Many companies rely on accurate salary ranges to determine compensation and create pay equity among employees. If salary ranges become out of date, salary compression and unfair wages could result.
Whether your company is beginning to grow to the point of hiring more people and creating salary ranges or you want to make sure you’re following the right steps to determine salary ranges, this guide has the information you need.
How To Determine Salary Ranges In a Few Minutes
If you’re going to create salary ranges, it’s best to do it the right way from the start. In other words, move to the next section if you want the true play-by-play about determining salary ranges.
But it’s also okay to become familiar with quicker options when you’re just starting out and want to see some baselines for creating your salary ranges. In that case, you can use public websites with salary data to see salary averages and what companies are paying for junior and senior-level roles. A few options:
You can also use job search sites to look for open positions similar to those at your company and their associated salaries.
Some states are governed by pay transparency laws, which require employers in those states to disclose their salary ranges and benefits for potential employees. Currently, 10 states have pay transparency laws for the entire state, including California, Maryland, and New York. Meanwhile, Ohio and New Jersey have select cities with pay transparency laws, while other states are considering enacting some version of these laws.
Some employers choose to include this information in their job listings even if they aren’t governed by pay transparency laws in an effort to promote pay equity and fair wages.
These methods certainly aren’t the best method for determining your own salary ranges, but they can be a good starting point. If you already have salary ranges in place, you can quickly scan this information to see if your ranges are on track with others or might need some updating.
If you’re going this route, here are some tips:
- Finding comparison roles: Organizations use different names for their positions, so your role might not compare to others with the same name. Dig deep into job descriptions to find better matches and use keywords for priority tasks within your roles.
- Finding comparison organizations: Ensure that you’re looking at salary ranges from organizations similar to yours by industry, size, and revenue. Comparing a small business to a massive organization, for example, will likely show large discrepancies in salary ranges for similar positions.
- Making good judgment calls: When looking at average salaries for a position, like how Payscale curates its data, pay attention to how many people are reporting for that position. Steer clear of salary data with only a few dozen salary reports and prioritize those with at least 100 reports.
The Better (But Longer) Way To Determine Salary Ranges
1. Determine Your Compensation Philosophy
Your compensation philosophy defines how you want to pay employees. Do you want to consistently pay employees ahead of what the majority of your competitors pay for similar positions? Do you want to be right at market level? Or, maybe you want specific positions to stay ahead of market.
Of course, there’s also the option of paying below the market, but that’s not something that most businesses should consider, as it can lead to employee dissatisfaction.
Whatever the case, figuring out your compensation philosophy will help you determine salary ranges because it acts as your baseline. If you want to lead the market in compensation, for example, you should create your salary ranges so that you pay above the 50th percentile for each position.
You’ll also want to use companies with a similar compensation philosophy to yours for benchmarking salaries, so determining your comp philosophy can help you narrow your data points when you begin searching.
2. Update Job Descriptions
Outdated job descriptions can be a primary downfall of wonky salary ranges. When your job descriptions aren’t up to date with what your employees really do each day, you may end up benchmarking roles that aren’t similar enough to those in your company, giving you inaccurate salary data.
Managers can learn about their employees’ responsibilities through surveys, meetings, or shadowing. Then, they or HR can use that data to update company job descriptions, giving the company the most accurate data for role comparisons.
Refresh job descriptions annually to keep them updated and useful.
3. Group and Rank Positions
Accurate job descriptions also make it easier to complete this step, which requires you to classify jobs into groups and ranks. Groups include similar roles with similar responsibilities, and ranks define job levels within those groups. This classification system breaks down jobs more granularly to create accurate pay grades later.
Your classification system can work however it makes the most sense for you. Smaller businesses will probably just have a few job groups, while large companies could have dozens. The more positions you have, you’ll probably find that higher levels of detail for categorization works better to define salary ranges. You can group roles in the following ways:
- Skill or Experience: With this classification system, you’d group roles requiring similar skill levels or experience, like executive, managerial, or skilled labor.
- Family: A job family groups jobs within the same department, such as finance, HR, or IT.
- Function: This classification groups jobs with a similar function. For example, financial accounting, recruiting, or tech support.
After choosing your classification system, rank the potential roles within. For example, many companies use a level system for customer support agents. Customer Support I would be an entry-level role with base pay, while Customer Support III would require more skills and experience, therefore offering increased pay.
4. Research Market Salaries with Benchmarking Tools
You’ve laid the groundwork to determine salary ranges, so now it’s time to research market salaries. The process of researching market salaries for your company’s specific roles is known as compensation benchmarking. The best way to benchmark salaries is to use compensation benchmarking tools like Payfactors or Salary.com.
Yes, they come with high price tags, but they’re a worthwhile investment, especially when you plan to refresh your salary ranges each year.
When benchmarking salaries, it’s important to be consistent with your data. You’ll want to make sure you’re using information from companies similar to yours and in similar areas.
This is easier if your company has one location and no remote employees. You can just stick with data from your location and surrounding areas to get a good idea of what you should be paying employees.
Larger, more widespread companies need to get strategic, though. For reference, we like to use NYC as our goal post. We have remote employees scattered all over. In the interest of pay equity, we benchmark our salaries based on NYC, which is known for its above-average salaries. This keeps all our data consistent, as we’re always basing our salaries on an above-average-paying location.
5. Define Pay Grades
Pay grades group similar positions into similar compensation levels based on the salary data you researched. For example, if three roles in accounting pay similar average salaries, you’d group them into a pay grade. Pay grades are generally based on the skill level and expertise needed for the job and the worth of the position to the company in an effort to promote pay parity.
As an example, a tech company would likely place a junior level software developer at Grade 1, a senior software developer at Grade 2, a software architect at Grade 3, and a software development manager at Grade 4.
6. Create Salary Ranges within Pay Grades
Using your defined pay grades, you can create salary ranges. This is where your compensation philosophy comes into play.
If you want to meet the market, you’ll define the midpoint of your salary range at the 50th percentile using the salary data you gathered. If you want to lead the market, you might set your midpoint around the 60th percentile instead.
Then, you can calculate the minimum and maximum salary for each range. Do this by considering the spread for each range. This is up to you, but it’s best not to allow a spread that’s too broad. Narrower ranges keep pay grades more defined to avoid pay inequities and salary compression down the road.
It’s common for companies to use a spread no higher than 40%. So, if your midpoint is $80,000, your maximum would be $96,000 ($80,000 x 1.2) and your minimum would be $64,000 ($80,000 x 0.8).
Now, what happens if an employee reaches the maximum salary for their range but hasn’t earned the qualifications to move into another salary range?
This sometimes happens, and you don’t want to leave employees stuck in one spot. It’s important to keep an eye on employees who may be moving quickly up the ladder in terms of salary.
Sometimes, offering bonuses for performance can be a better reward than increasing their base pay. It offers cash that doesn’t affect their salary range progress while still giving them the recognition they deserve. For example, earning a new credential might qualify an employee for a raise, but exceeding their quarterly sales goal could be met with a bonus rather than a raise.
How To Refresh Salary Ranges (And Why You Should)
Most companies complete a compensation cycle each year. That means that they review employee compensation, conduct a pay equity analysis, and update salary ranges each year to keep compensation fresh and fair.
It’s best practice. The last thing you want is for new employees to come in and make almost the same amount as someone who’s worked with your company for five years in the same role. That’s what can happen when job descriptions and salary ranges become outdated.
With the cost of living increasing steadily year by year, it’s equally important to collect new data and refresh salary ranges to align compensation accordingly. For example, you might set an annual goal to increase salary ranges across the board by 2-3% each year to adjust for the cost of living.
The good news is that once you have your first salary ranges complete, the process becomes easier each year. You already did most of the work and set your baseline; now it’s just a matter of updating job descriptions and using new data to refresh salary ranges.
Each year, look at individual salaries and take note of any employees who seem to progress too quickly or slowly through their salary ranges. Either situation could highlight potential issues with management, training, or job description inaccuracies.
Then, rely on your compensation benchmarking tool to lead you to the most current data for each role. Update your pay grades first, then move on to your salary ranges. Don’t forget to account for cost of living adjustments, if necessary.
It’s also a good idea to gather feedback from your workers at least a couple of times during the year. Ask them for full transparency in their feelings about pay without repercussion. It’s some of the most helpful data you can have to inform your compensation strategy and promote pay equity in your organization.
