How to build salary bands: a step-by-step pay structure guide

What are the steps to build salary bands?

A pay structure is a set of grades, each with a pay range, that every pay decision is checked against. Building one for a company of 20 to 1,000 people follows ten steps in order. Skipping the early ones (philosophy and levelling) is the most common reason structures fall apart at the first pay review.

• 1. Score where you are today and agree who approves what.
• 2. Write a one-page compensation philosophy: market position, pay mix, fairness and what you share.
• 3. Group jobs into families and career tracks, and level each job into a grade by its demands.
• 4. Choose benchmark jobs and match them on content in at least two independent salary surveys plus public statistics.
• 5. Age every market figure to the date your structure starts and combine sources with weights.
• 6. Set each grade's midpoint near the market average, with a smooth step between grades.
• 7. Choose a spread for each grade and calculate the minimum and maximum; check overlap and the legal minimum wage.
• 8. Place every employee by compa-ratio and range penetration; cost bringing people up to minimum.
• 9. Run the pay review with a merit matrix, calibration and rules for promotions and exceptions.
• 10. Brief managers, tell employees how it works, and move the structure every year.

How do you level jobs into grades?

Levelling decides which grade a job belongs in. Use a handful of factors that describe what the job demands: knowledge and skills, problem solving and effort, scope and impact, accountability, and working conditions. These match the criteria the EU Pay Transparency Directive names for pay structures (skills, effort, responsibility and working conditions), and they support the equal pay idea of work of equal value used in UK law.

Write a short level guide that describes each grade against those factors in plain words. Then have two people rate each job separately and compare. If they differ, a small panel decides. Only after the grade is agreed should anyone look at what the job holder is paid. If the salary does not fit, deal with the salary, not the grade.

How many grades? Enough that a promotion is a real step, few enough that each grade is clearly different. A 240-person company might use eight below the board; a company of 40 might use five or six.

Where do you get salary market data, and how do you age it?

Use at least two independent paid salary surveys for specific jobs and levels, plus public statistics as a sanity check: the ONS Annual Survey of Hours and Earnings in the UK, the BLS Occupational Employment and Wage Statistics in the US, and equivalent national sources elsewhere. Match each benchmark job on content, not title, and rate the match Good, Fair or Poor.

Survey figures describe the date the data was collected. Age each one forward to the date your structure starts, at an annual rate you estimate and record: aged value = value x (1 + rate) ^ (days / 365). Then combine sources with a weight for each source and each match quality.

Be careful how you benchmark. The UK Competition and Markets Authority's 'Competing for talent' guidance treats public data and independent, anonymised, aggregated surveys as lower risk, and warns against sharing current or future pay plans with competitors. The US Department of Justice and FTC guidelines on business activities affecting workers make a similar point, including about sharing through third parties.

How do you calculate a salary range from a midpoint and spread?

Set each grade's midpoint close to the market average of its benchmark jobs, then smooth the step between grades (the midpoint progression). Steps of around 15% at the bottom rising to around 20% at the top are a common pattern, but your number of grades decides it.

Range spread is (maximum - minimum) / minimum. Narrow spreads suit jobs people master quickly; wider spreads suit senior jobs where growth takes years. With a midpoint and spread, the range follows by formula: minimum = 2 x midpoint / (2 + spread), and maximum = minimum x (1 + spread).

Two checks finish the design. Overlap, (maximum - next grade's minimum) / (maximum - minimum), shows how much of a range the grade above also covers; some overlap is healthy, too much blurs grades. And every grade minimum must stay above the legal minimum wage for full-time hours wherever people work. In the UK, for example, the National Living Wage for people aged 21 and over is £12.71 an hour from April 2026 and £13.21 from April 2027.

What do compa-ratio and range penetration tell you?

Compa-ratio is salary divided by the range midpoint. At 1.00 someone is paid at the midpoint; at 0.90 they are 10% below it. Because it is a ratio, it lets you compare people in different grades on one scale, and it drives the merit matrix.

Range penetration is how far through the range someone is: 0% at the minimum and 100% at the maximum. Turn it into a position (below minimum, the four quarters, above maximum) and you can see the shape of the whole company in one chart.

People below the minimum should be brought up to it, ideally from a separate pool on the structure date so it does not eat the merit budget. People above the maximum should be red-circled: their pay is protected and increases are paid as one-off lump sums until the range catches up. Never cut contractual pay to fit a range without advice.

How does a merit matrix set pay review increases?

A merit matrix gives a guide increase for each combination of performance rating and position in range. Stronger performers get more, and people lower in their range get more than people higher up with the same rating, so strong performers move towards the midpoint faster.

Run the review in a fixed order: first bring anyone below minimum up to it, then apply the matrix to the adjusted salary, then pay anything that would pass the range maximum as a lump sum. Cost the whole matrix against the budget before managers see it. Let managers propose something different with written evidence, and have a small panel calibrate proposals before anything is approved.

In the worked example behind this guide, a 240-person engineering company spent 3.35% of its salary bill on merit against a 3.5% budget, with two departments slightly over their own pools because they held more people low in their ranges. That is the matrix working as designed.

How do promotions, offers and exceptions fit a pay structure?

Most structures leak through three doors: promotions, new hire offers and exceptions. Close each with a rule. For promotions, a common rule is a set percentage or the new grade minimum, whichever is higher, with a cap above which a pay committee decides. In the worked example, a software engineer earning £43,068 after the review was promoted at 8% to £46,513, above the new grade minimum of £44,800.

For offers, start between the minimum and the midpoint, look at peers in the same job and grade first, and require approval above the midpoint. Check the rules where you hire: some places restrict questions about pay history, and some require a pay range in job adverts. Ontario, for example, limits how wide a posted range can be, so a company with a wide internal range may post a narrower slice of it.

For everything else, keep an exceptions register: a market premium while a vacancy is open, a retention payment, an above-guide increase. Each one needs an approver, a reason and a review date. An exception with no end date quietly becomes a new rule.

How do you explain a new pay structure to managers and employees?

Brief managers before anyone else, because they carry every pay conversation. A 45-minute session covering grades and ranges, the pay review steps and how to hold a short pay conversation is enough for most teams, followed by a few scenario questions to check understanding.

Give managers one shape for the conversation: the decision first (new salary and percentage), the reason in one sentence, the path to the next grade, then listen. Never compare someone with a named colleague or promise future increases. Publish a short employee FAQ the day letters go out, and record every pay query with what was checked and what was replied. If a query may raise an equal pay concern, involve HR and your adviser and make sure the person is not discouraged from raising it.

What are the most common mistakes when building salary bands?

• Grading the person instead of the job, often to make a high salary fit.
• Matching survey jobs on title rather than content.
• Mixing survey figures from different dates without ageing them.
• Using one market source, or swapping figures informally with a competitor.
• Giving every grade the same spread.
• Forgetting to check grade minimums against the legal minimum wage each year.
• Cutting pay to fit a range instead of red-circling.
• Leaving people below minimum for years with no plan.
• Exceptions with no approver and no end date.
• Briefing managers on the day letters go out.

How do you keep a pay structure current?

Markets move and minimum wages rise, so a structure needs a yearly cycle: new survey data each autumn, aged to the next structure date; a pay committee that approves range movements and the budget; a check of new minimum wage rates; and the pay review itself. Each quarter, review exceptions and pay queries and check the official sources you rely on for anything new.

Three records make the structure defensible: a decision log with the reason for each structure decision, an exceptions register with approvers and review dates, and a log of what changed outside the company. If you want the whole method with the files for each step, the Compensation and Salary Band Builder from Bodhih Training follows one company from an unexplained pay gap to its first costed pay review. To check your managers' judgement on pay decisions first, the AssessAll Pay and Reward Decision Assessment is a useful starting point, and Jobulary's individual development plan turns what you learn into measured goals.