More than 30% of U.S. workers are already covered under some form of pay transparency law, and the EU Pay Transparency Directive comes into full effect in June 2026. Past that, employees have more access to salary data than at any point in history. Sites like Glassdoor, Levels.fyi, and LinkedIn have put salary benchmarking in everyone’s hands – anyone with an internet connection can see what the market is paying.
This covers what compensation modeling actually is, what a well-built model needs to include, how to anchor your salary ranges to actual market data, where pay equity gaps develop and how to build a working model from scratch.
Let’s dig into compensation modeling and how to get it right!
What a Compensation Model Actually Means
Compensation modeling is how a company plans and forecasts what it pays its employees. The different pieces of an employee’s total pay package (base salary, bonuses, equity and benefits) come together into one structured framework that you can work with, analyze and make decisions from. Without that structure, it can become very hard to see where your compensation dollars are going or if your pay strategy is actually working.
Businesses put compensation modeling off until they feel the pressure for it. But there’s actual value in having that structure early on – even if your team is still fairly small.
A compensation model is a set of guidelines and data points that define how pay gets structured – it might include salary bands for each role, formulas to calculate bonus targets or a way to track equity grants over time. The pieces work together to give you a full picture of what compensation looks like (and what it could look like going forward) as your company grows, your headcount changes, and your budget evolves.
Plenty of organizations treat payroll and compensation modeling as one and the same. They’re two very different tools. Payroll tells you what you’re currently paying – nothing more. One is a record of the past, and the other is a plan for where you’re headed. When organizations don’t make that distinction, pay decisions tend to get made reactively.
Why You Need a Pay Model
Pay is something that lives in the back of everyone’s minds at work – even when no one brings it up out loud. The minute it starts to feel random or inconsistent, trust breaks down, and the damage is hard to come back from.
For most employers, retention is the number one concern. A well-structured compensation model gives you a defensible way to set pay, so when an employee asks why they earn what they earn, you actually have a straight answer. That transparency builds confidence in the leadership. When employees trust the ones who make decisions about their pay, loyalty tends to follow.
Budget control is the other side of this. Without a structure in place, pay decisions drift upward – and not in ways that are easy to predict or plan around. A one-off raise here, a market adjustment there, and before long, your payroll looks nothing like what you first had in mind. Finance teams usually feel the weight of it well before they’ve had a chance to see where it all went.
The legal side of all this has become considerably more involved over the past few years. Colorado, California and New York have all passed pay transparency laws that now tell employers to post salary ranges publicly – and stand behind them. For employers, this changes how pay structures need to work. A pay structure that’s full of exceptions or hard to explain can put you in a tough position with regulators and prospective employees.
A sound compensation model is about being deliberate with your decisions. At its core, it pushes your organization to nail down what it values, what your market looks like for the roles that you have open and how to treat your employees fairly at every level.
What Goes Into a Pay Model
A compensation model is made up of different pay types, and when it’s done right, the whole point is to get them all to actually work well together.
Base salary is the foundation that almost every compensation plan is built on – it’s the fixed amount an employee takes home, no matter how the quarter went. Everything else in the package layers on top of it from there. Most employers set a salary range for each position, which gives them the flexibility to pay different employees at different rates depending on their experience or tenure, all while staying within a set pay band.
On top of base pay, most compensation models have some form of variable pay – bonuses based on your own performance, on personal targets or on company-wide goals.
Equity is another layer that matters. Stock options and equity grants are pretty standard at startups and tech businesses, and they add actual value to a total compensation package – even if that money isn’t liquid just yet. Benefits like health coverage, retirement contributions and paid time off round out the rest of the package, and they carry real financial weight.
The concept that ties this all together is pay grades or job levels. Most compensation models group roles into tiers, and each tier comes with a preset range for salary, bonus and other pay elements – instead of pricing out every role or person separately, which makes the whole system far easier to manage across a large workforce. The bigger and more spread out the organization is, the more these tiers start to matter.
Market Data Anchors Your Pay Ranges
The benchmarking process is what ties your entire compensation model back to the world – it draws from salary surveys, industry reports and labor market data to give you an accurate picture of what other organizations are actually paying for comparable roles.
Without that outside data, your pay model ends up reflecting what you’ve always paid – not what the market is doing at the second. That difference tends to widen slowly over time, and at some point it starts to work against you – with new hires and with the employees that you already want to hold onto.
On one end of the range, the main concern is underpaying for roles that are hard to fill. If your pay ranges fall behind what the market is paying, the candidates are already gone before a conversation ever gets started. Roles with a deep talent pool are a whole different problem – pay too much in those areas, and you’re spending your budget where it’s not going to make much difference.
A benchmarking process is about matching your internal job architecture to the external market data as closely as you can. A title match alone won’t get you there – you need to align the scope, the level and the job of each role first and then draw conclusions from the data. The more care that goes into that matching step, the more helpful your data will be when it comes time to set or adjust your pay ranges.
Most organizations revisit this at least annually. The ones that skip it tend to feel it before long. Pay markets move, and a range that felt competitive two years ago can quietly fall behind what your candidates and employees will find once they start looking around.
Why You Need a Pay Equity Audit
Pay equity tends to be one of the most skipped parts of a compensation model. Organizations put a fair amount of work into their pay bands and market data – and then just never check if those numbers are actually fair across the board. That gap ends up being expensive.
The legal exposure is real, and it’s only getting worse. California, Colorado and New York (with more states joining every year) have passed pay transparency laws that make employers post salary ranges and, in some cases, make their pay data public. Once that information is out in the open, any pay gaps that were quietly buried in a spreadsheet get much harder to hide. The EEOC has gone after employers in just about every industry for pay discrimination, and some of the biggest settlements came from businesses that weren’t even looking to underpay anyone – the gap just quietly built up over the years without anyone ever seeing it. The best intentions don’t give you much protection if your pay model still produces unequal results. Women and workers from underrepresented groups absorb the worst of it, and the pattern shows up at every job level across virtually every industry.
The fix here is to run a pay equity analysis as part of the modeling process instead of something that you tack on at the very end. This part gets pushed farther back in the queue than almost anything else in my experience. Taking a close look at how compensation is distributed across gender, race and other demographic lines needs to happen before the model is finalized.
A compensation model that leaves out pay equity is only half done. The numbers can look great on paper. The problem is that if those same numbers don’t hold up when you look at them across your entire workforce, you have a structural problem.
When Broadbanding is a Good Fit
Broadbanding is a pay structure built around fewer and wider salary ranges instead of a long list of narrow grades. With a traditional grade system, every job title gets its own little range – broadbanding takes those roles and groups them into bigger categories, which gives employees quite a bit more room to move around within each one.
The appeal makes sense. Managers have more room to reward their strongest performers without running into an arbitrary pay ceiling, and employees don’t have to wait for a promotion just to see their compensation actually move. For any company that wants a little less rigidity in how they pay employees, broadbanding is worth taking a hard look at.
The tradeoff is that wider bands leave more room for inconsistency. Without a tight structure to guide pay decisions, those calls rest more heavily on the personal judgment of whoever is making them. Most organizations go in underestimating this problem, and it tends to be a pretty expensive lesson.
Before going with broadbanding, it’s worth taking a close look to see if your organization is set up for it – it tends to work best in flatter organizations where managers already have some experience and where pay transparency is legitimately part of the culture. When oversight is limited or when managers are still newer to their roles, tighter salary grades may be a better fit for employees – the decisions tend to be more grounded and predictable.
The right answer can depend on how your team is set up and how much confidence you have in who’ll be making these calls every day.
How to Build Your Pay Model Right
Once you start breaking it down into smaller steps, the whole process gets more manageable.
Pull together your pay data – it’s a combination of your internal salary information and external market data from trusted compensation surveys. With that in hand, you’ll have a much clearer picture of where your pay ranges stand.
From there, the next move is to define your job levels. Each position in your organization needs to map to a level – based on its scope, its responsibilities and the skills needed to do the work well.
With your levels in place, the next step is to set the pay ranges for each one. Your benchmarking data will teach you the midpoint for each range – that’s your anchor, and everything else gets built around it. A range spread of roughly 25% above and below that midpoint is a pretty standard starting place, though the exact width will change a bit based on your structure.
You’ll finish the model and want to roll it out too soon – which is usually a mistake. Run it against your existing workforce first before you go live. Get a picture of which employees land outside their new pay range and what it would actually cost to bring them all into alignment.
Once that’s done, you can put together a rollout plan. Be straight with your team – let them know what changed, why it changed and what it means for each of them. A compensation model only works when the employees it covers make sense of it and trust it.
Level Up Your Incentives and Rewards
A well-built compensation structure is worth the effort – even when the setup is a big lift. The return on that work is hard to put a number on – but you see it across the whole organization.
Fair pay is just the starting line. Recognition, rewards and a well-built incentive program do most of the work for day-to-day morale and long-term performance. Without those pieces in place, even a strong compensation package can start to feel pretty empty to the very employees that it’s meant to support. It’s a common gap, and it tends to show up in ways that are hard to ignore once you know what to look for.
At Level 6, that’s what we specialize in. We partner with businesses to build incentive and reward programs that produce results (from sales performance to employee recognition) with tools like branded debit cards and customized program designs. A company might want to energize its sales team, reward top performers, or just show its employees that their work actually matters. Whatever the goal, we build programs that deliver, are built to scale and are designed to bring in a return on the investment. Every program we put together is built around what a company needs – not a one-size-fits-all strategy.
If any of this seems like a fit for your organization, a free demo is the best place to start. We get to work with high-performance businesses every day, and it never gets old to see what teams are capable of when they have the right program behind them. Reach out and let’s talk.