Determining Salary Range Widths by Profession

This blog post was updated in 2018. 

In a previous blog post we talked about the first few steps of establishing a formal compensation plan. Today’s post will be a continuation of that process. We’ll talk about how you can build your company’s salary ranges from market data.

The first part of this process is about deciding if you would like to adopt a straight market pricing philosophy. If this is the case, then you’ll have a unique salary range for every position within your organization. If you decide that you want to group similar positions together into salary grades, then you’ll want to first get all your market data in order for each job. Regardless of which method you choose, you’ll want to investigate the different types of job evaluation methods, choosing a job evaluation method that will work best for your organization.

Creating Pay Grades

If you are going to create pay grades for your organization, it’s important that you choose the right number of pay grades. You’ll want to select a number of grades that allows you to appropriately distinguish between the different difficulty levels of the jobs. However, you will not want to have so many that the distinction between the pay grades is too insignificant. Unfortunately, there is no magic answer, and it is going to depend on how many employees and positions you have within your organization. More than 25 pay grades may be difficult to administer, and fewer than 5 will create very broad bands.

How to Determine Your Midpoint

No matter if you are adopting a straight market pay policy where you create pay ranges for each position or a system that has pay grades, the next step will be to decide on the market data that you want to target. This is going to vary from organization to organization, function to function, and even job to job. Choosing your “target” is about understanding:

• How competitive your organization wants to be , i.e. lead the market, meet the market or lag the market.
• Your company’s organizational profile, i.e. are you a small start-up, a growing company, or a large established entity.
• The value of your overall rewards package, which includes other forms of financial compensation and non-financial rewards.

Let’s say that your organization is deciding to target the 75th percentile of the market data, because you want to lead the market in order to attract top tier talent. If you are a small start up or a company experiencing rapid growth, you will need this top talent. Another reason for targeting a higher percentile is because as a small company you may lack rich benefits and more of the rewards are based on direct compensation.

If you are using a straight market pay strategy, you’d use the 75th percentile from your market data for each position as your midpoint. If you are creating salary grades, there are a few schools of thought to consider for making a grade structure that works for your organization. Regardless, the midpoint should be adjusted annually or on some other regular interval to ensure your organization can stay competitive with its pay strategy. In a future blog post we’ll talk about updating your pay ranges.

Once you have established the midpoints for the positions, you’ll want to create a range. If you are adopting a straight market pricing strategy, you may decide to create use the market distribution as your range. As an example, you may use the 75th percentile as your midpoint, the 25th percentile as your minimum and your 90th percentile as your maximum. However, if you are not using this strategy, or working with multiple positions, you will want to build ranges from your midpoint, which means you’ll create a range around your midpoint.

How Do I Know What the Width of My Salary Range Should Be?

Like most things in compensation, there is no hard and fast rule on salary range widths. You’ll want to do what is best based on the goals for compensation within your organization. Generally, the wider the range the more opportunity there is for employees to move up in salary. You may want a wider salary range if your organization has employees with a lot of longevity or you want to encourage employees to stay in their positions for a long time. Generally, you will want to consider having wider ranges for higher level positions, where the expectation is that employees will have more longevity (or you want to encourage longevity), or differentiation of skills and performance.

Range widths can be represented two different ways: (1) as percentage of the range minimum or (2) as a percentage change from the midpoint (typically displayed with a preceding “+/-“).

As a general rule the following range widths can be used:

How to Calculate the Minimum and Maximum for Your Salary Range

Method 1: Percent of Minimum

If you already have your range, you can calculate the width using the following formula:

(Maximum – Minimum) / Minimum

Typically, however, you have your midpoint and a target width and you need to calculate the minimum and maximum. In that case the formulas are as follows:

Minimum = Midpoint / (1 + (Width/2))

For example: if your midpoint is $50,000 and you want your width to be 50%, then you would divide $50,000 by 1.25. This equals $40,000. $40,000 is the minimum for the range. Note: since width is a percent, represent it as a decimal value in these formulas (i.e. 50% would be .50).

Maximum = Minimum x (1 + Width)

In this example, to find your maximum, multiply your minimum, $40,000, by 1.50. This equals $60,000. $60,000 is the maximum for your salary range.

Your full salary range would be $40,000 to $60,000, with a midpoint of $50,000.

Method 2: +/- Percent of Midpoint

If you already have your range, you can calculate the width using the following formula:

(Maximum – Minimum) / Midpoint / 2

Typically, however, you have your midpoint and a target width and you need to calculate the minimum and maximum. In that case the formulas are as follows:

Minimum = Midpoint – (Width x Midpoint)

For example: if your midpoint is $50,000 and you want your width to be +/-20%, then you would take 20% of $50,000, $10,000, and subtract it from $50,000. This equals $40,000. $40,000 is the minimum for the range. Note: since width is a percent, represent it as a decimal value in these formulas (i.e. 50% would be .50).

Maximum = Midpoint + (Width x Midpoint)

In this example, to find your maximum, again take 20% of $50,000, $10,000, but this time add it to $50,000. This equals $60,000. $60,000 is the maximum for your salary range.

Your full salary range would be $40,000 to $60,000 with a midpoint of $50,000.

You are well on your way to establishing your formal compensation plan. Next comes the work of implementing and communicating your new plan. We’ll cover that in a future blog post.

Regards,

Stacey Carroll

Director of Customer Service and Education at PayScale.com

• Want more info on determining salary range widths? Watch our webinar on developing pay structure.
• Have you considered why increasing pay may not always be the answer? Check out this post.
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