Outdated or Essential: Are Salary-Bands Still Useful?

At a time when pay is a seriously hot topic, we sat down with Lisanne Metz, gradar’s COO, to discuss salary bands and whether alternative compensation tools - such as market-pricing - could be wiser in the 2023 job market.

In the midst of The Great Resignation, people are rethinking how - and why - they work. As employees leave their jobs in search of greener pastures, employers are feeling the pressure to attract and retain top talent. 

One of the main reasons employees have cited for leaving their jobs? Unhappiness about pay. In fact, in one study 63% of respondents said that low pay was a factor in their decision to quit. 

So, as inflation and soaring prices squeeze pay packets across the globe, pay is high on HR’s priority list. And as countries and states make it a legal requirement to post salary ranges in job postings, the conversation about pay transparency is only getting louder. 

In light of this, companies and compensation experts alike are asking: are salary bands still relevant? Or does it make sense to switch to market-pricing?

Salary Bands

What’s The Difference Between Salary Bands & Market Pricing?

Put simply, salary bands are defined pay ranges for jobs that are considered equal. An organization uses pay bands to establish the minimum and maximum amount they’re willing to pay for a job level, using these parameters as a decision-making tool when determining compensation for specific roles and individual employees.

Defining a salary band takes into account a combination of market value and internal value. Jobs with similar work requirements are grouped together based on factors such as the qualifications, skills, experience and level of decision-making authority required in a role.

Simple yet clear, salary bands are a powerful HR tool. When it comes to budget forecasting, salary bands are helpful as organizations can forecast exactly how much a job will cost. These costs are much more difficult to predict with a purely market pricing-approach as market-data is volatile from year to year.

Salary bands also foster pay equity. Employers can ensure that similar roles requiring equal levels of experience are compensated consistently. This can eliminate pay disparities and reduce discrimination based on factors like gender, race, or ethnicity. 

Finally, salary bands also encourage pay transparency. By establishing clear parameters and set ranges of pay, organizations can be upfront about what their staff are earning - without necessarily disclosing individual salaries.

In comparison, market-pricing bases compensation solely on external factors. By accessing Information about how similar organizations are paying - often from salary surveys - organizations set a competitive salary for each individual role. 

Some organizations are gravitating towards market-pricing because it makes them both competitive and adaptable. In a time of economic uncertainty and job-market flux, pinpointing specific pay levels provides greater flexibility to respond to changing markets, ‘hot skills’ and local labor market supply/demand trends.

Yet, market-pricing doesn’t reveal whether remuneration is also internally fair. It can create internal inequities in pay throughout career ladder progressions and foster a culture of pay secrecy. Also, by matching new-hire salaries solely to market-rates, HR departments need to constantly refresh the salary data they’re using.

A Checklist for Keeping Salary Bands Modern

It’s clear that salary bands are far from becoming obsolete. However, organizations should follow several basic rules to ensure that they remain competitive and up-to-date.

Regular Review

Salary bands should be reviewed regularly, both through internal analysis and against external market data. This data can be purchased from well-known study providers such as Willis Towers Watson or Culpepper, but also from newcomers such as competewith.com, pave.com or ravio.com. Comparison to collective agreements is also useful, especially for companies that are not themselves bound to them.

Broad Modeling of Salary Bands

In general, salary bands should be modeled as broadly as possible when there’s high variance in the market. As salary bands need to encompass every role in an organization, It might make sense to model separate bands for certain function groups, such as sales or executives. The width of the salary bands can also vary interculturally. For example, Chinese companies often define salary bands even more broadly due to the volatility of the market.

Observation of The Market

New market data does not necessarily have to be bought in every year, but a close eye should be kept on market rates and macroeconomic indicators such as unemployment rates and inflation. Well-known providers such as WTW, Lurse or Culpepper offer free annual budget surveys that show any increases that market participants plan for the next salary round. This data can be a helpful guide for making annual adjustments to salary bands. 

Employees' Perceptions of Equity

As we’ve seen, salary bands can support a sense of equity in an organization. Yet, this is only truly useful when the pay structure is perceived as being fair by staff. As employee satisfaction decreases if injustice is perceived (Schnaufer et. al., 2022), it’s essential that salary bands come with clear, transparent communication and are - ideally - based on an objective job evaluation system. 

Salary Bands in gradar 

Knowing the enduring value of salary bands, here at gradar we’re on a mission to help companies big and small efficiently implement them. Our complete tool uses objective job evaluation and up-to-the minute market-data to make the process consistent, fair and simple.

Firstly, considering wider factors such as professional knowledge, specific responsibilities and interpersonal skills, gradar offers a deeply analytical job evaluation to establish internal relativities. 

Then, thanks to gradar’s job matching feature, users can translate job evaluation results into market benchmark job codes. This allows users to seamlessly access salary survey data within the gradar system to establish competitive pay parameters for each salary band. 

Sounds like something that could work for your organization? Get in touch with our team today!