Key takeaways
- Salary bands give every role a minimum, midpoint, and maximum based on market data.
- Build job levels first. Bands without consistent levels fall apart within a year.
- Compa-ratio, salary divided by midpoint, is the simplest way to see who sits where.
- A merit matrix ties raises to both performance and position in range.
- Pay transparency laws in many states make defensible ranges a legal need, not just good practice.
A salary band, also called a pay range, sets the minimum, midpoint, and maximum pay for a job or job level. A compensation strategy is the set of decisions behind those bands: which market you compare against, where you want to sit in that market, and how pay grows over time.
A 120-person software company has never had salary ranges. Offers were negotiated one at a time, usually by whichever founder was free. Then the company posts its first job in Colorado, where the law requires a pay range in the posting, and nobody can say what the range should be.
When the new head of people pulls the payroll file, she finds two account executives with the same title, same tenure, and similar results, paid 31 percent apart. One negotiated hard. The other didn't. She also finds that three of the five lowest-paid engineers are women.
That is what pay looks like without a structure. It isn't usually anyone's intent. It is what happens when decisions are made one at a time. This guide walks through building a pay structure step by step.
Start with a compensation philosophy
Before any numbers, answer three questions in writing.
- Which market do you compete in? A regional manufacturer competes for engineers with other local employers. A remote-first software company competes with companies across the country.
- Where do you want to sit in that market? Many companies aim at the median, often called the 50th percentile. Some pay above the median for hard-to-fill roles and at the median for others.
- What do you reward? Individual performance, team results, skills, tenure, or some mix. Your answer shapes merit increases and bonuses.
A one-page philosophy keeps every later decision consistent and gives managers something to point to when employees ask why pay works the way it does.
Build your job architecture first
Bands attach to jobs and levels, so you need a consistent structure of both. Group roles into job families, such as engineering, sales, customer support, finance, and HR. Within each family, define levels with clear differences in scope, complexity, and independence.
| Level | Typical scope | Example in HR |
|---|---|---|
| Associate | Learns the work, follows established processes | HR coordinator |
| Intermediate | Works independently on routine work | HR generalist |
| Senior | Handles complex work, guides others | Senior HR business partner |
| Lead or manager | Owns a program or a team | HR manager |
| Director | Owns a function and its strategy | Director of people |
Map every current employee to a family and level based on the work they actually do, not their title. Expect this step to surface title inflation. That is normal, and it is one of the main benefits of the exercise.
Gather market data
Market data tells you what other employers pay for similar work. Common sources include paid salary surveys from compensation consulting firms, data built into compensation software, and free public data. The Bureau of Labor Statistics publishes Occupational Employment and Wage Statistics by occupation and metro area, which is a solid free baseline for many roles, though it doesn't separate levels the way a salary survey does.
Match each of your jobs to a survey job based on the job description, not the title. Use at least two sources when you can, note the date of each data point, and age older data forward to today. Salary data that is more than a year old is already out of date in a tight market.
Set midpoints and range spreads
The midpoint is usually set at your target market position, often the market median for that job and level. The range spread is the distance from minimum to maximum, expressed as a percentage of the minimum.
Narrower ranges suit entry-level roles where skills grow quickly and people move up levels. Wider ranges suit senior roles where people stay longer and grow within the role. A common design uses spreads around 30 to 40 percent for entry-level roles and 50 to 60 percent or more for senior and leadership roles. These are design choices, not rules.
An example. If the market median for a senior HR generalist is $80,000 and you use a 50 percent spread centered on that midpoint, the range runs from $64,000 to $96,000. Check that ranges for adjacent levels overlap somewhat, so a strong performer at one level isn't forced into a promotion just to get a raise.
Compa-ratio and range penetration
Compa-ratio is an employee's salary divided by the midpoint of their range. A compa-ratio of 1.0 means they are paid exactly at midpoint. Below 0.9 suggests they are paid low for the role, and above 1.1 suggests they are paid high.
Range penetration tells you how far through the range someone sits, from 0 percent at minimum to 100 percent at maximum. Both measures help you spot people who are underpaid, people who are nearing the top of their range, and teams where pay has drifted. Calculate them for everyone when you first build your bands, then decide how to handle people outside the new ranges.
Handling people above or below the new ranges
Employees paid below the new minimum should usually be brought up to at least the minimum, either right away or over a short, planned period. That adjustment is often the most important result of the project, and it frequently corrects historical inequities.
Employees paid above the maximum are often called red-circled. Don't cut their pay. Common approaches are to hold their base pay steady while the range catches up over time, pay any merit increase as a one-time lump sum instead of a base increase, or review whether they actually belong at a higher level.
Geographic pay for distributed teams
Remote and multi-location companies need to decide whether pay varies by location. Many use a small number of geographic tiers, for example a national rate, a higher tier for the most expensive metro areas, and a lower tier for lower-cost areas, applied as a percentage adjustment to the national range. Others pay one national range for all roles to keep things simple and fair.
Either approach can work. What matters is choosing one, writing it down, and applying it consistently, including when an employee moves.
Merit increases and the merit matrix
A merit matrix sets raise guidelines based on two things: performance rating and position in range. People with strong performance who sit low in their range get the largest increases, because they are both valuable and underpaid relative to the role. People at the top of their range get smaller increases, even with strong performance, because they are already paid well for the role.
| Performance | Low in range | Mid range | High in range |
|---|---|---|---|
| Exceeds | Largest increase | Above budget | At budget |
| Meets | Above budget | At budget | Below budget |
| Below | Small or none | None | None |
Fill in percentages based on your overall merit budget. Managers then recommend raises within the guidelines, with room for judgment and an approval step for exceptions.
Running a pay equity review
The Equal Pay Act prohibits sex-based pay differences for substantially equal work, and Title VII prohibits pay discrimination based on race, color, religion, sex, and national origin. Many states have broader equal pay laws. A regular pay equity review checks whether pay differences between groups can be explained by legitimate factors such as level, performance, location, and experience.
Start with simple comparisons within each job and level. Larger companies often use regression analysis to control for several factors at once. Many companies run the analysis under attorney-client privilege. When you find unexplained gaps, fix them with adjustments, then fix the process that caused them, such as unstructured offer negotiations.
Mistakes that sink a first pay structure
The most common failure is building beautiful ranges and then letting exceptions eat them. A hiring manager wants a candidate, the candidate wants more than the maximum, and the offer goes out anyway with a promise to "fix the range later." Do that a few times and the structure no longer describes reality, which means the next pay equity review will find problems you created on purpose. Set a clear exception process instead: who can approve an offer above the range, what evidence they need, and how often the range itself gets revisited when exceptions pile up.
Other common mistakes: matching jobs to market data by title instead of duties, forgetting to budget for bringing underpaid employees up to the new minimums, and announcing ranges before managers can explain them.
Communicating pay to managers and employees
Pay structures only build trust when people understand them. Train managers first, so they can explain how ranges work, where an employee sits, and what it takes to grow. Then tell employees, at minimum, their own range and how raises are decided. Many companies now share ranges for all roles internally, and pay transparency laws are pushing in that direction anyway. Our pay transparency guide covers the state rules.
Review ranges against market data at least once a year. Compensation software can hold your ranges, market data, and merit cycles in one place. See our compensation management buyer guide.
Salary band build checklist
Work through this list with your team. The printable PDF version has space to tick each item off.
- Write a one-page compensation philosophy
- Define job families and levels
- Map every employee to a family and level based on actual work
- Match each job to market data from at least two sources
- Age older market data to today
- Set midpoints at your target market position
- Choose range spreads by level
- Check that adjacent ranges overlap sensibly
- Calculate compa-ratio for every employee
- Plan adjustments for anyone below range minimum
- Decide how to handle red-circled employees
- Choose a geographic pay approach and document it
- Build a merit matrix tied to your budget
- Run a pay equity review before finalizing
- Train managers before sharing ranges with employees
- Review ranges at least once a year
Where to go from here
Wherever you are in the process, there is a next step that fits.
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Email templates for this topic
Ready-to-edit emails with subject lines, compliance notes, and a free PDF.
- Job offer email templatePut a verbal offer in writing with pay, start date, contingencies, and a clear deadline to respond.
- Salary increase notification email templateConfirm a raise in writing with the new pay, effective date, and the reason behind it.
- Merit cycle kickoff email to managers templateLaunch the annual compensation review with budgets, guidelines, deadlines, and pay equity checks.
- Bonus announcement email templateAnnounce an individual or company-wide bonus with the amount, timing, and tax details.
Frequently asked questions
What is a salary band?
How wide should salary ranges be?
What is compa-ratio?
What should we do with employees paid above the range maximum?
Where can I find free salary data?
Sources
We checked the facts in this guide against these primary sources. Laws and thresholds change, so confirm current rules before you act.
Written by the HRTally Research Team
Our guides are written and reviewed by people with hands-on US HR, payroll, and HR technology experience. Legal and tax facts are checked against primary sources, such as the Department of Labor, IRS, EEOC, and USCIS, and linked at the end of each guide. Vendors never review or pay for our editorial content.