Pay bands or pay scales are an instrument of an organisation's HR strategy and Compensation & Benefits' policies and practices. They define the company's willingness to pay for certain jobs (of equal value). Therefore, they serve as a decision-making tool for determining the salary levels of individual employees and help to objectify and legitimise decisions to various stakeholders.
Height and range of the pay bands depend on the company's willingness to pay which itself is a result of the revenue situation, the labour market, the actual internal remuneration situation, salary benchmarks, a remuneration strategy, etc. In many companies the remuneration practice not only depends on the own willingness to pay but is the result of collective agreements that are influenced by several interest groups (e.g. labour unions, employer's associations). A higher willingness to pay may be manifested in over-tariff allowances or a lower willingness to pay in exempting an organisation from collective bargaining agreements.
Typically, a pay band is modelled around a midpoint. Either minimum and maximum of the range are derived symmetrically e.g. +/- 20% or asymmetrically, e.g. -10% / +20%. This structural decision depends on the overall remuneration strategy of the company. Ideally pay bands are coupled to grades from an analytical job evaluation or company-specific levels.The height of the midpoint depends on the distribution of the actual salaries within each grade, a defined percentile from a benchmark (e.g. the median), and generally follows the company's remuneration strategy.
The remuneration of employees is oriented
Within the pay bands the individual salaries of the employees are negotiated. In contrast to defined salary groups e.g. used in collective agreements, pay bands allow for a certain flexibility of the salary calculation. This typically comes along with a heterogeneous salary development over time, that is oriented after internal factors like engagement, performance and potential of the employees and external factors like inflation, market growth, labour agreement regulations etc.
Since especially performance often is difficult to measure, a performance rating often reflects the subjective evaluation of the responsible manager.Thus HR plays a major role in reward management as cross-divisional moderator and corrective during salary adjustment negotiations.
Pay equity plays a central role from a motivation theory perspective, distributive justice, in other words, "the same pay for the same work" is ensured, when from the employees' perspective the own salary corresponds to the salary of comparable colleagues. Procedural justice of remuneration is ensured, when the criteria of pay differentiation are known and transparent and the individual assessment of merit increases is comprehensible.
Is a pay system perceived as unjust considering these aspects mentioned above, the desired incentive effects of pay differentiation cannot be achieved. Rather often undesired reactions of the employees happen which can range from frustration over reduced performance to (internal) termination. Cf. Dirk Holtbrügge, Personalmanagement.
In most European companies, the introduction of pay bands is governed between employer and employee representatives as part of a company agreement. In such an agreement procedural issues of compensation management and dealing with outliers above maximum and below minimum (e.g. with pay freezes) of the pay bands are regulated.