How a pay grading system works
A pay grading system is an organized structure within a compensation system that helps employees determine the amount of pay they can potentially earn over time in a certain position. This provides your employees with a framework that details the amount of pay available at each step of the employment process, which can motivate them to continuously do well in their positions.
A few factors can be taken into consideration when establishing compensation grades for the positions within your company. These are:
- The level of responsibilities within the position
- The amount of authority the position holds within your business
- The length of time the employee has performed the job
Generally, employees in a position to manage the work of others within the company take on more responsibility, which, in turn, leads to a higher pay grade. As an employee’s level of management continues to increase, a pay scale can show your employees how their hard work and added responsibilities are going to be rewarded.
What are pay scales?
Pay scales represent what an employee can expect to receive as compensation in their position within your company based on their skills, education, work experience and industry expertise. They can often take the place of salary negotiation and are commonly found in public sector employment or union-represented positions. Private sector jobs may also offer pay grades that reward an employee’s superior performance, commitment to the company and longevity.
A typical pay scale chart can document salary increases for employees based on a few factors.
Salary increase for the same position
In this case, your employee isn’t necessarily getting a promotion or changing positions within the company but receiving higher compensation for the work they’re already doing. The pay increase could represent the employee’s performance if they’re excelling in their position and you want to reward them for the hard work.
Another reason for a salary increase could be the length of time the employee has worked for your company. This could be your way of showing them that you appreciate their commitment and loyalty.
Salary increase for a higher position
A pay scale chart can also outline the salary increase if the employee gets new responsibilities as they continue to grow with your company. Being promoted to a management position and taking on a role of authority for the work of other employees usually leads to a higher pay grade.
Pay scales are always going to differ, depending on the organization, and can involve several steps before an employee reaches the top pay rate. Once an employee accomplishes that, the ability to earn more can be based on cost of living increases or other factors.
Overlapping salaries within a pay grade
It’s common to see overlap in the salaries available in each step of the pay grade because there may be overlap in the skills and responsibilities outlined in the job descriptions. For example, an entry-level job at pay grade 1 may require 5 to 10 steps to accomplish and offer a salary range of $30,000 to $40,000. Pay grade 2 may have a salary range of $35,000 to $45,000.
How your employee advances from pay grade 1 to pay grade 2 can vary. If an employee has a strong enough job performance to move to the next pay grade but not a lot of experience, you may assign them a salary at the lower end of pay grade 2. And vice versa, an employee may have a few years of experience but not a wide range of skills yet, depending on their work history.
In either case, offering several steps in a pay grading system and opportunities for advancement can help you attract and retain hardworking employees. As your company grows, establishing similar pay structures across positions that require a variety of job functions and skills can help you promote fairness among your employees.
What effects do pay grading systems have on employees?
Employees want to feel that their contributions to the company they work for matter. Using a pay grade that offers multiple compensation levels can push your employees to work toward each new milestone and feel as if they are building successful careers with your company, regardless of whether their position is evolving or not.
Some employees may not have the means or the desire to be promoted to a higher level within the company or take on management responsibilities. Especially in a public sector or unionized position, job security and the guarantee of receiving a regular paycheck may be more appealing than opportunities for promotion.
Pay grades are equally important in this case because they can prevent your employees from feeling stuck and unappreciated in their positions. Instead, it sends the message that they’re valued for their hard work, and this can motivate them to continue putting forth their best efforts for your company.
Whether you’re trying to encourage growth within the company or keep your employees satisfied in their current roles, compensation grades can prevent unhappiness among your employees and may lead to a greater retention rate.
