How To Establish Salary Ranges: A Complete Guide For HR and Payroll
If you're looking at the market and confused on how to establish salary ranges, that's okay, it is confusing. But it's important to get right for employee satisfaction.
Clear salary ranges are a primary component of pay transparency efforts, something that 67% of job seekers say is an important factor when they assess a potential employer.
In this article, we’ll dig into how to assess and establish salary ranges, examine their benefits, and look at payroll services that can help you create a salary structure that is competitive and fair.
What Are Salary Ranges?
Salary ranges are like the bookends of a library shelf – they keep everything organized and in place. These ranges include a minimum, midpoint, and maximum salary for each role within a company.
Clear salary ranges ensure that employees are fairly compensated and know what to expect as they progress in their careers.
Why are salary ranges important?
Having well-defined salary ranges helps in maintaining pay transparency and trust within the company. It also aids in budgeting and ensures competitive pay, which is essential in attracting and retaining top talent.
When Should You Establish Salary Ranges?
Establishing salary ranges isn't just a one-time task, it's a strategic process that can be triggered by several key events or changes within a company.
The purpose of compensation management in HR is to balance internal equity and external competitiveness. Understanding when to establish or re-evaluate salary ranges is crucial for maintaining fair and competitive compensation strategy.
Here are some common triggers:
Company growth or expansion
When a company experiences significant growth or expansion, it's a perfect time to establish salary ranges. As new roles are created and teams grow, having structured salary ranges ensures consistency and fairness. It also helps in budgeting for new positions and managing payroll effectively.
Mergers and acquisitions
During mergers and acquisitions, integrating different company cultures and pay structures can be challenging.
Establishing new salary ranges helps align compensation practices across the merged entities, ensuring equity and cohesion among employees.
Market changes
The job market is constantly evolving. Significant shifts in industry standards, economic conditions, or regional salary trends can necessitate a review and establishment of new salary ranges.
Keeping up with these changes ensures your company remains competitive in attracting and retaining talent.
Organizational restructuring
When a company undergoes restructuring, such as redefining job roles or implementing new levels within the organization, it's an ideal time to establish or revise salary ranges. This ensures that the new structure is supported by a fair and transparent compensation system.
High turnover rates
If your company is experiencing high turnover rates, it might be a signal that your compensation packages are not competitive or that your people don’t feel your pay practices are fair.
The value of pay transparency has been shown in a number of studies in which job satisfaction and retention increase as pay equity and transparency are addressed.
Employee feedback
Regular feedback from employees about pay dissatisfaction or concerns can trigger the need to examine salary ranges. Listening to employee feedback and responding with well-defined salary structures can improve morale and trust within the organization.
New regulatory requirements
Changes in labor laws and regulatory requirements can also trigger the need to establish salary ranges.
Compliance with new regulations ensures that your company avoids legal issues and remains aligned with the company’s compensation philosophy.
Performance and compensation reviews
Annual or bi-annual performance and compensation reviews often highlight discrepancies or the need for adjustments in salary ranges.
These reviews provide an opportunity to establish updated salary ranges that reflect current performance standards and market conditions.
6 Steps To Establish Salary Ranges
Setting new pay parameters is something that you'll want to do carefully and with one eye on the future. Here are some steps follow as you ponder your salary ranges.
Conduct market research
To start, you'll need to gather market data on salaries for similar roles in your industry. This involves looking at salary surveys and industry reports. Websites like Glassdoor, Payscale, and industry-specific surveys can be helpful in gathering information, but in many cases, are not where you need to stop your search.
Engaging with compensation management solutions or third-party analysts in the form of payroll service vendors can be highly valuable.
Market research helps you understand what competitors are paying and ensures your ranges are competitive, but that information may not be publicly available. Engaging with companies and tools that have access to this information can help a great deal in ensuring the accuracy of the data you’re working with.
Analyze internal data
Next, review your current employee salaries to identify patterns and discrepancies. Look at factors like job performance, experience, and tenure. You can also go over your checklist for payroll processing and pull holistic data about pay, benefits, employee classification, and pay schedules.
Dan George, CEO and Founder of Piper Key Analytics, notes that establishing which data points you're going to look at isn't a simple question to answer.
"Start with what are the core responsibilities for the roles and how does that apply to your operating model (where the org generates income or has variability to reduce expenses)," he says. "The two biggest overlooked aspects are how will the salary ranges scale over time and how is the org applying these ranges to different departments?"
Define job roles and levels
Creating detailed job descriptions and levels within each role is crucial. Consistency and clarity in job definitions and roles help in setting appropriate salary ranges.
"Consistency, meaning if levels or ranges start at level 1 and go up to level 5, do the roles of each department start at the same level or not? This goes back to the operating model," George said.
Companies like Google and Meta are known for their well-structured job roles and levels, which aid in clear salary determination. But even these companies are beginning to re-examine the traditional structure of how job roles and levels are determined.
As we found in our annual trends report, a move to skills-based structures is increasingly common.
"The top-to-bottom organizational skill taxonomy and cataloging we know is going to die in the next year or so," George added. "It's a never-ending job and trying to build a new model of it with AI is proving too much work for too little reward."
Set salary range parameters
Now, it's time to establish the minimum, midpoint, and maximum salary for each role. Consider market data and your company's budget. Good salary range parameters align with market trends and company goals, ensuring both competitiveness and sustainability.
Here are a few tips on how to do this.
- Balance Internal Equity with External Competitiveness: Ensure your salary ranges reflect both the internal hierarchy and the external market rates to maintain fairness and attract top talent.
- Factor in Future Growth: Set ranges that can accommodate future salary increases, considering the company's growth projections and budget forecasts.
- Regularly Update Market Data: Use current and comprehensive market data for setting salary parameters, and review this data periodically to keep up with changing industry standards and economic conditions.
Communication = Transparency
Nothing catches the attention of your employees quite like changes in pay. For this reason, if you're resetting existing salary ranges, you'll need to clearly explain the how, when, why and who is effected to employees to maintain transparency.
"If the org is looking to reset ranges, and is seeking to communicate this to all employees, then transparency is imperative," George said. "This means when ranges are reset, roles and current pay need to be adjusted regardless of other factors. It doesn't need to be immediate, but should have a set timeframe to which all roles and pay will have the new compensation structure become effective, usually within 6-12 months."
Review and adjust regularly
The job market is dynamic, so it's essential to review and adjust salary ranges periodically. Typically, companies review their salary structures every one to three years. Regular reviews help in staying competitive and fair.
According to the Society for Human Resource Management, about 77% of companies review their salary ranges annually, whereas only 17% wait a period of two to three years.
Those numbers are a bit old, but not much has changed when it comes to frequency of salary range checks. The only exception is if you're operating in a high inflation market where peer group salaries increase frequently.
Benefits Of Establishing Salary Ranges
It may sound like common sense, but having well established salary ranges has some clear benefits, including:
- Increased Transparency: Employees understand how their pay is determined.
- Improved Employee Retention: Clear pay structures reduce turnover.
- Easier Budgeting: Predictable salary costs aid in financial planning.
Statistics show that companies with transparent salary ranges see a 15% increase in employee retention rates, according to SHRM.
Common Challenges In Setting Salary Ranges
Salary ranges evolve, sometimes quickly. It presents a never-ending need for analysis and resetting. Here are some of the things that will drive that need.
Dealing with market variations
Different markets and regions have varying salary levels and regulations. To tackle this, Look for the most localized salary data you can find and adjust ranges accordingly for where candidates live.
Websites like the Bureau of Labor Statistics can provide a good starting point for regional insights.
Addressing internal pay discrepancies
Existing pay discrepancies can cause dissatisfaction, disengagement, and tensions within the ranks.
Conduct a pay equity audit and make necessary adjustments to ensure fairness. This process can highlight areas needing correction and ensure everyone is paid equitably for their role.
Maintaining flexibility
Flexibility in salary ranges is crucial for attracting exceptional candidates. Create guidelines for salary exceptions and approvals to accommodate these situations.
10 Tools And Resources For Establishing Salary Ranges
Modern compensation management requires the use of technology to aide in the process of understanding the market and applying insights gained to your payroll practices. Here are some of our favorite tools to help ensure your salary range decisions are based on data and best practices.
Summary
Establishing clear and competitive salary ranges is essential for attracting and retaining top talent. By conducting market research, analyzing internal data, defining job roles, setting parameters, and regularly reviewing ranges, you can create a fair and transparent pay structure.
Remember, regular reviews and flexibility are key to staying competitive in a dynamic job market.
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FAQs
What steps should I follow to establish effective salary ranges?
Follow these steps: conduct market research, analyze internal data, define job roles and levels, set salary range parameters, and review and adjust regularly.
How often should salary ranges be reviewed?
Salary ranges should typically be reviewed annually or bi-annually to stay competitive and fair.
What tools can help establish and manage salary ranges?
Tools like PayScale, Glassdoor, SHRM, CompAnalyst by Salary.com, and Radford Global Compensation Database can assist in establishing and managing salary ranges. But perhaps the best solution is a payroll service provider who can take on the task for you using both data from other clients and external data. Payroll software solutions or pay equity software may also prove valuable with their extensive range tools for tasks such as salary benchmarking.
Why are salary ranges important?
Salary ranges ensure transparency, fairness, and competitiveness, aiding in employee satisfaction and retention.
How can I address internal pay discrepancies?
Conduct a pay equity audit and make necessary adjustments to ensure fair compensation for all employees.
