I have witnessed number 3 in action. My first programming job introduced pay bands a few years in (it was a young company that grew from small to a few hundred at that point) and word got around about the people who were already earning above the band for their level.

The mood around those who were already above their band went from "yeah they're okay devs" to "wtf, those guys aren't nearly good enough" pretty quickly.

I'm just happy to be one of those that got a good raise to meet the bottom of my payband and not the other way around.