philosophy will act as a guiding light when it comes to making decisions around compensation; and it should be unique to your business – though you can take inspiration from what others are doing. You might approach this by paying above-market rates to compete with the big players; set a living-wage minimum salary that you won't pay below; or keep a small difference between your highest and lowest earners. For many small businesses unable to afford big salaries, there will be an emphasis on ‘total compensation’ – what you can offer an employee beyond salary.   

There are different approaches to it. The key differences are to do with how wide the range within each band is and how many bands you offer. A general rule of thumb is to align your salary bands with the levels you have in your company. As a small business, it makes sense to opt for a low number of bands – you can always add to this as you grow.

There can be discrepancies. It's rare to find a completely clean-cut structure – there's often overlap between bands and you might have unique cases that fall outside of the bands you've set. This can happen if you're retrospectively imposing them or if you're bringing in someone above your top band who is adding exceptional value. What's important here is to be aware of those discrepancies and be able to justify your decisions. 

Communicate what this all means. No matter how watertight your compensation strategy is, it means little unless you bring employees along with you. Explain your compensation philosophy and the associated salary bands internally and during interviews. Make sure each person knows what it means for them, and how you will monitor, review and reward progress.

How to create your own salary bands 

1. Audit your jobs. If you're doing this in-house, compile a list of the various jobs and their associated responsibilities at your business. If you're expecting to hire for a bunch of new and crucial roles soon, include these, too.  

2. Rank – and sort – them. Now start sorting the list. Depending where you're based, there may be laws around pay equity and how you rank jobs. If there aren't, there are a number of ways you can do this – and much might be led by your intuition. You're looking to get a sense of perceived value and an idea of different responsibility levels for each role.  

3. Review market rates. Find out what the going rate is for these roles in your sector and location. How much are others paying? As well as the specialized tools listed at the bottom of this guide, your network, recruitment agencies and websites like LinkedIn, Glassdoor and Indeed will help. Take account of the entire range, but the all-important numbers are those offered by businesses of a similar size, location and industry. 

4. Assess your budget. Get clear on your constraints. Working with an accountant or your finance department, work out how much you can afford to allocate to compensation. What does this mean about where you'll be against others? You obviously want to be paying at least the market rate, but you may find that – on the basis of cash alone – you're lagging (below market rate). In that situation, consider what other forms of compensation you can offer employees outside of cash. 

5. Decide how high and low you'll go. Use your understanding of what's out there to ground your own salary structure. Establish an overall minimum and maximum – ie, the top of the top band and the bottom of the bottom band. Consider legal requirements like the minimum wage. 

6. Create your salary bands. Return to your jobs ranking and create logical salary bands within the minimum-maximum range you've determined: grouping jobs by difficulty, skills required, years of experience and other relevant criteria. Be mindful of the number of bands you land on and what this will mean for your business. 

7. Create ranges within your bands. Each of your salary bands should itself have a minimum and maximum sum. This is essentially the midpoint (determined via market research, altered according to where you choose to sit in the market) plus or minus an average of 30%. You can alter this percentage as you see fit, or align with the market rate. HR experts will be able to help you with the maths, but check Step 7 of this guide from the Society for Human Resource Management for a more detailed explanation. 

8. Change when necessary. Your salary bands should change as your business grows and in accordance with market fluctuation. A good starting point is to formally reevaluate your structure once a year. 

Key takeaways 

• Once you detect that your team is growing, you need to prioritize designing a scalable salary structure with pay equity at its core. 

• Salary banding offers transparency, a clear route for employees to move up the company and a practical way to budget. 

• The two grounding points for designing salary bands should be your compensation philosophy and the market rate for each role. 

Learn more 

Perspective. Tandem is a custom software consultancy. Here, the team explain why they took the decision to publish their salary bands, and how they went about designing them. 

Example. Check out some example tables and diagrams to help you visualize different pay structures, including narrowbanding and broadbanding.

Tool. When conducting market research, you can find information for a fee via compensation tool Option Impact and analytics platform Radford; and for free via Salary.com, PayScale and the US Bureau of Labor Statistics

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