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Table of Contents

• Introduction
• What are Compensation Bands?
• Common Compensation Band Structures
• Building Compensation Bands
• Common Trade Offs
• Conclusion

Helpful Templates included in this Guide

• Job Architecture Guide
• Salary Band Generator
• Geo-based Salary Band Generator
• Compensation Philosophy Template

Introduction

Compensation bands (often referred to as pay or salary ranges/bands) are arguably the most consequential part of a compensation program. With the rise of pay transparency laws, compensation bands are now more important than ever. According to CNBC, more than 25% of U.S. workers are covered under pay transparency laws, and that number could soon exceed 50%!

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At Assemble, we’ve seen thousands of compensation bands across multinational companies in various industries and with various compensation philosophies. We distilled many of our observations and lessons for you.

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Whether you’re designing compensation bands for the first time, updating your company’s salary bands, or simply eager to learn how to create compensation bands or pay ranges, this guide is for you.

What are Compensation Bands?

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Compensation bands, or pay ranges, represent the acceptable range a company is willing to pay for a specific position. These bands are fundamental in managing compensation decisions, creating financial budgets and forecasts, and complying with pay transparency laws.

The Anatomy of a Compensation Band

When you break it down, a typical compensation band is comprised of:

• Compensation Types (e.g., Salary, Commissions, Bonuses, Equity)
• Band Points (usually three: Minimum, Midpoint, and Maximum)
• Position Level or Grade: ensuring the band matches the job’s responsibilities

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Driving Factors Behind Compensation Bands

Various factors influence a company’s compensation bands, including:

• Company Specifics: your company’s industry, size, stage, objectives, financial position, and factors like compensation philosophy, job architecture, and more
• Locations: the locations your company operates in, especially if that involves multiple currencies
• Market Rates/Benchmarks: what the market is paying for similar positions

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Designing Your Compensation Bands

Before you start, make sure that you have the following:

• A Compensation Philosophy: the overarching strategy guiding your compensation decisions. (📖To learn more, read our Compensation Philosophy Guide)
• A Job Architecture: the structure and hierarchy of positions relevant to your company. (📖To learn more, read our Job Architecture Guide)
• Data: a combination of existing employee data plus accurate and relevant market benchmarks.

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Common Compensation Band Structures

To help you get started, below are some common structures we see at Assemble.

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3 Band Points, Uniform Widths

This simple structure works well for companies across all industries and sizes.

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Definition

• Uniform band widths
  • For example: +/- 10% from midpoint for all bands

Key Benefits

• Easy to explain and maintain

Main Drawbacks

• Limited flexibility, particularly for more senior positions
• Ambiguity as to how to use the compensation band (where an employee falls)

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3 Band Points, Increasing Widths (The “Inverted Pyramid”)

This structure increases pay flexibility for more senior positions.

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Description

• 3 band points: Min, Midpoint, Max
• Wider bands for more senior levels. For example:
  • Levels 1-3: +/- 10%
  • Levels 4-5: +/- 15%
  • Levels 6+: +/- 20%

Key Benefits

• Increased flexibility for more senior positions

Main Drawbacks

• More overlap across compensation bands
• Increased pay variability in for employees in the same position

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Quartiles, Uniform Widths

This structure further divides the band with more band points for greater control.

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Definition

• 5 band points: Min, 25th, Midpoint (or 50th), 75th, and Max
• Uniform band widths. For example:
  • +/- 10% from midpoint for all bands

Key Benefits

• Easy to explain and maintain
• Clearer guidance on how to use

Main Drawbacks

• Requires increased education to explain
• Slightly more challenging to calculate
• Increased risk of confusion with market benchmarks, which are also reported in quartiles

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Building Compensation Bands

Once you’re ready, follow the steps below to design your compensation bands:

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1) Establish Rules & Guiding Principles

Determine the structure of your compensation bands, including band points and band widths. We strongly recommend that you start simple, as this can get complicated.

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Identify key rules or guiding principles that are important to your bands. For example:

• Location-based or geo-based pay policies
• Functional principles, such as different market reference points for different functions (e.g., for a software company: engineering jobs at 75th percentile, sales jobs at 50th)
• Exclusions or differences, such higher levels having wider bands, or bonuses being available for managers and executives only

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2) Collect Data

Gather employee data and market benchmarks to inform your bands.

• For employee data: make sure the information is up-to-date and that every employee is properly “leveled”. In other words, every employee has a position in your job architecture.
• For market data: look for data providers and benchmarks that fit your company’s needs and constraints. It’s important to understand that no dataset is perfect, and that you may need more than one. Most Assemble customers have at least 2.

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3) Calculate & Visualize

Use your data, rules, and guiding principles to calculate the compensation bands or pay ranges for each position and location in your job architecture.

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At a minimum, your goal is to end up with a table that shows:

• Rows — every position with key information such as department or function, ladder, and level
• Columns — every compensation band point for each compensation type (e.g., salary minimum, salary maximum)

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We strongly recommend visualizing data, too. This will convey information more clearly and help you identify insights and surface inconsistencies, such as excessive gaps or overlaps between your compensation bands.

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💡Tip: looking for a simple tool to get started? Check out our Salary Band Generator, or our Geo-based Salary Band Generator if you operate in multiple locations.

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4) Pressure Test

Ensure your compensation bands are practical, affordable, and satisfy your stakeholders’ expectations.

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In particular, pay close attention to gaps and overlaps across your compensation bands, and make sure your key stakeholders are bought in. That usually means multiple approvals from stakeholders including leadership, Finance, and Recruiting or Talent Acquisition.

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5) Launch!

Introduce the compensation bands to your organization.

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Before launching, here are some tips:

• Define Guidelines. It’s worth the effort of defining some guidelines, such as who will have access to the bands and who to go to with questions. Note that some pay transparency states (e.g., California) give applicants and employees the right to ask for the compensation bands for a position.
• Pre-launch Test. Before a broad launch, introduce the bands to a smaller audience. Collect their feedback and incorporate before the broad launch.
• Expand Access. We find most companies expand access to bands by starting with a select few (e.g., leadership and HR), then expanding to recruiting and managers, and lastly employees.

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6) Review, Refine, Repeat

Regularly review and update your bands to reflect changes in the market and your business.

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We recommend reviewing and refining your compensation bands at least annually, and more frequently if your business requires it — especially if your company, industry, or regulatory landscape are changing.

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Common Challenges and Trade-offs

You will likely face some challenges and trade-offs. Below are some of the most common ones and how to navigate them.

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Procuring Accurate Market Data

Market data should inform, not dictate, your compensation bands.

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While market benchmarks are important, the data available is far from perfect. It requires careful interpretation. It’s common to see that market datasets are missing jobs, locations, or compensation data that matter to you. And don’t be surprised if some data doesn’t pass the sanity test — like benchmarks for a senior position showing lower pay than a junior position in the same career ladder or job family. (We see this a lot!)

Remember: market datasets are an aggregation of employee data points across many companies that are normalized against one common job architecture. 

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Look for datasets that fit your budget and needs, get more than one if you can, and remember to use market data as an input into your compensation bands. Do not use them as your own compensation bands.

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Addressing Pay Disparities

Compensation bands will help you identify and correct pay inequities. In some cases, companies may find sizable gaps between the bands and employee pay that they are unable to remediate. Going forward, use your compensation bands to help you remediate and avoid future pay inequities. 

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Please consult with your company’s counsel to properly navigate potential pay-related litigation issues.

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Transitioning to New Structures

Develop a plan to smoothly transition employees to the new compensation band structure.

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Whether you’re transitioning your entire company, or a subset (e.g., if you acquired a company), a successful transition will require clear and careful planning and communication. 

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Communication Strategies

Anticipate questions and objections. Develop a list of questions you may be asked, how you will answer them, and how you will answer those you’re not prepared for.

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Remember: this is an opportunity to educate your employees about the work your team has done to design these compensation bands and how they will be used.

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Simplicity vs. Complexity

Start simple, and add complexity only as needed.

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Simpler structures are easier to maintain and explain, although they may limit some flexibility or accuracy your team needs to control costs, avoid pay inequities, or improve offer acceptance or employee retention rates.

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Before adding complexity, consider the impact of adding it and your team’s resources and bandwidth to maintain it.

Conclusion

Creating compensation bands is a vital step towards an effective, equitable, and transparent compensation program. While the process can be complex, following these guidelines will help you establish a solid foundation.

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To get started creating your compensation bands, check out our free salary band generator or book a demo with Assemble.