Building Salary Bands: Creating Pay Structures That Scale

As companies grow past 20-30 employees, informal compensation approaches break down. Without structure, similar roles end up with wildly different pay, negotiating skills determine compensation more than performance, and pay equity issues emerge. For context on what owners typically pay themselves, see our owner compensation benchmarks.

Salary bands solve these problems by creating defined ranges for each role and level. This guide walks through how to build a salary band structure from scratch.

Why Salary Bands Matter

Benefits for the Company

• Consistency: Similar roles paid similarly, regardless of negotiation skills
• Budget predictability: Easier to forecast compensation costs
• Manager enablement: Clear guidelines simplify hiring and promotion decisions
• Legal compliance: Structured approach supports pay equity requirements
• Reduced bias: Less room for unconscious bias in pay decisions

Benefits for Employees

• Transparency: Employees understand what pay is possible in their role
• Career clarity: Clear progression from one level to the next
• Fairness: Confidence that pay is determined objectively
• Trust: Structured approach signals mature, fair management

Building a Level Framework

Before setting pay ranges, define your job levels. This creates the architecture for your compensation structure.

Typical Level Structure

Level Definition Criteria

Each level should have clear criteria covering:

• Scope: How broad is their impact? (Task → Project → Team → Function)
• Autonomy: How much supervision do they need?
• Complexity: How complex are the problems they solve?
• Influence: Who do they influence or lead?
• Experience: Typical years of relevant experience

Setting Pay Ranges

Each level needs a pay range with minimum, midpoint, and maximum values.

Key Concepts

• Midpoint: Target pay for fully competent performance in the role
• Minimum: Starting point for someone new to the level
• Maximum: Top of range for exceptional performers who haven't promoted
• Range spread: Distance from min to max (typically 20-50%)

Range Spread Guidelines

Example Salary Band

Level Progression

The gap between midpoints of adjacent levels is typically 10-15%. This creates meaningful progression while maintaining some overlap between levels.

Geographic Pay Differentials

With remote work, geographic pay decisions have become more complex.

Approaches to Geographic Pay

• National rate: Same pay regardless of location
• Location-based: Pay adjusted for local cost of living/market
• Hybrid: Pay within a range, but location affects where in range
• Zone-based: Group locations into tiers (Tier 1 cities, Tier 2, etc.)

Considerations

• Competitiveness: Can you attract talent in high-cost markets with national rates?
• Retention: Will employees in low-cost areas leave for national-rate competitors?
• Fairness perception: How do employees perceive geographic differentials?
• Complexity: Location-based pay adds administrative burden

There's no single right answer. Consider your talent strategy, business model, and company culture when deciding.

Placing Employees in Bands

Where someone falls within their range should reflect their performance, experience, and value contribution.

Guidelines for Placement

• Below midpoint (0-50%): New to level, developing competence
• Around midpoint (40-60%): Fully competent, meeting expectations
• Above midpoint (60-80%): Exceeding expectations, high performer
• Top of range (80-100%): Exceptional performer, ready for promotion but staying in role

Movement Within Bands

• Annual increases: Performance-based movement through the range
• Promotions: Move to the next level's range
• Market adjustments: When market data shows ranges need updating

Handling Exceptions

• Below range: Red-circle—bring to minimum quickly (should be rare)
• Above range: Green-circle—no increases until promoted or range catches up
• Market premiums: Some roles may need premium pay (document and review regularly)

Maintaining Salary Bands

Annual Review Process

• Market data: Update with current compensation surveys
• Range movement: Typically increase ranges 3-5% annually
• Structure review: Are levels still appropriate? Do you need to add/remove?
• Equity audit: Check for pay gaps by protected characteristics

Communication

• Share ranges with employees (many companies now required to)
• Explain how placement and movement work
• Train managers on compensation conversations
• Be transparent about your compensation philosophy

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