Companies have been sharing pay ranges with the public as new pay range transparency laws go into effect (most recently California and Washington State at the beginning of 2023). The goal of pay range transparency laws is to reduce pay gaps. For example, new research shows that the accountability from pay transparency incentivizes institutions to compensate women more fairly. We also know that pay transparency is becoming table stakes for the employee value proposition, as employees want greater visibility into rewards and it has a demonstrable impact on employee intent to stay, which is critical in the continued tight labor market.
However, some companies are posting salary ranges so wide that they fail to be useful for job candidates (and worse, give the impression to candidates and current employees that they’re hiding something). Ideally, salary ranges should be externally competitive, internally equitable, and based on factors that are easily explained to employees who might question them — but it’s not easy to achieve the right balance.
“It’s really a scenario almost like a Goldilocks: the range can’t be too big. It can’t be too narrow. It can’t be too high, it can’t be too low.”
Christine Hendrickson, Syndio VP of Strategic Initiatives in The Wall Street Journal
Below, we discuss why so many companies have been relying on wide salary ranges and how compensation professionals can modernize their approach to compensation management to set salary ranges that are useful, fair, and explainable for today’s era of pay transparency.
Shifting mindset from pay management to pay explainability
Attention-grabbing headlines about wildly broad pay ranges that vary by hundreds of thousands of dollars are confusing. It can seem like companies are purposefully setting ranges so broad that they become utterly meaningless to job seekers and the employees already in those jobs. However, as a former compensation professional, I can tell you that most of these wide ranges were not created with bad intentions. Instead, it’s likely that many compensation professionals are still taking a traditional approach that was meant for managing pay — not talking about pay.
As “pay explainability” — the ability to clearly articulate how pay is determined and ensure it is fair and consistent with a transparent compensation philosophy — becomes increasingly important, compensation teams must evolve their approach pay management.
A compensation history lesson: For many years, compensation professionals haven’t had a lot of resources or technology with which to manage pay. The traditional approach has been to tie compensation to the job architecture. Typically, job structures have broad bands because each level represents multiple sets of jobs across job functions/families that have been evaluated in the same way based on job evaluation methodology factors. To create a salary range for each level, you typically compile market data for the benchmark jobs at each level and aggregate it to create a midpoint. You then build a broad range around the midpoint to accommodate the different jobs and salaries associated with those jobs, while managing pay to the midpoint of the range.
From the perspective of managing compensation, this is an efficient approach. Traditional market data sources were compensation surveys published once a year, so the data didn’t change often. Benchmark jobs across different job families often had similar market data, and aggregating the data made it easier to manage pay to what was considered “competitive,” usually the midpoint of the range.
However, we’ve moved to a world where market data is accessible to everyone much more “real-time” than annual surveys. Employees are doing their own research to uncover what their jobs are paid. Companies that continue to use a traditional broad grade structure won’t be able to easily translate it for employees, job seekers, and the general public, who want to know the range for a single job.
Moving to job-based salary ranges: In today’s era of pay transparency, “pay explainability” must be built into the compensation design. You’ve got to be able to explain how you created the ranges you’re using to set pay. A Gartner press release stated that “When organizations educate employees about how pay is determined, employee trust in the organization increases by 10% and pay equity perceptions increase by 11%.” Pay explainability is essential to retaining and engaging employees in the era of transparency.
For more concise, clearer explanations of pay, we believe that we will continue to see a narrowing of salary ranges to more job function/family or job-based, a move away from the broad grade range. This will be a big change — and it won’t happen overnight. This will require you to reexamine your compensation philosophy and design and shift from a one-size-fits-all approach to something that makes more sense for how employees think of their jobs and their pay.
To accomplish this, companies need to go back to the basics in better defining and honing their rewards approaches. This includes foundational things like being crisp and clear about what each reward element — base salary, short-term incentives, and long-term incentives — represents (e.g., “Your base salary is based on what is competitive for the work you do, your skills, and your performance”). You need to be prepared to explain in detail how, for example, you differentiate performance in base salary. It will all be out in the open and your employees will be asking. Learn more about the steps you can take to prepare for pay transparency in our article here.
Demonstrating salaries are equitable: Additionally, as pay ranges are posted, more employees are talking to one another about what they are paid. So being able to prove that salaries are equitable is also fundamental for pay explainability. A Gartner press release stated, “The Gartner survey of 3,523 employees in 2Q22 also found that employees who perceive their pay as unequitable have a 15% lower intent to stay with their employer and are 13% less engaged at work than employees who perceive their pay as equitable.” It’s crucial for compensation professionals setting salary ranges to be able to take into account what is internally equitable for each role. This requires the ability to integrate data from your pay equity analyses.
How to set salary ranges in the era of pay transparency
When it comes to specifically creating salary ranges appropriate for the era of pay transparency, companies should take a step-by-step approach so they can make incremental progress as they transition to compensation programs better-suited for pay explainability.
Step 1: Assess and leverage what you have.
Your first step should be to conduct assessments across different dimensions of pay to determine your starting point. For example, we recommend running pay equity analyses to show how pay is being delivered and then cross-referencing that with position-in-range analyses to show how employee pay is managed within the ranges. You should also assess the jobs you are posting and where. By combining the findings from these assessments, you can better prioritize the changes you need to make to meet your immediate job posting needs.
The above assessments are helping companies then map out the transition from what exists to what they may need to refine or build. For example, some employers are still using their wide ranges, but they are leveraging the market reference ranges within the broader ranges they may already be using for their at-market and above-market job functions and families.
Speaking of job functions and families, many companies that have job architectures also have function-based frameworks that overlay the enterprise-level architecture. Opportunities and career growth are integral to employee retention, and we believe that companies that build on these more job-specific frameworks will more effectively engage their employees. When linked to job function/family-based salary ranges, these become tools that can be used by Total Rewards and Talent Management together in telling the story of how employees can grow with the organization.
Step 2: Consider new approaches to data sourcing.
Compensation professionals should also rethink how they approach market data. Leading companies are pulling more data on skills premiums in addition to using standard market data sources. Real-time compensation tools are emerging, such as Squirrel from Comp Tool, that scrape web data from millions of job postings with employer-reported pay to create a current and detailed look at what is happening in the local labor market. Companies should also carefully watch the many other sites (e.g., levels.fyi) that their employees regularly access for compensation data as well as create a regular feedback loop with Talent Acquisition regarding offers and what they’re seeing.
Step 3: Combine market data with internal equity data.
Finally, companies must determine how to best bring market data sources and established ranges together with the results of their internal pay equity analyses to arrive at ranges that truly represent what they pay for jobs.
Purpose-built technology, like Syndio’s Pay Finder™ solution, can help with this. Pay Finder provides organizations with a comprehensive view of current pay for the same and similar roles, market data and/or salary structures, and an equitable pay range calculated from their pay equity analyses. By using the compensable factors from their pay equity analysis to model different levels of experience and/or skills of candidates for a given job, for example, compensation teams are better able to set and post pay ranges with confidence that they are preserving internal equity while being market-competitive.
An evolving opportunity, not an overnight fix
Adopting a new compensation philosophy is a transition, not flipping a switch. Companies’ approaches to setting salary ranges will continue to evolve and take shape as the market adjusts to new requirements and employees weigh in. The scale has certainly tipped in favor of job-based salary ranges — there are simply too many out there now to put the genie back in the bottle.
Employees are a crucial part of the conversation now around pay — they want to know why they’re being paid what they’re paid, how their pay is being determined, and they want to know they’re being paid fairly. It’s time to manage pay in a way that’s meant for prime time, rather than something that’s analyzed behind closed doors.
As Syndio CEO Maria Colacurcio shares in this New York Times article, for forward-thinking companies, the pay transparency era is an opportunity to get good at proactively addressing and communicating compensation policies. This can ultimately improve trust with employees and job candidates.
Want to learn more about how to take control of your workplace equity narrative? Our 2023 Workplace Equity Communications Playbook linked below offers real-world examples and strategic advice.
The information provided herein does not, and is not intended to, constitute legal advice. All information, content, and materials are provided for general informational purposes only. The links to third-party or government websites are offered for the convenience of the reader; Syndio is not responsible for the contents on linked pages.