Compensation bands – those guidelines for how roles are paid based on department, level, and location – are designed to create cross-functional compensation clarity, promote equity, and a shared set of understanding among managers and employees.
Put simply, it’s a blueprint for determining what different members of your organization should be earning.
Creating these bands and maintaining them quarter after quarter of change can be daunting, even for experienced compensation professionals.
To help, we held a webinar with Zapier titled “Building and Maintaining Your Compensation Bands” as a part of the Pave Compensation Bands product launch. (More on that later.)
In this webinar, Katie Rovelstad (Operations Leader, Pave) and Catherine Nacson (Global Compensation Leader, Zapier) went over a six-step process to build compensation bands and scale them for any sized organization.
Below, we’ll go over each step and cover what our panel discussed so you can have a proven strategy for managing this crucial process.
Not all processes will be perfectly identical, but the one outlined in the webinar (and discussed below) can be easily adapted for your organization’s specific user case..
Start by creating a list of all your employees with their department, level, location, and current compensation.
It’ll look something like this (borrowing just a bit from The Office):
This step is first because you need a solid foundation to work from.
Pay needs to be appropriate to the role - but it also needs to be competitive, and that means you have an important decision to make about how well to compensate your team relative to the market, or in other words, what percentile of the market data you should base your bands on.
Here are four key factors to consider – they aren’t exhaustive, but should help you identify what percentile you want to use to set your bands:
Catherine explained how it worked at Zapier when they overhauled their comp bands: “We had a mission to hire a lot of people. So for us, targeting high at the 90th percentile made the most sense. As a result, we've been able to achieve our hiring targets.”
Another critical decision flows from the previous one, and this decision has a lot in common with real estate: location, location, location.
How will your compensation vary based on location for the same role? If you have two sales engineers at the same level, but one is based in Los Angeles and the other is in St. Louis, how will you determine their compensation?
The factors are similar to the above (and again, are not exhaustive but can land on a decision) :
This challenge may be more pronounced for larger, more widespread companies like Zapier, which operates in over 40 countries.
“At the end of the day for us, it’s really about having an efficient system to be able to price jobs or to be able to map jobs to a specific pay grade and pay structure,” said Catherine when discussing how Zapier decided to address location-based pay. Ultimately, despite operating in more than 40 countries, they group locations together and use fewer than 5 pay structures for their compensation bands.
Next, it’s important to find the mid-point for your bands. To do that, you have to use the compensation benchmarks you’ve gathered in an earlier step.
Don’t try to get too granular with exact function matches and the compensation data: the added granularity won’t make your bands more competitive or fairer, but will make creating, maintaining, and communicating compensation bands harder.
For example, instead of differentiating between front-end, back-end, and full-stack software engineers, you could create a family of jobs called software engineering (like they do at Zapier). Doing so makes it easier to get the market data that you need in order to set percentiles and mid-points.
According to Catherine, “It's really just a much more streamlined efficient process if you market price based on a job family versus individual jobs.”
The image below shows how you can perform this step with our Pave Bands software:
The percentile (selected in Step 2) will become the midpoint of your compensation band, so that you can anchor your compensation competitively and build outward from the center.
Then, you can move to finding either end – the minimum and maximum pay – for your compensation spectrum.
How you figure out the pay spread between the lowest compensation to the highest within a band depends a lot on your organization’s size, structure, and values. But in general, you can use your baseline to calculate either endpoint using a common percentage (such as 10% in the example below):
The Sales P3 level, for example, set the mid-point at $100,000 and subtracted the middle times 10% – creating a minimum pay of $85,000. The opposite was done to set a maximum of $115,000.
Note that it’s possible to use different percentages for different levels within the same department. For M6, for example, you could have 15% in the formula instead of 10%, which would give you a wider comp spread.
For Zapier, they always ensure their midpoints are 10% apart from each other, but when mapping one job level to another, there's a minimum 20% difference: “The most important thing for us is having that pay progression and a little bit of consistency to know that when somebody is moving to the next level, there is that twenty percent differential when they move or get promoted,” said Catherine.
Finally, setting up the band structure makes it easier to benchmark individual employee compensation and assess it based on more granular categories.
There are two features within Pave’s software that can help: the Compa Ratio (annual cash compensation divided by the compensation mid-point) and Range Penetration (the difference between annual cash compensation and the minimum pay divided by the difference between maximum pay and minimum pay).
The first allows you to quickly identify people who are above and below the compensation mid-point. The second lets you see just how far into your pay range people are. Both enable a level of simplified analysis that can better serve not just how you run compensation, but how the organization handles and rewards its talent overall.
From there, you can build more sophisticated approaches to analyzing employees relative to their compensation, like Zapier does “We have a more structured process and approach because now we have competency levels and associated compa-ratio zones to reference and analyze.” says Catherine.
That kind of analysis is vital to a company like Zapier, which places such a premium on competitive pay while also wanting to further differentiate by competency levels and other granular metrics.
All in all, the six-step process can put a method to the madness that many pros find invaluable. Whether it’s this framework or another, having a system can be the difference between smooth comp band building and management and the kind that makes you pull your hair out (metaphorically, we hope).
We’d be remiss if we didn’t throw out a pitch for our newest product: Pave Compensation Bands. Pave Compensation Bands allow you to store, edit, visualize and securely share access to your compensation bands.
With a centralized place for your compensation bands, you can be more competitive and transparent, while making the compensation band management process more efficient. (If you want to learn more or check out a demo, just click here.)
If you missed the webinar on compensation bands, or you want to review it again, you can sign up to watch the full session recording here.