Virtual HR Department

Compensation and Benefits

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The base salary or wage is the annual or hourly rate of pay that an employee receives for normal job performance, not including shift premiums, overtime or other incentives or premiums. The creation of a base salary or wage grid can be quite simple or made to be very complex if a highly structured system is implemented. For an organization where the employee headcount is not likely going to be measured in hundreds or thousands, adopting a structurally heavy system will create an unnecessary level of administrative complexity. For a relatively small organization, maintaining a simpler system that requires less administration time and provides for some flexibility is the preferred approach.

There is minimum-wage legislation in place that establishes the lowest hourly wage that can be paid to workers. Links to the various federal and provincial employment standards websites can be found in the Resources and Links section of this website.

Creating Salary Bands

A system that uses a small number of salary bands usually features bands that are wider, or have a larger difference between the minimum and maximum. These broad bands provide greater flexibility to an organization in paying employees what they need to in order to attract and retain capable employees. The drawback can be that, through accumulating years of service and annual merit increases, an employee can end up being paid more than you wish or need to pay them for the job they do, as the band maximum is higher than what is required by the market.

If a system is implemented using a high number of salary bands, the problem of overpaying is usually solved, as employees reach the maximum pay rates sooner. If the bands are too narrow, it can create a challenge in that in order to remain competitive with your wages, you either have to adjust the bands or ‘promote’ the employee to another band to enable paying them more. As soon as you do this, you have started to make exceptions, and managing employee salaries and wages becomes much more complicated. It can become difficult to ensure internal equity, and exposes you to potential issues of employee dissatisfaction and other complaints or issues related to differences in pay.

How wide the salary bands are will determine how many jobs fall into each band, based on what you want and/or need to pay to attract and retain the quality of employee you need. Salary bands can overlap; that is, the maximum salary of one band can be higher than the minimum salary of the band above it. Salary bands can be put together using fairly complex ratio and percentage formulas or structured more simply by grouping similar types of jobs together into bands in a way that makes sense. There is a formal process, called job analysis or job evaluation, through which elements such as responsibilities, skills and working conditions are assessed and awarded points for the purpose of grouping positions together into bands. If you have the resources with the ability to conduct this type of process, it is certainly worth while. If you don’t, using good judgement and common sense will allow you to create salary bands that will be effective and better than having no structure at all in place.

It is recommended that each salary band be structured with a minimum salary, a target rate and a maximum salary. The target rate would be the maximum salary an employee can be paid in a particular band for performance that meets performance objectives. Salary levels between the target rate and the band maximum would be available only to employees whose performance is rated as exceeding objectives. It is highly effective to link base salary to performance in a more significant way than simply establishing differentials in merit increase amounts.

Following are examples of salary-band structures and how the target salary and maximum salary work. Annual salaries are used in the examples, but the models work equally well for hourly wages.

Salary Bands – Example 1

Salary Band Minimum Salary Target Salary Maximum Salary
1 $18,000 $21,500 $23,750
2 $21,500 $25,750 $28,500
3 $25,750 $28,250 $31,000
4 $28,250 $34,000 $37,500
5 $34,000 $40,750 $44,750

In Example 1, the lowest salary that the company would pay is $18,000, therefore it becomes the minimum salary for salary band 1. To determine the target salary, a multiplier of 120 percent of the minimum salary was used, with the result being rounded to the nearest multiple of $250. To determine the maximum salary, a multiplier of 110 percent of the target salary was used, again rounded to the nearest $250. The target salary for band 1 was selected as the minimum salary for band 2, and the process was repeated through band 5. Based on the market value of employees skilled in the occupation, an individual job would be assigned to the salary band that it best fits. The percentages used to determine the target salary and maximum salary can be smaller or larger based on your preference. The larger the percentages, the wider the bands will be and you will likely have fewer bands.

Salary Bands – Example 2

Salary Band Minimum Salary Target Salary Maximum Salary
1 $18,000 $20,000 $21,000
2 $20,000 $22,000 $23,000
3 $22,000 $24,000 $25,000
4 $24,000 $26,000 $27,000
5 $26,000 $28,000 $29,000

In Example 2, the same minimum salary was used for Band 1. This time, the target salary is $2,000 more than the minimum salary and $1,000 higher than the target salary. The target salary from band 1 becomes the minimum salary for band 2, and the process is repeated through band 5. This is an alternative approach to setting up bands and, once again, the increment between levels within the band and from one band to the next can be determined by your preference. This example will obviously lead to a structure with more salary bands and less flexibility in paying your employees. Using larger increments will add flexibility and reduce the number of bands in your structure.

Salary Bands – Example 3

Job Position Minimum Salary Target Salary Maximum Salary
Job 1 $18,000 $22,000 $25,000
Job 2 $21,500 $23,000 $26,000
Job 3 - Level 1 $28,000 $30,000 $32,000
Job 3 - Level 2 $31,000 $33,000 $35,000
Job 3 - Level 3 $34,000 $36,000 $38,000

In Example 3, a structure using salaries assigned to individual jobs is presented. The minimum, target and maximum salaries are determined by what you need to pay to attract and retain quality employees, with no specific formulas used; round numbers are used in the example, but they don’t have to be. For Job 3, a position that has three distinct levels is used (as is seen in many of the job classifications in the National Occupational Standards section of the website). The salaries overlap slightly to allow for some flexibility in salary when promoting an employee from one level to another. In the previous examples, the different levels of Job 3 would each be assigned to a different salary band.

Salary Bands – Example 4

Using the target salary and maximum salary with performance appraisals:

Salary Band Minimum Salary Target Salary Maximum Salary
4 $28,250 $34,000 $37,500

Using salary band 4 from Example 1 above, an employee who is rated as meeting objectives (Quality – Solid, if using the scale provided in the Performance Appraisal section of this website) would not be eligible to receive a base salary of any more than $34,000. 

Another employee in the same salary band who is rated as exceeding objectives (Quality – High or Exceptional, if using the scale provided in the Performance Appraisal section of this website) would be eligible to receive a base salary of up to $37,500, the salary-band maximum.

When an employee reaches the target salary with Quality – Solid performance and is no longer eligible for a salary increase, it should be explained to the employee that further salary increases can be attained by increasing performance levels or being promoted into a higher-level position. This is also true for the Quality – High or Exceptional-rated employee reaching the maximum salary, where future salary increases are attainable through promotion to a higher-level position. There are tools available to assist both manager and employee in this process in the Training & Development section of this website.