How to Establish Salary Ranges: A 7-Step Guide

A well-designed salary structure is essential for every organization as it serves as a framework for determining fair compensation for employees.

A competitive salary structure helps organizations attract and retain talented employees, establishes a clear and consistent approach to compensation, helps organizations to manage compensation costs, provides transparency to employees regarding their pay, and minimizes the risk of legal challenges related to pay discrimination.

Setting fair and competitive salary ranges is crucial for attracting and retaining top talent. Salary ranges provide structure for compensation planning and help employees understand career growth opportunities.

Establishing effective salary ranges takes research, analysis, and strategic decision-making Follow this 7-step guide to learn how to create salary ranges tailored to your organization.

Step 1: Determine the Compensation Philosophy

The first step is deciding the overarching compensation philosophy. This guides salary range creation andongoing pay decisions. Key factors to determine include:

Pay Structure: Will pay be job-based, skill-based, or a hybrid model? What works best for the organization?
Market Position Will pay target leading, lagging, or match the market? This impacts pay ranges
Pay Mix: What is the ratio of base pay to variable incentive pay? A higher base pay ratio provides more stability.
Pay Level Variance How wide will pay ranges be from minimum to maximum? Wider allows more recognition.
Pay Communication: How will pay ranges be shared internally and externally? Transparency improves perception.

Defining the compensation philosophy upfront aligns pay with culture and strategy.

Step 2: Conduct a Job Analysis

The job analysis gathers key information about each role. This forms the foundation for the entire compensation structure.

For each job, compile details including:

Job Summary: Overview of primary duties and responsibilities.
Required Competencies: Needed knowledge, skills, abilities, and experience.
Education and Licensing: Required credentials and minimum education.
Leadership Scope: Number and type of employees managed.
Metrics and Goals: Key performance indicators and targets.
Working Conditions: Physical, social, and environmental factors.

Conducting in-depth job analyses ensures ranges accurately reflect differing roles and requirements.

Step 3: Group into Job Families

With job analysis complete, similar jobs can be grouped into job families or job worth hierarchies. Common options include:

Executive: C-suite leaders like CEO and CFO.
Management: Department heads, regional managers, and supervisors.
Professional: Engineers, accountants, analysts, specialized individual contributors.
Technical: Skilled production and trades workers.
Administrative/Clerical: Assistants, coordinators, customer support.
Service: Customer-facing hourly workers.

Categorizing jobs simplifies range setting, comparisons, and growth.

Step 4: Rank Positions Using a Job Evaluation Method

Next, rank each job family and specific job by importance. A job evaluation assesses the duties, complexity, and value of roles.

Common job evaluation methods include:

Job Ranking: Rank all jobs from highest to lowest overall value.
Classification Method: Groups jobs by key factors like skills, experience, and accountability.
Point Factor Comparison: Scores jobs based on compensable factors like skills and working conditions.

The result is a hierarchy of jobs by weight within the organization. This ranking guides appropriate pay differences.

Step 5: Conduct Market Research

With internal job values defined, it’s time to assess external market pay rates. This ensures ranges are competitive in the talent market.

Research pay for comparable roles at other employers. Useful salary data sources include:

Salary Surveys: Compilation of pay from multiple companies.
Industry Associations: Some industries publish pay data.
Public Filings: Review disclosed executive pay at public companies.
Recruitment Firms: Experts who track pay by role.
Government Data: The Bureau of Labor Statistics provides pay by occupation.

Blend survey sources to understand prevailing compensation. Focus on data specific to your industry, location, and organization size.

Step 6: Create Job Grades

With job values and market rates in hand, jobs are grouped into salary grades. Jobs of similar ranking and market value are placed in the same grade.

For example, an organization might have:

Grade A: Executive jobs
Grade B: Senior management
Grade C: Managers and senior professionals
Grade D: Entry management and mid-level roles
Grade E: Administrative and technical jobs
Grade F: Entry-level and service positions

The number of grades varies by company size and structure. Grades provide the framework to design aligned pay ranges.

Step 7: Create a Salary Range Based on Research

Finally, determine competitive pay ranges for each defined job grade. Ranges have a minimum, midpoint, and maximum salary.

Set minimums based on:

Low end of market rate
Legal minimum wage
Company’s compensation philosophy

Midpoints represent the market rate for a fully proficient employee.

Maximums are influenced by factors like:

Seniority level in the role
Scarcity of skills
Company ability to pay

Allow appropriate variation between grades. Test ranges using actual job data to identify issues before finalizing.

Maintaining the Salary Structure

Once created, actively maintain the pay structure. Review at least annually against market movement and internal changes. Adjust as needed stay aligned.

When well-designed and updated, salary ranges are a strategic advantage in managing compensation.

Key Benefits of Establishing Salary Ranges

Attracts qualified applicants with competitive pay.
Reduces unfair pay disparities between employees.
Provides transparency into pay growth opportunities.
Improves budgeting with defined salary parameters.
Increases consistency in compensation decisions.
Allows flexibility within defined minimums and maximums.

By following this 7-step guide, you can develop salary ranges tailored to your organization’s needs and strategy. Your investment will pay off with a motivated, high-performing workforce.

how to establish salary ranges

What is a salary structure?

A salary structure outlines an organization’s approach to employee compensation levels for each job position within the company based on factors such as experience, education, skills, and responsibilities.

Adding structure to how you determine salaries and raises ensures that earnings are consistent, fair, and competitive with industry standards. It also helps attract, retain, and motivate talented employees who contribute to the organization’s success.

Salary structure is an important aspect for both organizations and employees. Here are some of the reasons why:

1. Helps in attracting and retaining talent: A well-defined salary structure helps in attracting top talent to the organization. It also enables the organization to retain its most valuable employees by offering them competitive salaries.

2. Improves employee motivation and productivity: A clear salary structure that defines how employees can progress and earn more can motivate them to work harder and be more productive.

3. Ensures fairness and transparency: A clearly defined salary structure ensures that employees are paid fairly based on their skills, experience, and performance. This helps in fostering a culture of transparency and fairness within the organization.

4. Helps in budgeting and financial planning: A structured salary system helps in managing the organization’s payroll costs and allows for better financial planning.

1. Provides clarity on earning potential: A clear salary structure gives employees an indication of how much they can earn over time and what they need to do to progress.

2. Helps in negotiating salaries: Employees can use the salary structure to negotiate their salaries during performance appraisals or when joining a new organization.

3. Motivates employees to improve performance: A structured pay system motivates employees to improve their performance and earn more.

4. Increases job satisfaction: A fair and transparent salary structure increases job satisfaction and feeling valued within the organization.

Best practices for creating an effective salary structure

Conduct a thorough job analysis to determine the required skills, knowledge, and experience for each position.
Determine the relative value of each role within the organization based on its level of responsibility, scope of duties, and market demand.
Identify comparable positions in the industry and use them as a benchmark to establish competitive salary ranges.
Create a clear and transparent system for employee compensation that includes base pay, bonuses, and other incentives.
Develop a pay for performance program that rewards employees based on their individual contributions to the organization.
Regularly review the salary structure to ensure that it remains competitive and aligned with the organization’s goals and objectives.
Ensure that compensation policies comply with applicable laws and regulations, such as minimum wage requirements and equal pay laws.
Communicate the salary structure clearly to employees, including how salaries are determined and how they can advance within the organization.
Provide training and support to managers and supervisors to ensure that they can effectively administer the salary structure and communicate salary decisions to employees.
Solicit feedback and input from employees and stakeholders on the effectiveness of the salary structure and make necessary adjustments as needed.

How to Create Salary Ranges For Different Grades | Payscale Overview

How do you establish a salary range?

One way to establish a salary range is through a well-defined “Level System.” When we first created our internal job-specific level system, it started with a lot of research. But once the research was done, we used the data to create a level system based on years of experience in the field or within the company.

What should employers consider when establishing an average salary?

Employers should note the range of pay in the salary surveys and other information that may be relevant when establishing an average salary. For each pay grade, an organization will need to establish minimum, midpoint and maximum pay ranges.

What is an example of a salary range?

Typically, the salary range has a starting pay and a maximum salary. For example, a position’s compensation range could start at $45,000. But depending on the candidate, the employer may be willing to pay up to $55,000. Employers and employees alike use compensation or salary ranges.

How do companies create salary ranges?

Companies create salary ranges based on what they can afford to pay and what competitors are paying for similar roles.