--- name: compensation-bands description: 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 compensation philosophy and guidelines. Triggers on phrases like "salary bands", "pay grades", "comp ratio", "grade structure", "comp philosophy", "broadbanding", "salary structure", "pay matrix", "comp midpoint", "range penetration". --- # 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 - **Hot markets** (AI engineers, cybersecurity): Consider separate, market-responsive bands updated quarterly; allow wider ranges (60%+ spread) for critical scarcity roles - **Global compensation**: Use local market data for each country; apply COL (cost of living) adjustments or equity-based approaches; consider total rewards not just base salary - **Startup to scale-up transition**: Move from informal/ad-hoc compensation to structured bands; may require one-time equity analysis and remediation - **Unionized roles**: Follow negotiated wage schedules; bands must align with collective bargaining agreement - **Executive compensation**: Separate from grade structure; tied to market peer group data, often involves equity and long-term incentives beyond base salary