8 Types of Pay Progression Structures Employers Use

By Indeed Editorial Team

Published October 18, 2021

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

A company's pay structure can be a major factor in employee satisfaction and retention. Pay progression is the structure that a company uses to increase employee compensation over time. If you want to attract the best employees to your company and improve employee retention, you might consider implementing a pay progression structure. In this article, we explain what pay progression is and list several different types of pay progression.

What is pay progression?

Pay progression is a structure that companies use to periodically increase employees' compensation. There are many different methods of pay progression, including pay raises based on performance and external factors. Companies often implement pay progression structures to add clarity to the process of offering pay raises, as the structure can act as a guide. There are many benefits to these structures, including increasing employee satisfaction and retention.

Related: A Complete Guide to Competitive Pay

Why is pay progression important?

Pay progression is important because it can help a company attract the best employees. Offering competitive compensation can help companies ensure that employees choose them over other companies. It can also help ensure that employees feel satisfied with their pay.

A company's pay progression structure can also act as a clear path to an employee's salary goals. An employee can use the structure to determine their salary potential during their time at the company. This can make them more likely to keep working for the company over time, increasing employee retention.

Related: 20 Strategies for Employee Retention

8 types of pay progression

Here's a list of several types of pay progression that employers use:

1. Length of time employed

Many companies increase their employees' compensation based on how long they've been employed. For example, a company might increase an employee's salary by $5,000 per year every two years. This type of structure rewards employees who stay with a company for several years, promoting employee retention.

2. Competitive rates

Some companies also adjust their pay rates to remain competitive with other companies. They may do this by researching other companies and determining whether they can match their pay rates with their resources. It's important for companies to remain competitive to persuade top employees to choose them over other companies.

Related: Competitive Pay: What You Need To Know

3. Company performance

Companies may also base employee compensation on the overall performance of the entire organization. They can use metrics to gauge the performance of the company and determine appropriate pay rates. This structure can help employees feel connected to the success of the company.

4. Individual performance

Many companies also award pay raises to employees with strong individual performance. The purpose of this type of pay progression structure is to encourage employees to excel in their jobs. This structure motivates individuals to perform at a high level, which can increase employee morale. Companies might base performance on specific achievements or overall contributions to the company.

Related: How To Get a Raise: 10 Tips To Prove You Deserve a Raise at Work

5. Team performance

Along with individual performance, some companies base their pay rates off of team performance. They use metrics to review the performance of entire teams and determine the appropriate pay increase. This type of pay progression can encourage teamwork and commitment to the company.

6. Skill development

Often, companies also increase employees' pay in exchange for them developing new skills. The purpose of this pay progression structure is to encourage employees to continue building skill sets that can make them better at their jobs. This can make these employees assets to the organization.

7. Inflation-related pay raises

Pay rates can also change due to inflation. This occurs when surrounding prices are increasing, so the company increases employee compensation to keep up with these changes. For example, if the cost of living increases in the company's city, the company might increase its pay rates so employees can continue to live in the city comfortably.

Related: What Is an Average Cost of Living Raise? Definition and How To Calculate

8. Promotions

Some companies also award pay raises on a promotion basis. In this case, top-performing employees move into higher-level roles and receive a corresponding pay raise. This type of structure can motivate employees to continue to improve and move up throughout the company. This can help companies attract employees who stay for many years and work at multiple levels, contributing to the organization significantly.

Related: Everything You Need To Know About Compensation and Benefits

Tips for choosing a pay progression type

Here are a few tips for choosing the right pay progression structure for your company:

Think about your resources

Another tip is to think about your company's financial resources. Considering your company's financial situation can help you determine which pay progression structures are realistic. For example, if your company is in a strong financial situation, you might be able to afford to increase employee salaries by $5,000 per year every two years. A smaller company with less stability might choose a pay structure based on company performance, awarding pay raises that correspond with company success.

Related: Types of Pay Structures and When To Use Them

Refer to your goals

You can also use your company's goals to help you choose a pay progression structure. For example, if your company wants to stay ahead of its competitors, then you might choose a competitive structure that attracts top employees. If you're more focused on developing your workforce, then you might choose a skills-based structure to encourage employees to improve.

Consider external factors

Another tip for choosing a pay progression structure is to think about external factors that affect your company and employees. For example, if you live in a location with a high cost of living, you might choose an inflation-related pay structure. This structure could help your company ensure that employees make enough to live comfortably in your location. You can also observe the pay structures of other companies in your area to make sure your company can compete with them.

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