Pay banding drives pay equity, both are important for transparency, serving to keep employees feel valued and engaged without any untoward biases.
Pay banding is a compensation management approach that provides a salary range based on a position and its requirements as well as considerations of market rates. It’s a way of ensuring that pay rates are equitable both within a given position and between positions based on the value assigned to each role.
How Pay Banding Works
Pay bands establish clearly defined upper and lower pay limits for a specific position. In addition, clear determinants exist to indicate how employee pay will be determined within the band and the process involved in being promoted to a higher band.
For instance, as the requirements of the job change and become more complex or require new or higher-level skills, then the pay band may be adjusted.
A Focus on the Position, Not the Person
The purpose of pay banding is to put the focus of compensation on the position and its value to the organization rather than on the person in the position. Employees who provide similar value to the company will, therefore, be paid similarly. It’s a fair, consistent, and non-personal way of determining pay that offers clear benefits for both employers and employees.
The Benefits of Pay Banding
One of the big benefits of pay banding is transparency. Issues around pay transparency, or lack thereof, have long been the topic of conversation in HR and leadership circles with many companies choosing to keep pay levels secret even to the point of attempting to prohibit employees from discussing their salaries with each other. Of course, those attempts were generally futile.
Pay banding puts payout into the open. While employees still may not be privy to exactly what others may be making, they are privy to information on relative pay ranges. This can help with internal pay equity concerns—employees can readily see how their job is ranked compared to other jobs within the organization.
Internal pay equity is important from an employee satisfaction and engagement perspective so having this type of transparency can serve to keep employees loyal, engaged, and productive.
Another benefit of pay banding is that it can serve to relieve concerns—real or perceived—related to pay equality overall. Regardless of an employee’s age, gender, race, ethnicity, sexual orientation, veteran status, disability, etc., their pay is based on criteria related to the job and not on their individual personal traits and characteristics. Pay banding is by its very nature designed to ensure that jobs are valued appropriately.
Pay banding also offers some discretion to hiring managers in terms of where they might be placed within that band.
Despite the many benefits of pay banding, there are some drawbacks to be aware of.
Some Drawbacks of Pay Banding
One potential drawback of pay banding is that in the process of valuing jobs the organization may find that some jobs have been undervalued and, consequently, payroll costs may rise. The converse, of course, could also be true.
Another potential drawback is the rigor required to appropriately evaluate and place value on each position within the organization. Many would argue that this rigor is worth it to provide transparency around pay decisions.
Citing competitive issues and the ability to make discretionary choices, not all employers are on board with pay transparency. Some recruiters actively exclude workers from states like Colorado, which is moving to mandate the inclusion of targeted pay ranges in job postings. Nearly 20 states including California and Michigan have joined in to adopt pay transparency laws.
Moving Toward Pay Banding
Foundationally, in order to make a move to pay banding organizations must thoroughly understand the positions in their company; the specific knowledge, skills, and abilities required for the position; and the value the position provides to the organization overall.
For instance, a research scientist position in a pharmaceutical company provides greater value to the organization than a receptionist position. As alluded to earlier, it’s critically important that considerations are related to the position and not the person in the position. The receptionist may be very highly skilled and the best receptionist the company has ever had, but it is the position’s relative value that is considered, not the person.
Obviously, when introducing pay banding it’s important to have clear factors that will be used to determine where an employee’s pay will fall within a band. These factors could include such things as location, experience, education, performance, etc.
In addition, it’s important to communicate to employees the role that pay banding can play in helping with their professional development. The receptionist may decide that he would like to move into a higher-level role, seeing an administrative position at a higher pay grade he may decide to prepare and apply for that role.
One of the hot topics today, driven by the pandemic and the surge in remote work, is whether employees working from a rural area for a company headquartered in an urban setting should be paid at a lower rate to reflect the lower cost of living. In other words, should pay be based on market rates where employees actually work or where the organization is located? There are no clear answers but quite a bit of variation in philosophy on this point among employers and employees alike. Despite the fact that these types of geographic pay variations have long existed for multi-location and global organizations, pandemic-related variations due to the need for employees to work from home have created some angst around the issue.
Regardless of the criteria, you use to place positions within bands and indicate how employees will move through those bands, it’s important to be transparent and clear in conveying how these decisions are made. This is one of the best ways to be proactive in addressing potential employee objections.