Step by step guide on implementing an effective salary band structure

If you’ve seen our recent blog on pay transparency, you’ll have read about how hushed the topic of salaries is. Historically, salary bands and pay ranges have been kept private, but that hasn’t stopped Australians from demanding greater transparency.

With Employment Hero's Talent Insights Report revealing that 51% of Australians said they would accept a role in another organisation for a salary increase, it’s more clear than ever that businesses who are open about their compensation packages are winning the race for talent.

Salary bands, also known as pay bands, categorise jobs with similar responsibilities, skills, and qualifications into broad pay ranges. Each band can have sub-bands or grades that account for differences in performance, experience, and education among employees. These bands are usually developed using market data, internal equity, and organisational strategy.

What are the benefits of salary bands?

Pay equity and reduced bias

Salary bands promote fair compensation practices by providing clear guidelines for pay increases and career progression, reducing the potential for bias in salary decisions. According to the World Economic Forum, it will take 132 years to reach full parity where the global gender pay gap is fully closed. Salary bands put in place a structure that reduces these biases from entering Australian workplaces.

Better transparency

Salary bands help employees better understand how their pay is determined and what is required to advance to a higher band. This simplifies the communication of compensation policies and also helps to inspire staff and promote higher performance. Clear channels and policies around salary increases helps to avoid the pitfalls of unfair pay.

Easier budgeting

Salary bands can streamline the budgeting process by reducing the number of pay levels and ranges that need to be managed. Everything is structured in set bands, which can be carried across strategies for team building and planning. Having clearer visibility and a set structure for salary groups ensures that nothing is missed when budgeting for teams, or when looking to fill new positions.

Attract and retain talent

As mentioned before, clear salary structures help attract and retain top talent by providing transparent career progression paths. Despite the belief that being guarded with staff salaries is the best way to approach the taboo subject, it’s becoming more apparent that organisations with salary transparency (at least for those with the right salary bands) are far more likely to attract and retain their talent.

The difference between salary bands and pay ranges

While often used interchangeably, salary bands and pay ranges are two very different concepts. Salary bands are broader categories that group jobs with similar responsibilities and qualifications, providing a framework for career progression and pay increases. In contrast, pay ranges are specific to individual jobs or groups of similar jobs, allowing for more flexibility and customisation based on performance, experience, and market demand. Let’s break these down further:

Salary bands

Salary bands cover broad categories of pay for jobs with similar responsibilities. These bands are usually based on market data and internal equity. As mentioned above, they provide a structured framework for pay increases and career advancement.

Advantages:

• Consistent framework for career progression
• Simplified administration of compensation policies
• Transparency for employees

Disadvantages:

• May limit flexibility and responsiveness to market conditions
• Potential for pay compression or inequity if not regularly updated
• Can discourage individualised pay differentiation

Pay ranges

Pay ranges, as mentioned, are more specific intervals of pay that apply to individual jobs or groups of similar jobs. For example, different pay ranges might exist for a coordinator, manager, or director.

Advantages:

• Greater flexibility and customisation of compensation
• Tailored to reflect the value and complexity of each job
• Allows for individualised pay differentiation based on performance or experience

Disadvantages:

• Requires extensive analysis and maintenance
• Potential for confusion and dissatisfaction if not transparent
• Risk of disparity issues between ranges

How does pay banding work?

Pay banding simply refers to jobs with similar work requirements being grouped within a salary range. Overlap between bands is quite common, where employees who are in the same band might not get the same pay. For instance, employees moving to a higher band may not immediately see a salary increase, but instead simply have a higher earning potential.

How to create a salary band

Step 1: Review relevant job descriptions

To start the implementation of salary bands, conduct thorough surveys to gather information on daily responsibilities. You can work with your managers or leaders to understand each role and how it operates within the greater business. After that, create or update job descriptions and compare them with similar roles in other businesses who are in your same industry.

Step 2: Rank job roles

Next, use a classification system to rank positions based on qualifications and responsibilities. This step of the process focuses on properly grouping roles based on how they impact and operate your business. For instance, you may group administrative roles together due to their support functions, technical roles by their specialised expertise, and managerial positions by their leadership and strategic responsibilities.

Step 3: Gather market data

Utilise resources from relevant forums, HR experts, legal sites like Fair Work, or benchmarking tools to find pay averages and ranges for similar roles and industries. You can find out about pay ranges with our complete guide to salary benchmarking, or try out our new salary insights tool. These trends are going to be essential when you develop your salary bands, as they will help you align with the industry norms.

Step 4: Develop pay grades

Group positions with similar pay into relevant grades – you’ll be analysing the roles within your business and categorising them into specific pay grades based on things like qualifications and responsibilities. Smaller businesses may have fewer grades due to a simpler structure, or due to less role diversity. Larger businesses may have more grades to accommodate a wider variety of positions and levels of responsibility. 

Step 5: Develop ranges within grades

Once you have established pay grades, determine the minimum, midpoint, and maximum pay ranges within each grade. This means setting a starting salary for the least experienced or lowest-performing employees within a grade, a midpoint that reflects the market average or typical pay for the role, and a maximum for the most experienced or highest-performing employees.

You’ll avoid overly large ranges, especially if you have budget constraints, or else you might find yourself facing pay inequities or budget overruns.

Step 6: Monitor always, update as needed

Much like how Covid-19 caused the shift to remote and hybrid work models, unforeseen issues like economic crises affect salary expectations.

Even without these events, salary expectations will continue to shift as demands change. Monitoring these can ensure your salary bands remain aligned with market conditions, which can reduce turnover while attracting more talent.

Best practices for using salary bands

We’ve said it before – continuously monitoring market changes is one of the best ways to keep salary bands aligned with industry standards. Salary bands become ineffective if you aren’t updating them regularly to accommodate changes in your industry.

Effective budget management is the next area you have to stay on top of. Making sure that salary bands and any additional incentives fit within your businesses financial constraints helps you avoid the risk of budget overruns.

Consider the current pay structure and your competitive positioning to maintain internal equity. When you’re transparent about your processes for salary increases and compensation decisions, you inspire employee trust and satisfaction. While it’s not always practical to fully disclose individual salaries, you should avoid being guarded around details that may generate distrust or scepticism. If you’re unsure how to shape compensation in your business, have a read of our Compensation Management Guide.

Should you hire at the lower end of the salary band?

Not necessarily. When considering new hires, you should be thinking about what you need, and ensuring that what you need is within your budget. While hiring at the lower end can be cost effective, you need to balance that with the need to attract and retain high performing employees. 

Offering competitive salaries can motivate new hires and encourage growth within your business. Depending on the role you’re hiring for, you’re going to want to ensure the candidates you're drawing in are hard working and eager to make their mark in your business. Bottom line, what you put in is likely what you get out.

Need more employment advice? Reach out to our team.

Employment Hero has an employment solution for every business, and our platform helps businesses support their teams and create the work environment they want. From building a high performance culture to improving engagement, we’ve got everything you need to manage your people effectively.

And if you’re looking for top talent with the right fit for your business, check out SmartMatch by Employment Hero. It’s an AI-powered tool that connects you with great candidates instantly, and could save you up to 80% on hiring costs.