Guide to Developing Salary Bands

Practical Guide to Developing Salary Bands for Tech Companies

Executive Summary: What You Absolutely Must Know

If you're a small to mid-sized tech company without a dedicated compensation team, here are the five things you absolutely must get right:

1. Use relevant comparisons: Benchmark against companies of similar size and stage, not Big Tech giants who can outspend you. Getting this wrong leads to unrealistic bands you can't afford to maintain.

2. Focus on total compensation, not just base salary: Equity, bonuses, and benefits are significant components in tech. Ignoring them means you'll either overpay on base or lose candidates who receive apparently "lower" offers.

3. Use median data, not averages: Averages get skewed by outliers and will make your bands unrealistically high or low. One $300K compensation package in your data can throw everything off.

4. Balance internal equity with market competitiveness: Pay new hires substantially more than existing employees, and you'll face a retention crisis. Pay everyone below market, and you'll struggle to hire at all.

5. Revisit your bands at least annually: In tech, compensation data ages like milk, not wine. Using 18-month-old data in a hot market can put you 20-30% below competitive rates.

Now let's dive deeper into why these elements matter and what happens when companies get them wrong.

The Real Costs of Getting Compensation Wrong

Before we get into the mechanics of creating salary bands, let's understand what happens when companies make common compensation mistakes:

When You Overpay

Scenario: You offer a senior engineer $200K base salary when the true market median for your company size is $160K, based on a single candidate's salary demands or an outlier data point.

Immediate consequences:

• You've potentially set a new internal anchor that will drive up expectations across the engineering org

• You've decreased your runway or profitability unnecessarily

• You may have created compensation inequity that could lead to legal exposure

Long-term impact:

• Word spreads internally, creating pressure to adjust others' compensation

• This creates a "ratchet effect" where compensation can only go up, never down

• Financial sustainability becomes challenging as you've artificially inflated your cost structure

Real-world example: A Series B fintech startup I worked with hired a "10x engineer" at 40% above their band maximum. Within 6 months, three other senior engineers discovered the discrepancy and demanded raises. Two left when refused, costing the company approximately $85K in replacement costs per engineer and delaying a key product launch by 4 months.

When You Underpay

Scenario: Your salary bands for product managers are 15% below market because you're using outdated data from last year.

Immediate consequences:

• Extended time-to-fill for open positions (industry average is 45 days; companies paying below market average 68+ days)

• Lower acceptance rates on offers (below-market companies typically see acceptance rates of 65% vs. 85%+ for market-competitive offers)

• Higher recruitment costs as you need more candidates in the pipeline

Long-term impact:

• Difficulty attracting experienced talent who understand their market value

• Higher-than-normal attrition (15%+ annually vs. industry average of 8-12%)

• Knowledge gaps and decreased product velocity

Real-world example: A mid-sized SaaS company maintained PM salaries at 2021 levels through 2023. Their voluntary turnover in the PM organization reached 22% in a single year, with exit interviews citing compensation as the primary factor in 78% of departures. The cost of lost productivity and replacement reached an estimated $1.2M.

Key insight: Some attrition due to compensation is normal and even healthy (2-3% annually), but when it consistently exceeds 5%, your compensation strategy needs immediate attention.

Step-by-Step Process: Building Practical Salary Bands

Step 1: Define Your Compensation Philosophy

Why this matters: Without clear principles, your compensation decisions will be reactive and inconsistent. You'll either overpay when under pressure or lose good candidates by adhering to arbitrary limits.

The practical approach: Answer these three questions with your leadership team:

1. Market positioning: Where do we want to target relative to the market?

   • 25th percentile (below market, typically requiring other strong selling points)

   • 50th percentile (market median, the most common approach)

   • 75th percentile (above market, typically for fast-growing companies prioritizing fast hiring)

2. Internal vs. external equity: Which will be our primary driver?

   • External market first (easier to recruit, harder to maintain internal equity)

   • Internal equity first (better for culture, may create hiring challenges)

   • Balanced approach (usually the most sustainable)

3. Pay transparency level: How open will we be?

   • Need-to-know basis

   • Range transparency

   • Full transparency

Document these decisions as your compensation principles before collecting any data. This prevents "moving the goalposts" later when faced with difficult decisions.

Step 2: Identify Your Actual Competition for Talent

Why this matters: Comparing against the wrong companies will create bands that either break your budget or fail to attract talent. This is the #1 mistake small/mid-sized companies make.

The practical approach:

1. Create your true competitive set:

   • Look at the last 10-15 people you hired. Where did they come from?

   • Look at the last 5-10 people who rejected your offers. Where did they go?

   • These companies are your actual talent competitors, regardless of whether they're in your industry

2. Filter by company stage and size:

   • For startups: Compare with companies at similar funding stages (e.g., Series A to Series B)

   • For established companies: Look at organizations within 50-200% of your size

   • Remove outliers like FAANG/Big Tech unless you're genuinely competing with them

Reality check: A 50-person Series B startup physically cannot match Google's compensation and shouldn't try. Design bands that are competitive within your actual peer group.

Step 3: Gather Reliable Data from Multiple Sources

Why this matters: Each data source has inherent biases. Using a single source essentially imports those biases into your compensation system.

The practical approach:

Primary sources (invest budget here if possible):

• Industry compensation surveys (e.g., Radford, Option Impact for startups)

• Recently closed offers from your recruiting team (last 3-6 months)

• Rejected offers where candidates shared their alternative compensation

Secondary sources:

• Public job listings with salary ranges (from states with transparency laws)

• Aggregator websites (with appropriate skepticism)

• Informal networks and communities

For each role, triangulate data from at least 3 sources before setting ranges.

Why averages mislead: Consider a dataset where 5 senior engineers make $150K, $155K, $160K, $165K, and $270K. The average ($180K) is higher than what 80% of engineers actually make! Always use the median ($160K) as your primary reference point.

Step 4: Build Practical Bands with Appropriate Width

Why this matters: Bands that are too wide become meaningless; bands that are too narrow create administrative headaches and constant exceptions.

The practical approach:

1. Set the midpoint at the median market rate for a fully proficient performer

2. Set band width based on role characteristics:

   • Standard roles (well-defined, abundant market data): ±15% from midpoint

   • Specialized roles (harder to benchmark): ±20% from midpoint

   • Leadership roles: ±25% from midpoint

3. Check your bands against reality:

   • Map your current employees to the bands

   • If more than 15-20% fall outside the bands, reconsider your approach

   • If clustering occurs at band minimums or maximums, adjust accordingly

The flexibility zone: For truly exceptional candidates, consider allowing hiring up to 10% above the stated maximum, but only with specific approval and documentation. This prevents the "special case" from becoming the new standard.

Step 5: Deal with Total Compensation, Not Just Base Salary

Why this matters: In tech, equity and variable compensation often represent 20-50% of total compensation. Ignoring these components leads to misaligned offers and compensation structures.

The practical approach:

1. Design a consistent equity philosophy:

   • Early-stage: Define standard equity percentages by level

   • Growth-stage: Define dollar-value equity targets by level

   • Set equity refresher guidelines to prevent "golden handcuff cliff"

2. Document your approach to variable pay:

   • Will you offer bonuses? At what levels?

   • Are they performance-based, company-performance-based, or guaranteed?

   • How will you communicate target vs. maximum values?

3. Calculate and communicate total compensation value:

   • Show candidates the annualized value of all components

   • Be transparent about the assumptions used to value equity

Warning sign: If you find yourself dramatically increasing base salary to compensate for weak equity or benefits, this indicates a need to revisit your overall compensation strategy rather than making one-off exceptions.

Step 6: Implement with a Focus on Existing Employees

Why this matters: New compensation bands that ignore current employees create internal inequity, resentment, and eventual turnover.

The practical approach:

1. Map all current employees to new bands

2. Identify outliers:

   • Below minimum (needs immediate adjustment)

   • Above maximum (needs careful management)

3. Create an adjustment strategy:

   • If budget allows: Immediate corrections for all below minimum

   • If budget limited: Phase in over 2-3 compensation cycles, prioritizing largest gaps and highest performers

4. Coach managers on communication:

   • Provide clear talking points about the new structure

   • Train them to handle common questions and concerns

   • Create a feedback loop to identify emerging issues

Critical warning: The most expensive mistake companies make is implementing new bands only for new hires. The short-term savings are inevitably dwarfed by the long-term costs of replacing experienced employees who leave when they discover the discrepancy.

Step 7: Establish an Update Cycle and Monitoring System

Why this matters: Static compensation bands in a dynamic market quickly become obsolete. Companies that "set and forget" find themselves with systemic hiring and retention problems within 12-18 months.

The practical approach:

1. Schedule regular reviews:

   • Full market analysis: Annually

   • Spot-check on high-demand roles: Quarterly

   • Immediate review when offer acceptance rates drop below 70%

2. Monitor key indicators:

   • Time-to-fill for open roles (increasing = potential compensation issue)

   • Offer acceptance rates (decreasing = potential compensation issue)

   • Voluntary turnover citing compensation (>5% = potential compensation issue)

3. Designate clear ownership:

   • Who is responsible for maintaining bands?

   • Who can approve exceptions?

   • Who tracks market movements between formal reviews?

Practical trigger: When recruiters consistently ask for "exceptions" to get candidates across the line, it's a clear signal your bands need review, regardless of when they were last updated.

Real-World Considerations and Challenges

The "I Can't Afford Market Rates" Challenge

The reality: Many small companies genuinely cannot match market rates for certain roles, particularly in engineering and product.

Failed approaches:

• Pretending you can compete on cash alone

• Ignoring the issue and hoping candidates won't notice

• Making promises about future compensation that you may not be able to keep

Effective strategies:

1. Be transparent about your constraints but highlight other advantages:

   • Impact and responsibility beyond what's available at larger companies

   • Accelerated growth opportunities

   • Mission alignment and purpose

   • Work flexibility and autonomy

2. Get creative with non-cash compensation:

   • Additional equity with specific liquidity planning

   • Extra time off or sabbatical programs

   • Professional development budgets

   • Four-day workweeks

3. Consider alternative talent strategies:

   • Hiring promising but less experienced talent you can develop

   • Geographic arbitrage (if your company structure allows)

   • Contract-to-hire arrangements

Success story: A 30-person startup I advised couldn't match market rates for senior engineers but created a "maker schedule" with no meetings on Tuesdays/Thursdays and a 4.5-day workweek. They successfully hired 4 senior engineers who explicitly cited this structure as more valuable than the additional $30K they could have earned elsewhere.

The "Hot Candidate" Scenario

The challenge: You've found an exceptional candidate, but they're asking for 20% above your band maximum.

The naive approach: Just pay what they're asking to "get them in the door."

Why that fails: One exception quickly becomes the new expectation. Internal candidates find out (and they always do). You've now reset your entire compensation structure for one hire.

The balanced approach:

1. Verify the market data: Is this truly an outlier, or are your bands out of date?

2. Consider total package creativity: Can you structure something attractive without breaking base salary bands?

3. Document the exception case: If you proceed, clearly document why this situation is unique

4. Plan for potential impact: If others learn of this exception, how will you respond?

The "Mass Exodus" Warning Signs

Warning signs that your compensation is significantly misaligned:

• Voluntary turnover exceeds 15% annually, with over 50% citing compensation in exit interviews

• Offer acceptance rates fall below 60% with compensation as the primary objection

• Time-to-fill for key roles extends beyond 60 days despite active recruiting

• Consistent feedback from managers about compensation concerns during retention risk conversations

Required response: This situation demands immediate attention, not gradual adjustment. Consider:

1. Emergency market analysis: Conduct an expedited review of current market rates

2. Retention-focused adjustments: Prioritize increases for high-risk, high-performing employees

3. Temporary incentives: Consider one-time retention bonuses while redesigning your overall structure

4. Leadership transparency: Acknowledge the issue openly and share the plan to address it

Cost comparison: A typical company will spend 100-150% of annual salary to replace a mid-level employee when considering recruiting costs, lost productivity, and onboarding time. Proactive retention almost always costs less than replacement.

Simplifying Complexity: A Framework for Non-HR Leaders

For founders, CEOs, and other leaders without compensation expertise, here's a simplified framework:

Three Questions to Ask Monthly:

1. Are we closing the candidates we want? If not, compensation is likely a factor.

2. Are we losing people we want to keep? If yes, run a quick market check on their compensation.

3. Do our managers feel confident in our compensation framework? If they're constantly requesting exceptions, your bands need updating.

Red Flags That Demand Immediate Attention:

• Multiple candidates citing compensation as their reason for declining offers

• Unexpected resignations of high performers for "better opportunities"

• Managers creating "workarounds" to increase compensation outside official bands

• Compensation discussions consuming disproportionate leadership time and energy

When to Invest in Professional Help:

• Company reaches 50+ employees

• Hiring plans include 20+ roles in the next year

• You're expanding into new geographic markets

• You're experiencing unexplained retention issues

• Your compensation exceptions are becoming the rule

Conclusion: Compensation as a Strategic Tool, Not an Administrative Exercise

Effective salary bands aren't just about compliance or administration—they're a strategic lever that directly impacts your ability to attract, retain, and motivate the talent your company needs to succeed.

The most successful tech companies of any size share these compensation practices:

1. They're intentional, with clear philosophies driving their decisions rather than reacting to each candidate's demands

2. They're informed, using reliable data from multiple sources rather than anecdotes or outliers

3. They're dynamic, treating compensation as an evolving practice rather than a static policy

4. They're balanced, considering both external competitiveness and internal equity

5. They're transparent, communicating clearly about their approach even if they don't share every detail

By focusing on these principles rather than getting lost in compensation complexity, even small companies without dedicated compensation specialists can create effective salary bands that support their business objectives while treating employees fairly.

Remember: The goal isn't perfect compensation—it's compensation that works for your specific business context, talent needs, and financial reality.