HR AI Skill

Compensation Bands

Design, manage, and maintain salary bands, grade structures, and compensation philosophy documents. Use when creating or updating pay grades, setting min/mid/point/max for roles, conducting comp ratio analysis, managing broadbanding, or developing compensat...

Compensation Bands & Structure

Design and maintain equitable, competitive compensation structures.

Workflow

  1. Define or review compensation philosophy: how the organization positions pay relative to market (lead, match, lag, or mixed).
  2. Conduct or update job evaluation: assign each role to a grade/level based on impact, scope, complexity, and required qualifications.
  3. Source market compensation data: buy surveys, use compensation platforms, or collect peer data.
  4. Build or update salary bands: set minimum, midpoint, and maximum for each grade.
  5. Validate for internal equity: check for overlaps, gaps, compression, and progression between grades.
  6. Document and communicate the structure to managers and HR.
  7. Apply structure to hiring, promotions, and merit increases.
  8. Review and adjust annually (or semi-annually for volatile markets).

Compensation Philosophy

Philosophy Options

COMPETITIVE POSITIONING STRATEGIES
==================================

Option 1: Market Leader (50th–75th percentile)
  - Pay above market average to attract top talent
  - Best for: organizations in talent-scarce markets, high-growth companies
  - Cost: higher fixed labor costs
  - Risk: must deliver proportional value to justify premium

Option 2: Market Match (40th–60th percentile)
  - Pay at market median
  - Best for: most organizations; balance of cost and competitiveness
  - Cost: moderate
  - Risk: may lose top performers to premium payers without differentiation

Option 3: Market Lag with Catch-Up (25th–40th percentile)
  - Pay below market but with strong non-monetary benefits
  - Best for: mission-driven orgs, government, nonprofits, strong employer brand
  - Cost: lower fixed costs
  - Risk: higher turnover, recruiting difficulty

Option 4: Mixed Strategy
  - Lead for critical/hard-to-fill roles
  - Match for standard roles
  - Lag for abundant-supply roles
  - Best for: most mature organizations
  - Cost: targeted premium spending
  - Risk: complexity in management and communication

Recommended for most tech companies: Mixed Strategy
  - Engineering: 50th–75th percentile
  - Sales: 50th percentile base + variable comp to 75th
  - Operations: 40th–50th percentile
  - Executive: 50th–75th percentile + equity to 75th+

Grade Structure Design

Job Evaluation Method

JOB EVALUATION FRAMEWORK
=========================

Four-factor evaluation model:

Factor 1: Impact (25%)
  How the role affects organizational outcomes
  Scale: Individual → Team → Department → Business Unit → Enterprise

Factor 2: Scope (25%)
  Breadth of responsibility
  Scale: Single function → Multiple functions → Cross-functional → Multi-regional → Global

Factor 3: Complexity (25%)
  Difficulty of problems solved
  Scale: Routine → Standard → Complex → Strategic → Transformational

Factor 4: Expertise (25%)
  Knowledge and skill requirements
  Scale: Entry-level → Experienced → Expert → Authority → Pioneer

Each role scored on each factor (1–5), total score maps to grade.

Grade assignment:
  Score 4–10:   Grade 1 (Entry)
  Score 11–16:  Grade 2 (Associate)
  Score 17–22:  Grade 3 (Professional)
  Score 23–28:  Grade 4 (Senior)
  Score 29–34:  Grade 5 (Lead/Principal)
  Score 35–40:  Grade 6 (Manager/Director)
  Score 41–50:  Grade 7 (Senior Director/VP)
  Score 51–100: Grade 8+ (Executive)

Salary Band Construction

SALARY BAND STRUCTURE — EXAMPLE (US, Tech)
============================================

Grade  Midpoint   Range  Min      Max      Spread  Cache
------  --------  -----  -------  -------  ------  -----
G1      $52,000   50%    $41,600  $62,400  30K     Entry analysts, coordinators
G2      $65,000   50%    $52,000  $78,000  26K     Associates, junior specialists
G3      $82,000   50%    $65,600  $98,400  32.8K   Professionals, engineers
G4      $105,000  50%    $84,000  $126,000 42K     Senior professionals
G5      $135,000  50%    $108,000 $162,000 54K     Leads, principals
G6      $170,000  50%    $136,000 $204,000 68K     Managers, directors
G7      $220,000  50%    $176,000 $264,000 88K     Senior directors, VPs
G8+     $290,000  60%    $232,000 $348,000 116K    C-suite, SVP

Notes:
  - Range spread increases at higher grades (more discretion for complex roles)
  - Cache (step between midpoints): 18–25% typically
  - Overlap between grades: ~40–50% (allows top performers in lower grade to
    earn more than new hires in next grade — prevents forced promotions for money)
  - Market adjustment: bands updated annually based on market data changes

Broadbanding Alternative

BROADBANDING (fewer, wider bands):

Band  Min      Mid      Max      Roles Covered
----  -------  -------  -------  -----------------------------------
A     $40K     $65K     $90K     All individual contributors (entry to mid)
B     $75K     $120K    $165K    Senior ICs and team leads
C     $120K    $190K    $260K    Managers and directors
D     $180K    $280K    $380K    Senior leadership
E     $250K    $400K    $550K    Executive

Benefits of broadbanding:
  - More flexibility in compensation decisions
  - Fewer forced promotions for pay increases
  - Easier lateral movement
  - Simplified structure management

Trade-offs:
  - Less clear progression signal
  - Requires stronger manager judgment
  - Wider bands need stronger governance to prevent inequity

Comp Ratio & Range Penetration

Analysis

COMPENSATION ANALYSIS METRICS
==============================

Comp Ratio (Comparation Ratio):
  Formula: Employee salary ÷ Grade midpoint
  Interpretation:
    < 0.80: Below range — new hire, underperformer, or market shift
    0.80–1.00: Within range — typical for tenured performer
    1.00–1.20: Above midpoint — strong performer, market premium
    > 1.20: At or above max — red flag; may need promotion or freeze increases

Range Penetration:
  Formula: (Employee salary minus Range min) ÷ (Range max minus Range min) × 100
  Shows where employee sits within their band
  0% = at minimum  |  50% = at midpoint  |  100% = at maximum

Red Flags:
  - Comp ratio > 1.20: "red circle" — employee earns above band maximum
    Action: freeze merit increases until market catches up, or promote to next grade
  - Comp ratio < 0.85 after 12+ months: employee may be underpaid relative to grade
    Action: consider market adjustment or grade review
  - High range penetration (> 85%) with no promotion path: compression risk
    Action: create next-grade role or adjust band

Healthy distribution (across all employees):
  Below midpoint: 30–40%
  At midpoint: 20–30%
  Above midpoint: 30–40%
  If > 60% above midpoint: consider band adjustment (bands may be outdated)

Merit Increase Guidelines

MERIT INCREASE MATRIX
======================

Based on performance rating and comp ratio:

             Comp Ratio < 0.90    0.90–1.00    1.00–1.10    > 1.10
           ┌──────────┬──────────┬──────────┬──────────┐
Excellent  │   6.0%   │   5.0%   │   4.0%   │   3.0%   │
           ├──────────┼──────────┼──────────┼──────────┤
Above Avg  │   5.0%   │   4.0%   │   3.0%   │   2.5%   │
           ├──────────┼──────────┼──────────┼──────────┤
Meets      │   4.0%   │   3.0%   │   2.0%   │   1.5%   │
           ├──────────┼──────────┼──────────┼──────────┤
Below Avg  │   2.0%   │   1.5%   │   1.0%   │   0.0%   │
           └──────────┴──────────┴──────────┴──────────┘

Notes:
  - Budget constraint: average merit increase typically 3–5% of total payroll
  - Market adjustment separate from merit (addresses below-market situations)
  - Promotion increase: 10–20% (move to new grade, place at or near new grade minimum)
  - Minimum increase: $1,000 or 2% (whichever greater) to maintain perceived fairness

Edge Cases