What Is a Compensation Structure?

Many companies use a compensation structure to inform their employee pay decisions. While most companies' actual compensation details differ, the structures themselves usually follow a consistent setup. Knowing what a compensation structure is and understanding how it works can help you make educated decisions about your career. In this article, we explain what compensation structures are, describe the common types of compensation structures most companies rely on and highlight the factors that often determine the type of compensation structure that a company uses.

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What are compensation structures?

Compensation structures are the pay-based frameworks companies use to establish fair and equitable pay for all employees in the organization. A compensation structure gives a business clear guidelines for assigning initial pay rates, managing raises and distributing bonuses. An effective compensation structure seeks to dismantle pay practices based on inequitable factors, like past salary history and ineffective negotiation, and on inherent biases like gender or race.

Related: What Is Salary vs. Total Compensation?

Types of compensation structures

Compensation structures can take myriad forms, depending on the needs of the organization. A few common types of compensation structures include:

Broadband structure

A broadband structure is an older compensation style that some companies still use. In a broadband structure, the company sets pay bands, which can differ dramatically from entry-level pay to top-level pay. Many companies used the broadband structure to support employees who might stay with the company for their entire career, often in the same position.

Step structure

The step compensation structure is a tenure-based framework that primarily accounts for an employee's time with the company. Step structures are highly effective for some industries and roles in which there's not substantial room for upward growth, such as teachers or firefighters. The pay steps reward employees for their loyalty to the organization and continued commitment to the industry.

Grade and range structure

The grade and range structure is one of the most common compensation structures for businesses to use today. It's similar to the broadband structure in that there's a salary range within each grade, but the range is often much smaller than with the broadband structure and the overall system provides more opportunities for growth and promotion. Usually, a grade and range structure combine both tenure and performance when moving employees from one grade to another.

Benchmarking structure

The benchmarking compensation structure relies on market research and data to assign competitive salaries to specific roles. Unlike some of the other systems in which there's a clear trajectory upwards for employees and their pay, a benchmarking structure relies far more on data and may shift from year to year. A benchmarking structure is particularly useful for companies or roles that are highly competitive or challenging to hire for.

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What factors determine compensation structures?

A number of factors can impact which compensation structure a company chooses. A few of the most common elements businesses take into consideration when establishing their pay structure include:

Unions and collective bargaining rights

One factor that can impact some organizations' compensation structures is whether or not employees are unionized and have collective bargaining rights. Some companies must consider the contract agreed upon during collective bargaining sessions to inform their overall compensation structure and the steps, ranges or grades within it.

Employee perception

Employee perception can influence the overall compensation structure a company chooses. Most employees want to work for an organization that's transparent about how their employees are compensated and how those wages are determined. Creating a compensation system that employees feel is straightforward and equitable is often in the company's best interest.

Cost of living

Cost of living is another factor in the overall establishment of a compensation structure. Some areas, particularly big cities, might have higher than average rises in cost-of-living expenses than in suburban or rural areas of the country. Considering how annual non-performance or tenure-based increases can impact the overall pay structure for the business is useful for creating an effective compensation structure.

Government legislation

Depending on where you live, your state might have specific wage and salary regulations that can impact how your company structures its organizational compensation. Some states regularly increase the minimum wage, which can shift every pay band, step or grade in your company's structure upward.

Job competition

The demand for a certain job can also influence the type of compensation structure a company uses. For example, if a hospital needs a number of highly educated, trained and experienced surgeons for its staff, they'll likely use a benchmarking system to ensure they're paying enough to attract the specific type of surgeon they need. Alternatively, if a company primarily employs administrative workers who do not need a tremendous amount of specialized training, they may use a step or grade structure instead.

Industry

Some industries categorically use the same type of compensation structure, while others vary from company to company. In the public sector, it's very common to use a step or grade compensation framework. For example, the military grades all active-duty employees, paying them the same amount per grade and rank regardless of job type. Many private sector companies use independent systems to evaluate their overall pay scheme. Some, like those with longstanding employees, might rely on the broadband system, while others, particularly newer companies, might use a benchmarking system.

Growth potential

The company's overall growth potential can also affect how they choose to structure their organizational pay. For companies who anticipate serious growth and expansion, it's important to take that potential into account when structuring a compensation structure. These companies might choose to use a step or grade system that can easily expand to accommodate more levels, or they may choose to use a broadband or benchmarking system, which are both easier to manipulate for singular role changes or additions.