What is Broadbanding in Compensation?

In human resource management, broadbanding is defined as having extremely wide salary bands, much broader than in traditional salary structures. While a typical salary band has a 40% difference in pay between its minimum and maximum points, a broadbanding structure can cover more than double that between its low-end and high-end.

In the article, the follow questions will be answered:

• What is broadbanding?
• What are the advantages and disadvantages of broadbanding?
• When should I use broadbanding for my compensation?
• What is a broadband pay structure?

The Definition of Broadbanding

Broadbanding pay structures in HR consolidate the many grades found in a traditional salary structure into a few larger salary bands. These bands have wider range spreads, larger midpoint differentials, and less overlap than traditional grades.

Broadbanding pay structures tend to place a greater emphasis on career development rather than job promotion, since employees stay within a single band for a much longer period of time during their tenure with an organization.

The Appropriate Time to Create Broadband Pay Structures

Broadbanding is an appropriate method to use when your organization need greater flexibility for pay determination and management. If job evaluation doesn’t drive your decisions when moving individuals up or down pay grades, then broadbanding is preferred because your focus would be on rewarding people for skill development, leading to lateral or latticed career movement. Furthermore, if you have a relatively flat hierarchy in your organization, broadbanding is the best option for your pay structure.

Typically, each salary band will have many consolidated, smaller grades within it, usually with a range spread of 80% to 200% of the median. For example, if the median salary for a range is $50,000, then it has a minimum of $40,000 (i.e., 80% of $50k) and a maximum of $100,000 (i.e., 200% of $50k).

These minimum-to-maximum pay range spreads are greater than traditional structures. If you’re business is broadbanding, your salary structure will also show larger midpoint differentials between bands, and less overlap between each band.

What Are the Advantages of Broadbanding?

• Career development over job promotion – Salary structures are built to define future career and compensation growth opportunities for employees. Broadbanding places a greater emphasis on career development over internal job promotion. In flattened organizations, fewer promotional opportunities exist, so a broadbanding structure allows for more pay increases and career growth in skills and responsibilities without a promotion. Broadbanding encourages the development of broad employee skills, because non-managerial jobs are appropriately valued and skill development is rewarded.
• Streamlined hierarchical structure – Broadbanding structures can show that your organization has fewer levels of management, meaning your job hierarchy is much simpler to understand. In traditional structures, there are more grades with smaller pay ranges, but there are more jobs because of the company’s size. Broadbanding is useful for smaller organizations because of the reduced number of grades and collapsed salary ranges. As smaller companies start to increase in size, they would then shift to more traditional pay structures.
• Reduce the need for specific skills – The jobs placed in traditional structures are narrow and specialized. For employees to advance in pay and responsibility, they have to further develop specific skills so they can be considered for promotion.In contrast, broadbanding pay structures value employees who expand their skillset and abilities because the grades themselves are so broad, giving more room for movement laterally.

What Are the Disadvantages of Broadbanding?

• Lack of external market rates – Broadbanding pay structures value greater internal flexibility for pay determination and movement. However, because companies value internal development, there is lesser awareness when it comes to external market rates.
• Non-precise midpoints – Broadbanding leaves your organization with very wide salary bands within your structures. The midpoints within those bands are ill-defined because the range is so large.
• No cost-control mechanism – The wide range of a broadbanding structure can cause individual pay to increase at different rates among the few bands in your structure, potentially causing issues with your budget. Be sure to analyze how pay increases will be given, and whether any job changes will result in lateral or upward moves in compensation, to avoid going over budget and losing revenue due to high expenses.