In the era of pay equity, will we see the death of the salary band?

A key decision point when establishing a compensation philosophy is the degree to which salary structures are oriented around market rates vs individual performance.

At one end of the spectrum, we have broad salary ranges around a relatively limited number of pay grades throughout the organization. The arguments in favor are that while the market might provide a reference as to where we want to pay i.e. the midpoint, since we have a number of individuals with varying degrees of knowledge and experience, we want the freedom to make pay decisions within a range and allow for differentiation.

At the other end of the spectrum, we have market data points. That is, a level of pay, to which all individuals within the grade are aligned based on their role, regardless of individual experience and no range of pay to work within.

Of course, there are various other approaches on this continuum to consider:

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For years, companies have striven for a pay-for-performance environment where merit increases are aimed at high performing individuals creating that perfect bell-curve distribution where higher performers move towards the top of the band, steady performers occupy the middle section, and newly-promoted or under-qualified individuals lie at the bottom of the range. In theory this is great. In practice, it places a high degree of reliance on managers understanding the concept of salary ranges and using them effectively.

Recently however, pay-for-performance has given way to a focus on pay equity. Although most companies still build salary bands, I have also come across a number of companies shifting to individual market benchmarks citing the need to reduce pay inequity. While this shift won’t solve pay equity on its own, it does indicate the direction of travel.

Increasingly, companies are focusing not just on identifying and adjusting for pay gaps, but implementing governance and practices that reduce the risk of pay inequities occurring in the first place. At the root of pay inequity is some form of conscious or unconscious bias, and the three main opportunities for bias to play a role are: at the time of hire, the merit cycle, and promotion.

“The three main opportunities for bias to play a role are: at the time of hire, the merit cycle, and promotion”

Putting time of hire and promotion to one side for the moment, the challenge with pay-for-performance is that it provides plenty of opportunity for bias to enter into the merit increase process.

So here’s an easy solution – remove merit increase decisions from the equation. Do away with salary bands, and align all employees to a set of data points. This may sound drastic, but we already know that base salary is not a strong driver of engagement, so why expose ourselves to potential litigation, and disengagement when there is a simple solution?

Personally I don’t think we will see the end of salary bands completely as there will always be a desire to differentiate pay, but I think we’ll see increasing adoption of job-specific benchmarking and narrow ranges as companies look to reduce the risk factors behind pay equity. At some stage, if they haven’t already, I fully expect a company to lead the way with this and remove salary bands entirely, promoting pay equity as the cornerstone of their pay philosophy.

That’s all for today, folks.

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