A Quick-Start Guide To Building Pay Bands With Benchmark Data

Building your first set of salary bands can be intimidating—especially if you’re not a compensation analyst or total rewards professional.

Most mature or larger organizations take the approach of evaluating all of their roles and grouping them into Levels and Functions (often called Job Families) based on each position’s skills, experience, and responsibilities. This process helps you build ranges that cover multiple, similar jobs and create a foundation for future hiring. (Read our full guide to building salary bands.)

However, creating your first pay bands doesn’t have to be such a lengthy, drawn-out process (especially if you’re part of an early-stage or growing organization). By using a simpler ‘Pay Band per Job Title’ approach instead, you can quickly build out a salary band for everyone at your organization with less effort. 

In this post, we outline how to efficiently create bands with this second method so you can figure out how to determine salary, how you compare to the rest of the market, or how to introduce more transparent pay practices. 

Step 1: Align on Your Compensation Philosophy

Compensation philosophies guide how you approach pay. To determine yours, you’ll need to decide two things:

A) Your salary percentile target. This is the target range that you’d like to pay the majority of employees within compared to what others in the market will pay for the role. Usually, companies anchor around a few options:

• Below the 50th percentile—meaning you pay below the market median. Young companies or startups often use this because they lack the budget for high pay.
• The 50th percentile—meaning you pay the market median and you're aiming to "meet the market". Most companies fall into this bucket, especially for non-competitive roles.
• The 75th percentile—meaning you pay above the median market rate for roles. Usually, roles in a scarcity market or highly competitive roles pay in this range.
• The 90th percentile—meaning you are at the top of the market. Very few companies fall in this range, or they save this rate for critical, difficult-to-find roles. A company like Google may pay most roles in this range. 

B) Your approach to geographic-based pay. Do you pay differently based on the city, state/province, or country employees work in? Do you want to break things down into specific regions? Knowing where you’ll anchor your benchmark data to is important since most salary benchmarking surveys (which we’ll explain more about in Step 2) offer location-based ranges. This is because major city centers or industry hubs often pay differently than rural areas. You’ll need to understand if you want to anchor to either national data or a specific region or city to inform your salaries.

Step 2: Select Your Benchmarking Data Sources

Before you can start building your salary bands, you’ll need to select the benchmarking data sources that best meet your needs. There are lots of pay data providers to choose from, so you’ll want to select the most relevant one for you based on a few factors:

• Your industry. Benchmarking data can be very different for the financial services sector vs. the software industry. (Industry groups and associations also sometimes provide benchmarking data that is specific to your sector.)
• The types of roles or functions you are looking to benchmark. If you have a lot of specialized roles, only certain vendors/surveys may provide benchmarking data for them.
• Location of your employees and approach to geographic pay. Not all providers have robust global benchmarking data, so you may need to use different benchmarking providers, depending on the locations you want to look at.

When it comes to benchmarking sources, there isn’t one right answer or choice. While you may choose to use one benchmark source, it’s typical (and, in many cases, a best practice) to leverage multiple sources of data to inform salary ranges. (We have a whole guide on choosing salary benchmark sources.)

Step 3: Match Your Jobs to the Benchmarking Data

Once you have your benchmarking data, you’ll need to go through the job-matching process. 

Every salary benchmarking provider should have a detailed leveling and job functions guide that allows you to match your internal job titles to them. To do this, you’ll need a general job summary for each role you’re benchmarking so you can match it to the best-fit job title from your benchmarking provider. For example, a ‘Senior Software Engineer’ at your company may map best to the ‘RSW - Software Engineering - Apps Function and P4 - Mastery level’ within Mercer Comptryx benchmarking data.

For a job to be considered a “good match,” the contents and responsibilities should match by 75% or more. If you can’t find a good match or have a role straddling multiple functions, you can create a ‘hybrid’ role by combining benchmarks from several jobs that cover all the aspects of the role. For example, if you have a role that is a 50/50 split across both Accounts Payable and Accounts Receivable work, you could evenly blend benchmarking data for an accounts receivable role and an accounts payable role to build a band.

Once you’ve matched your jobs, you need to look for the right salary range data based on your percentile and geographic region or country (which you determined in Step 1). You may be able to narrow down the results further by filtering by industry and company size, depending on your provider. You may also want to distinguish if your pay bands are based on base salary alone or on-target earnings (i.e. base salary plus variable compensation, bonuses, etc.). 

At the end of this exercise, you should have a benchmark salary for each job title, which is sometimes referred to as the Market Reference Point (MRP). These market reference points for each of your jobs are what sets the midpoint or target for each of your pay bands. 

Note: if you plan to use more than one benchmarking data source, you can create a “composite” benchmark that takes the ranges across your data sources into account. You can do this by calculating an equal median across benchmark data sources you have for each role or calculating a weighted median, placing a higher emphasis on the benchmarking source you think is most relevant.  

Step 4: Build Your Pay Bands

Now that you have a midpoint set for each role, you need to apply a spread on either side of that midpoint to build your band. 

As an example, if the market reference point is $100,000, then applying a 20% spread would mean that your salary band will be $80,000 to $120,000. (This is done by multiplying the market reference point by 0.80 for the minimum and 1.20 for the maximum.) 

The spread for the pay band of each job could be different depending on the seniority of the position. Typical salary range examples include:

• Individual Contributor Roles: 15% to 20% 
• Manager Roles: 15% to 25%
• Executive Roles: 25% or greater

The spread for your pay bands should take into account not only seniority but also how you look at growth within a given role and the frequency of promotions. For example, if you have a job where most people get promoted within the first 12-18 months, then you likely will want to implement a tighter spread. However, in roles where someone will have the same job for years without a promotion, you’ll want to have a wider range so employees can continue to increase their pay without a title change. Your ultimate goal is to give your team room to grow based on their experience, merit, skills mastery, and eligibility for promotion.

Step 5: Review Your Employee’s Positions Within Your Pay Bands 

Now that you’ve built your pay bands, you’ll want to review where your employees are sitting within those bands. 

What you’re going to be on the lookout for are:

• Employees who are under the new pay band. This indicates they’re being paid below market value or less than their peers.
• Employees who are above the new pay band. These employees may be due for a promotion or are being paid more than their peers. 

Once you’ve done your analysis, you’ll need to make a plan for addressing any of the disparities or outliers you may have uncovered. For those who are below their band, this may mean doing a salary or performance review to understand why they are so low. For those who are above their band, this may mean spreading future salary increases out more conservatively over time or offering lump sum bonuses instead of salary increases to reduce gaps.

Regardless, it will be important to establish a remediation plan that includes a timeline and budget on how you will be addressing these gaps over time. 

Step 6: Decide How to Roll Out Your Salary Bands 

When it’s time to introduce your new pay bands to your organization, it’s best to start by sharing them with your finance team and talent partners, since they’ll be using the bands to make decisions around hiring, promotions, and bonuses.

Depending on your level of pay transparency, the next step is providing visibility for people managers so they’re aware of how their teams are compensated against the new pay structures. This will help inform how they approach recommending promotions, salary increases, or compensation reviews.

Based on the pay legislation in the regions and countries you operate in, you will likely need to comply with salary transparency regulations—which may mean including salary ranges on all of your job postings and sharing each employee’s salary band with them (for their role and likely any role that they may be promoted to). 

If you’re sharing your pay bands with your employees or adding salary ranges to your job postings, you’ll need a plan on how to address any potential disparities in pay and establish a communications strategy—including empowering people managers to answer frequently asked questions. Here’s our comprehensive guide to introducing pay transparency.

Step 7: Review and Update Your Pay Bands

Building pay bands isn’t a “set it and forget it” exercise. Both your company and the market are not stagnant, and compensation for roles will continue to evolve based on the market conditions and the supply and demand of jobs and talent. 

After establishing your salary bands, you will want to review them at least once per year. For fast-moving markets, it should likely be every three to six months. Different benchmark providers run their surveys at different intervals, so make sure to choose one that will happen frequently enough for your roles or industry. 

Building a Foundation for Better Pay Decisions 

With your salary bands in place, you can now make better compensation decisions—whether you want to improve pay equity, support your compensation review process, or empower your talent partners to have more informed conversations about salaries.

As your organization evolves, so will your compensation structure. Although the above approach is fast and easy to develop, it may not be as scalable in the long term. As you introduce more roles and geographies, it may be helpful to group multiple roles into Job Functions and Levels to streamline the number of pay bands that you manage. 

Although this approach may not scale past a certain point or size, you can still consider grouping your bands into departments of functions to make them easier to compare. In addition, having a simple leveling framework that covers responsibilities and skills for entry-level roles up to executives. This is useful for defining how pay bands change from one position to the next.

If you want to further streamline the salary benchmarking process, consider using a compensation management tool like Barley. It simplifies the entire benchmarking process—from uploading salary information to comparing benchmarks against your current employee’s pay. 

See how Barley makes creating pay bands and benchmarking salaries faster and easier. Request a demo today.