A guide to establishing salary ranges that motivate & engage team members

Pay transparency is a hot topic in the current world of work. An increasing number of professionals expect their current and prospective workplaces to be upfront about how much they pay their team members. In the European Union, some pay transparency measures are even legally required (1).

In addition, while employees have traditionally been reluctant to talk to their coworkers about their salaries, that may no longer be the case. As many as 82% of Gen Z workers and 74% of Millennial workers don’t have a problem discussing compensation with their colleagues (2).

This increasing demand and necessity for pay transparency has caused many organizations to take a good hard look at their approach to compensation management and, more specifically, their established pay ranges. We wrote this article to answer any burning questions you may have about salary ranges and structures. We’ll discuss how to establish a salary range, the different types of salary structures, and the top benefits salary ranges can offer your business, so let’s begin.

1. European Commission, 2022
2. ‍CFO Magazine, 2023

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What is a salary range?

A salary range is a kind of compensation framework that organizes company positions into a series of tiered pay grades or salary bands. The three most common types of salary ranges are market-based, traditional, and broadband. The model an organization chooses to work with often depends on company size, compensation philosophy, business objectives, and how competitive the industry is.

Salary ranges should also evolve with time. That means even if you know how to create salary ranges, it’s essential that you review them regularly to ensure they still align with your company mission, objectives, and level of maturity. Designing fair, intentional salary structures can help early-stage companies with more limited budgets stay competitive while maintaining a conservative salary expenditure.

“Never build your pay structure as a set-in-stone plan. You should revise your pay structure annually to ensure it’s on par with the job market and accepted among your employees. Some companies revise their compensation plans every 3-5 years, but I find that too much changes in that time.

Over the course of a year, I’ve seen my company grow, market conditions change, inflation rise, wages increase, and pay equity laws get amended. All of these factors make a large impact on expectations for compensation. With this in mind, you should always design your salary structure with room for growth.

‍— David Aylor, Partner and CEO of David Aylor Law Offices

Pro tip 💡: Keep in mind, salary ranges are just one part of a larger approach to compensation management. A team member’s salary represents their fixed pay. However, they should also receive other forms of variable compensation, incentive compensation, and benefits, such as bonuses, stock options, and extended health coverage. An intentional approach to compensation planning is a great way to ensure you develop and maintain a competitive compensation package.

How to develop salary ranges for your organization in 6 steps

As part of your employee compensation plan, your company’s salary ranges are central to your ability to attract, retain, motivate, and reward talent. The way you create salary bands depends on the type of salary structure you adopt and the way you customize it, but here are some essential steps to keep in mind.

‍🚀 Leapsome can help you develop salary ranges that suit your needs

Our compensation management planning and scaling tools help you streamline your compensation workflows and help you grow.

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1. Define your compensation philosophy & strategy

A compensation philosophy is a formal statement that explains the “why” behind your approach to compensation and explores what it means to your organization. Your philosophy should guide all your future compensation decisions while promoting transparency and financial flexibility within your company.

While your compensation philosophy should help you make judgments about compensation as a whole, including topics like rewards, benefits, and promotions, it can also enable you to drill down into the connection between salary ranges and business objectives.

Suppose you run a small software development startup. Your compensation philosophy statement might highlight that you pay software developers salaries between the 75th and 80th percentile because of how central they are to your company’s success and your previous experiences hiring for those roles. Meanwhile, you may decide to offer salaries for other positions within the 50th to 70th percentile.

Your compensation philosophy is also key to establishing how incentive pay works within your organization. It also gives you space to explain how you’ll navigate salary increments and pay reviews and whether you’ll base them on factors like time with the company, performance, or embodiment of company values.
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2. Perform a job cost analysis

Conducting a job cost analysis, also known as “job costing,” helps companies weigh how much they pay employees against how profitable they are for the organization. If you’ve never carried out a job cost analysis before, it’s time to ask yourself what your average profit-per-project expectations are.

If you’re currently exceeding your set profit-per-project goals — let’s say you want to make 50% profit and consistently make around 65% — you may be underpaying team members. In that case, it might be time to probe further into the data to determine which teams or departments are most profitable and why.

Once you’ve worked out your current cost per employee, you should also do some market research to see how other companies value similar roles.
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3. Compare your average salaries to your competitors’

Analyzing your competitive posture is one of the most useful aspects of taking a market-based approach to establishing salary ranges, especially if you’ve committed to paying higher-than-market rates for some or all of your positions in your compensation philosophy. 

If attracting and retaining top talent is your current goal, and your median salaries are lower than the market average, you need to update your pay structure or your overall compensation plan to account for that difference.

Leapsome Compensation partners with Mercer, the leading provider of salary benchmarking data. That means our tool is ideal to help create salary ranges that are not only fair, but competitive and in-line with the latest market trends.
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💬 “Structured compensation is something we live and breathe here at Leapsome, where fairness and consistency are important to us. We have a structured career path and leveling framework with fixed compensation packages per level. Team members in the same role and on the same level all have the same compensation package.

This is because salary negotiations, especially at the higher levels, often disadvantage underrepresented groups. Having structured leveling and a well-defined salary structure in place allows us to prevent any systemic differences, e.g. based on gender or ethnicity, which is a fundamental basis for ensuring diversity, inclusion, equality, and equity.

We have committed to paying salaries at the 75% percentile of median in the market, and this has been working well to help us attract and onboard candidates that align with our equitable philosophy — with our offer acceptance rate currently standing at 94%. Additionally, only 0,03% of our voluntary leavers mention compensation as a reason why they left.”

— Claire Rosenthal, Head of People and Culture at Leapsome

4. Determine your company’s pay raise margin

Your company’s pay raise margin, also called your compensable leverage, is the average percentage you increase employee salaries yearly. You’ll also want to compare this metric with pay raise margins for similar jobs on the market. 

If your pay raise margin is similar to or higher than your industry’s average, your pay raises are competitive and may not need adjustment. If they’re lower, consider increasing them to improve your competitive posture, or think about what rewards and incentives you’ll offer instead — like opportunities for continuous development or other types of supplemental pay throughout the year.
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5. Check for any outliers

Finally, do an equity check to ensure there aren’t inconsistencies across departments and teams. If you have employees or even entire teams earning significantly more than their colleagues or market averages, do some investigating. Make sure that any increases in compensation have been made based on appropriate criteria like performance, experience, or whether someone’s role is central to your company’s business strategy.
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6. Create your company’s salary structure

Once you’ve fine-tuned your structure, apply it to your current team members. This is when you should conduct salary talks and offer increases to employees who are earning below your defined minimums. 

If you realize that there are team members who are earning above your newly established maximums, our recommended best practice would be to freeze their next salary raise until any shifts in the market justify an increase. In the spirit of transparency, be sure to communicate that to anyone affected.

Be sure to clearly communicate your new salary structure and associated processes with all team members. Ensure employees understand where they fall in a given salary range and how that may change as they grow with your organization.

When it comes to compensation, transparency is key. Team members are more likely to feel that their input matters when you take the time to explain the “what” and the “how” behind the organization’s salary structure.

💡 It can be difficult to keep track of all the different moving parts that make up compensation management. That’s why many organizations choose to adopt compensation management software! Check out the best options on the market at the moment in our comprehensive breakdown.

The main 3 types of salary structures

There are three main kinds of salary structures companies can adopt to compensate employees — but that doesn’t mean you should have a “pick one” mindset. 

Let’s break down how each of these structures works so you can take what best suits your company, leave what doesn’t, and understand how you can tailor them to fit your organization’s unique needs.
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‍Traditional salary structure

The system of dividing employee salaries into position-based ranges comes from traditional salary structures. That means that for one role — suppose it’s a junior accountant position — two employees could be paid at different levels depending on professional factors like experience, seniority, credentials, or skills.

‍So, someone who’s new to your accounting firm and fresh out of university might make a salary in the first paid grade. However, another junior accountant who’s been with your firm for two years and just passed their CPA exam could earn a salary in the fourth or fifth pay grade.  

With this kind of structure, unlike broadbanding, salaries for given roles are broken down into multiple, rather narrow pay grades with a small margin between the maximum and minimum salaries. 

The multiple pay grades and narrow salary ranges ensure that employees don’t hit their maximum salary for the position too quickly. Companies also opt for this system as a retention strategy to show that there’s room for gro​​wth.

Let’s look at a salary structure sample for the same role within the same company:

• ‍Pay grade 1: US$45-47,000
• ‍Pay grade 2: US$47-49,000
• ‍Pay grade 3: US$49-51,000
• ‍Pay grade 4: US$51-53,000
• ‍Pay grade 5: US$53-55,000
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Market-based salary structure

In a market-based salary structure, companies use market data from similar industries and roles to develop each salary range. This is one of the more common salary structures as it helps companies stay on par with competitors, which helps attract and retain talent.

However, while taking market data into account is important, there’s an emerging sentiment that relying exclusively on market data to make salary decisions isn’t always the best practice. There are a few reasons for this:

• The market can be volatile, and changes can be unpredictable
• Market data doesn’t always take your company size, values, pay equity, or compensation philosophy into account
• Smaller organizations in earlier growth stages often lack representation in salary survey data

Creating a salary structure should be a holistic process. So, if you’re taking a market-based approach, consider that market data, while useful, warrants an objective assessment in balance with fiscal responsibility and business goals.
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Broadband salary structure

In a broadband structure, also referred to as broadbanding, the salary range for a role is broken down into fewer pay grades with wider ranges between the minimum and maximum rates.

Unlike in a traditional salary structure, a company that chooses broadbanding may assign only two or three pay grades for a given role. There are also more significant differences between maximum and minimum salaries than you’ll find in a traditional salary structure. 

While broadbanding can give the impression of fewer promotion opportunities, one advantage of this approach is its flexibility and potential for better internal equity. This is especially helpful for employers who want to move from a strict organizational hierarchy to a more horizontal structure with seamless internal promotion opportunities, as broadbanding reduces the number of apparent “tiers” that exist in a traditional structure.

Employees may also enjoy the feeling that, because they might share the same pay grade as someone with more seniority or experience, they’re equally valued and respected team members.

“The advantage of broadbanding is its greater emphasis on career development and progression compared with traditional salary structures. Broadbanding is suited for organizations that wish to respond quickly to changes in recruiting markets and want to have a flatter, less hierarchical organizational structure.”

‍— Dean Kaplan, president of The Kaplan Group

On the other hand, broadband salary structures can lead to more internal inequity. While managers have more discretion over how much to pay an employee, the wider salary range can also mean that there aren’t as many built-in steps to ensure that two employees with the same role and background aren’t paid vastly different amounts.

For employers that don’t take the time to review their compensation decisions for fairness, this could lead to one worker being paid more for the same role — but for subjective and possibly biased reasons.

Ultimately, broadbanding can be an effective way to organize your salary structure as long as managers, HR professionals, and leadership are aware of its potential shortcomings.‍
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Top benefits of establishing salary ranges

Robust, transparent salary ranges can have substantial cultural, organizational, and economic benefits for your company. The right approach can help you:

• Set fair, clear guidelines to guide compensation decisions — When done right, your compensation plan and chosen salary structure can help create trust and psychological safety within your company. With two out of three workers reporting a belief that compensation should be part of their organization’s diversity, equity, inclusion, and belonging (DEIB) initiatives, companies need structured salary plans that are straightforward, simple to implement, and easy to talk about with employees company-wide.
  

• Better allocate resources and make budgeting easier — While establishing salary ranges can require an unexpected mixture of quantitative analysis and creative decision-making, putting one in place will make budgetary considerations easier. After all, you’ll have a solid grasp of where you can make financial compromises and where you can’t.
  

• Contribute to an open, transparent company culture — 79% of employees want more employer transparency around salaries, and for a good reason. Creating and sharing specific salary ranges with your company keeps you from making subjective and unwise compensation decisions and can support accountability around pay. Even more importantly, companies that are committed to transparency are likely to have better engagement survey results and a stronger Employee Net Promoter Score (eNPS).
  

• Help with career planning and progression — The pay grades system that’s embedded in typical salary structure frameworks can help managers and HR professionals responsibly usher employees along their career development journey and advise staff during career development talks.
  

• Stay competitive in a tight labor market — When sought-after talent researches your company’s salaries and compares your organization with competitors, which they will, well-designed salary ranges will show that you recognize that team members deserve to be rewarded for their efforts with monetary compensation.
  

• Increase employee motivation and satisfaction — According to a recent report from SHRM that ranks factors for employee satisfaction, compensation came second only to respectful treatment of team members. Overall, people aren’t just interested in more money for the sake of it. They want to know they’re being paid fairly and can expect compensation increases in accordance with their growth.

⭐ Along with compensation, growth opportunities are a huge motivator for employees.

‍Don’t let team members stagnate. Check out our guide for developing career progression frameworks for your company.

Set up scalable compensation processes with Leapsome

Your company’s approach to compensation management — including salaries, bonuses, and benefits — isn’t just about keeping you financially viable from year to year. Rather, the way your organization deals with compensation is critical to retaining your best performers, attracting top talent, and building a dynamic, high-performing team that propels you toward your most ambitious goals.

Leapsome is here to simplify compensation management, integrate it into your day-to-day operations, and ensure it can scale with your organization as it grows. Our dedicated Compensation module is designed to help companies build fair, transparent compensation and promotion processes that can evolve with them over time. It can help you set up automatic, streamlined compensation workflows, empower people teams to make smart, data-guided decisions, and foster a great employee experience for all team members.

Because Leapsome knows that taking good care of team members is central to any successful organization — and fair salary ranges are a big part of that.‍
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