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Building Salary Ranges for Beginners

Editor’s note: This piece was updated in November 2018. “What’s the typical salary range for an administrative assistant?” Talk about a loaded question! Here at PayScale, we work with a lot of companies who are trying to determine typical salary ranges for their jobs. What are the signs that your organization needs a salary range overhaul?

“Typical” is a tricky word because it implies a standard salary range can be applied to a single job across many companies. The truth is there is no one-size-fits-all range that will make sense for every business and in every market. Rather, there is a standard approach used by many companies to build out salary ranges that are competitive in today’s market.

Why you need to establish salary ranges

Not all companies want or feel ready for formal salary ranges. As an HR Professional, it is your job to identify when a compensation plan is needed and, more importantly, to educate your leadership team that creating pay ranges is good for the business.

The sooner you develop formal salary ranges for your positions, the sooner you’re able to ensure that your compensation package is in fact competitive in your talent market. That said, it can be difficult to obtain leadership approval on developing ranges without any impetus for change. Therefore, keep an eye out for the following situations to occur, as they usually signal it’s time to start formalizing pay practices at your company.

  1. A top performer comes to you with a “ransom” offer from a competitor.
  2. A manager advocates paying a new hire $10,000 above the market rate for a job because no candidate will accept the amount they’re offering.
  3. Several employees complain to HR about how they’re paid relative to another group/department.

Each situation is a red flag to HR that a formal compensation plan is needed. Establishing pay ranges helps ensure external competitiveness as well as internal equity. And, when implemented well, a compensation plan can help improve recruitment, retention, and employee satisfaction. Let’s walk through the typical approach to building salary ranges. 

how to use data to build salary ranges

overpaying_employees

Now that you’ve determined you need to build salary ranges, the first step is to anchor your ranges to salary market data. Data is the core of any legitimate compensation plan – it ensures that employees are paid fairly, makes conversations about employee pay easy and comfortable, and of course, protects your company from legal action.

Remember: The data you choose should reflect your compensation philosophy (how competitive you want to pay employees) and your compensation strategy (where you compete for talent). 

Once you’ve established which market you compete in for your talent (industry, company size, and location) and at what point in the market you wish to position the company (meet, lead, or lag), then it’s time to select some data sources.

Compensation Data Sources

Selecting sources for market data is an important, but often confusing, process. There are four primary sources for salary data and each have their own set of benefits and drawbacks. When making your selection(s), consider what type of company you are as well as your available budget for conducting a market study.

1. Published, Traditional Surveys: Provided by the government, professional associations, and/or consulting firms

Pros: Depending on the type of company you are, data from Professional Associations that service your industry might be helpful, particularly if you hire specialized talent from a niche industry. Consulting firms gather salary information from Fortune 500 companies in large metro areas, so if your company is positioned similarly, you may consider using this type of data. Government data from the Bureau of Labor Statistics (BLS) provides a broad perspective on market conditions.

Cons: It can take up to a year (or more) to receive results from these sources, which means the data will be outdated by the time it reaches you. Often the firm conducting the study will ask you to provide your data in order to receive a discount on the survey results, which may save you money but could cost you a considerable amount of time as you will need to gather and submit your information first. Results are often delivered in a published binder, CD/ROM, or excel file, which can make it challenging to analyze the data. Consulting firms typically survey large, well-established companies so the data tends to skew high and may not be applicable to your company. And Professional Association surveys typically have a small sample size of participating businesses.

2. Crowd-Sourced Surveys: Gathered From individuals who complete salary surveys online

Pros: These sources are very timely, can be easy to use, and are often a good value compared to traditional sources. A leading source for salary information is PayScale, which gives you access to real-time data and surveys millions of respondents so the information itself is a highly accurate representation of the market.

Crowd-sourced data is the only source that provides information on how specific skills are impacting pay. For example, PayScale’s crowdsourced data set holds over 55M salary profiles and 15K job titles.They span 365 industries and add in details like certifications and skills.

Here at PayScale, we collect detailed information about each individual’s salary, role and company through our online salary survey, and then puts the data through a rigorous validation process.

  1. First, we screen for inconsistencies between profiles, automatically removing those that don’t make sense.
  2. We put the remaining profiles through PayScale’s compensation model, removing the outliers.
  3. We only keep profiles that are tied to an individual’s current job or job offer. We use a unique fingerprinting technology that tracks user behavior in the survey, to catch Internet scrapers and other suspicious activity.
  4. Finally, we apply statistical algorithms to the data; anything that falls too far outside of our forecasts is removed from the dataset. We also regularly compare our crowd-sourced data to other sources to check for bias.

Cons: Depending on the online vendor, determining where they source their data can be difficult. Some online vendors simply buy traditional salary data and then average that information together to generate report. As a result, it is difficult for both vendor and user to discern exactly where the data came from. PayScale’s best practice is to go directly to the source (employees) to gather salary information. We pride ourselves on report transparency, so you always know where your data is coming from.

3. Data Sharing Networks: Provided by your compensation management platform company

Photo by NASA on Unsplash

Pros: Data sharing networks is a new type of data source that emerged in 2017; PayScale was the first company to release such an offering. The way it works is that your organization would join a community along with other organizations that use the same compensation data management platform. The compensation management platform company (PayScale) would aggregate all members’ data –by tracking users’ in-product behaviors and using their previously uploaded HRIS data — and automatically generates updated compensation benchmarks every quarter.

Every quarter, you would receive aggregated data that is very specific to your market (city, industry) and covers fast-moving jobs. Unlike standard surveys, receiving this valuable data requires no work (or participation) from your end.

In addition to the benefit of saving time, this data source provides coverage over many geographical locations — information that may be missing from certain traditional surveys. By using learnings gleaned from the wealth of data PayScale has access to, PayScale has calculated geography differentials for each job and applied these differentials to our data sharing offering (we call this Company-Sourced data). 

For example, PayScale’s Company-Sourced data can tell you software developers in Seattle make 29 percent more than the national average, while Accountants in Seattle make 15 percent more than the national average. In an increasingly tight job market, this type of competitive information can help you retain key employees and win over candidates who have multiple offers.

Cons: The value of data sharing networks will vary depending on the size and make up of the participant list. For PayScale’s offering, the list of participants is rapidly growing and has exceeded one thousand orgs at this point.  

4. Custom Surveys: Some firms offer to conduct custom market surveys for your business

Pros: With this option, the firm will survey competitors of your choice for their salary data and provide the aggregated results to you. These types of surveys are often very accurate.

Cons: Custom surveys are usually the most expensive market data option. It can also be a lengthy process for the firm to collect and report back on the data they receive. And, depending on the companies you wish to survey, you may struggle with participation.

Once you have your salary market data, you can start to develop your salary ranges. A pay range has a minimum, midpoint and maximum.

How to determine the midpoint of your range

range_midpoint

In general, you want to start by determining the range midpoint for each of your positions. You will use the range midpoint to determine the width of the range. 

Let’s say that based on how you’ve defined your talent market (the combination of your industry, organizational type, organizational size), you find that a Data Analyst who knows Excel and SQL with 2 years of experience makes between 60,000 to $80,000 a year. In this case, the range for this position is $20,000, and the range midpoint (or 50th percentile) is $70,000.  

Now, you’ll want to decide how competitive you want to be in setting pay for this position. In other words, do you want to lead the market, meet the market or lag the market? What you decide should be based on how critical a particular role is to your organization, your organizational profile (whether you a small startup, a growing company or a large established organization), what you can afford, and the value of your total rewards package (including benefits and perks).

Let’s say that your organization decided to target the 75% percentile of the market for the Data Analyst position, because you want to lead the market in order to attract critical talent. In that case, you would set your range midpoint at $75,000 for your Data Analyst position. To get to this number, we used this formula: range minimum + range width multiplied by target percentile. In this example: 60,000 + (0.75 x 20,000) = 75,000 

Next, you would create a range around your midpoint.

How to determine the width of a salary range

There are no hard and fast rules on salary range width; it will depend on your goals and particular organization. Generally, the wider the range, the more opportunity there is for employees to move up in salary. Typically, you’ll want to consider having wider ranges for higher level positions, where the expectation is that employees will have more longevity, or differentiation of skills or performance. On the other hand, if you want people to quickly master a position (e.g. entry-level positions) and give people a sense of rapid career growth, you may set narrower ranges for each position but set the expectation with employees that these are “stepping stone” positions.

For more information on how to determine the width of a salary range, check out this article.

Compare existing employees’ salary to your proposed salary ranges

Once you’ve gathered market data and developed ranges based on the results, there’s one more important step to take before you implement the new pay ranges. Before you roll out any compensation changes, it’s a good idea to compare your employees’ current pay against the proposed salary ranges. Doing so will highlight any large discrepancies that may need more attention – market data that is well above or below incumbent pay could indicate a need to reevaluate your job benchmark. In addition, analyzing your new ranges against internal pay will reveal whether you have any employees who fall below the minimum of the range (green-circled) or above the maximum of the range (red-circled).

If you find you have employees paid outside of their range then you will need to think through how you plan to address these situations before implementing the ranges.

Strategies for Green-Circled Employees: Depending on the number of employees below range, you may want to consider raising their base pay to at least the range minimum, provided they’re performing well in their job. If the cost is too great to provide at-once sweeping increases, consider providing tiered increases over the next few budget cycles to bring those employees in range. When budgeting, make sure you allocate a bit more for the employees below range.

Strategies for Red-Circled Employees: If you find you have a number of employees falling above their range maximum, consider what might be causing the overpayment. Do you have a very tenured workforce? Have employees received a standard 3% raise year-over-year regardless of performance? These situations can often lead to a significant amount of overpayment, which can make implementing your pay ranges challenging.

One commonly used strategy is to freeze base pay for red-circled employees and offer performance-based bonuses. Taking that approach will continue to incentivize your top performers in this group and potentially weed out any employees who are just “dialing it in.” If freezing base pay is too controversial, especially when rolling out a new pay structure, another option is to budget for smaller increases for employees high in range. Limiting raises at the top will free up money to be spent on employees below the range (if any).

Preparation is key when rolling out a compensation plan, especially if you need executive approval to move forward. If you are not able to explain how you plan to address your outliers, your leadership team may be hesitant to employ the ranges you created. Worse, it could sour their perception of the benefit of a compensation plan, which will make implementing ranges at any point a challenge.

Want to get the most from your salary ranges for a better, more engaged workforce and a balanced budget? Find out how real-time salary data can impact your business with a free demo of PayScale software. 

Jenni Marquez
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Chris
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Chris

Hey Jenni! Good article. We’ve done some preliminary work with Jenna Running at your office, but haven’t engaged Payscale yet because of some upcoming changes. However, that doesn’t stop the need for us to keep moving forward with our comp strategy. My main concern with our strategy is that our sales and commission based employees (about half of our workforce) are making 2 to 3 times more than our admin ppl. Also, our Sales VPs are making 3 to 4 times what non-sales VPs are making. This is causing some disgruntled VPs (if the avg admin employee knew what the… Read more »

Jane
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Jane

Chris – we have a very similar situation here.

Jenni help!

Shaun
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Shaun

Hello Jenni, I also found the article useful. In the past 12 months, I’ve had to address 2 of the 3 signs that it’s “time for a formal compensation strategy.” Thanks for the information. I look forward to reading future articles.

Tim Donnan
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Tim Donnan

interested

Agnes
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Agnes

This is very useful in our current situation

Mohit
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Mohit

Hi Chris

Hi Jenni, Thanks for sharing the wonderful article.

Chris, You may present market salary data to your CEO on Sales jobs, also you may put FSI or SSI rather then adding to fixed cost,(if incentives are not properly planned for sales people)

Mohit

anwar
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anwar

informative and useful for those who tend to create salary structure for the first time and also for those who join the company to commence their career.

Cindy
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Cindy

Thanks Jenni for this article. I’m looking forward to part 2.

Jenni
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Jenni

Great question Chris! Part of what we know in working with organizations like yours is that you can’t always use the same strategy for every segment of your workforce. I think the best thing you and the leadership team can do is to get real about the situation. Regardless of whether their compensation is reflected in base pay or incentive payouts, it’s true that sales employees usually make 2-3 times more than the rest of the employee population. So first things first – consider what you’re trying to accomplish as a business and how the sales team helps you achieve… Read more »

Cindy
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Cindy

Thanks Jenni for this article. I’m looking forward to part 2.

Alison Avalos
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Alison Avalos

Hi Jenni! Thanks for your reference to WorldatWork’s recommendation on best practices for sourcing salary data! Just a quick clarification that is probably just a typo…WorldatWork recommends getting salary information from employers (not employees).

Thanks again for the shout-out!

Septian
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Septian

Looking forward to Part II!

Jenni
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Jenni

Hi Alison, So glad to see you reading our blog. We are huge fans of World at Work. We apologize if we misinterpreted your position on salary data, and have subsequently removed the reference to your company. That being said, we take a different view. PayScale believes passionately that employee submitted salary data is the gold standard. We believe this because: 1) It’s direct from the source – employees know their job better than their managers, or really, the HR assistant whose job it is to collect all this information. 2) It’s real time – we are crowdsourcing data around… Read more »

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