Types of pay structures

All pay structures have one thing in common: They’re organized in a hierarchical way. Every position has a corresponding band, grade or level, making it easier to determine how much to pay employees.

A hierarchical structure helps employees understand what to expect. For example, a new team member should be able to look at your salary scale to determine what they’ll earn if they accept a promotion or make a lateral move within the next few years.

Using well-organized pay structures also helps your HR team calculate an appropriate raise for each employee. This can help make the process less subjective.

Here are five common compensation structures to consider.

1. Traditional

A traditional structure sets compensation according to pay grades. The federal government uses a traditional pay structure. Every federal job has a grade ranging from one to 15. Within those grades are steps, which allow employees to earn more money based on years of service or job performance.

This traditional pay structure example shows how compensation increases from one grade to the next:

• Grade 1: $32,500 to $34,500 per year
• Grade 2: $34,501 to $36,500 per year
• Grade 3: $36,501 to $38,500 per year
• Grade 4: $38,501 to $40,500 per year
• Grade 5: $40,501 to $42,500 per year

If you decide to use this pay structure, consider making sure you have a wide range of grades. You’ll need them to accommodate the salaries for employees in positions ranging from customer service associate to chief financial officer.

2. Market-based

A market-based pay structure uses current market data to determine the appropriate compensation for each job. Using this structure can help make it easier to attract quality employees in these situations:

• You operate in a highly competitive industry.
• The job market in your area has more openings than candidates to fill them.

A common first step in implementing a market-based pay structure is to conduct a salary survey. This involves sending surveys or contacting employers directly to find out how much they’re paying for specific job roles. Many companies choose to have a third-party company conduct this type of research.

If you send out a survey, consider including questions related to base salaries, bonuses and other forms of compensation. Gathering this type of data can help you create a pay structure that’s in line with your company’s current compensation and benefits practices.

3. Step pay

Step pay structures have well-defined progressions based on an employee’s performance or tenure with the organization. For example, a government agency may have 10 steps within a single salary band, which includes a pay range for a specific position based on skills and market trends. Here’s an example:

• Step 1: $50,000
• Step 2: $51,500
• Step 3: $53,000
• Step 4: $54,500
• Step 5: $56,000
• Step 6: $57,500
• Step 7: $59,000
• Step 8: $60,500
• Step 9: $62,000
• Step 10: $63,500

4. Broadband

Some pay structures are based on specific job titles. In contrast, a broadband structure groups jobs into categories. As a result, the pay ranges are typically wider for companies using the broadband structure. For example, the top of the range may differ from the bottom of the range by $10,000 or more.

If you use this type of structure, you might have categories for administrative support professionals, sales professionals and management. Because the pay ranges are so wide, the broadband structure gives you extra flexibility. You have more room to give merit-based increases or reward employees for their loyalty.

5. Mixed

A mixed structure combines the features of at least two pay structures. One common example is the use of the traditional pay structure with the step pay structure. The federal government uses both grades and steps, which helps employees understand what to expect as they complete additional years of service.

How to implement a pay structure

Before you implement a pay structure, consider the following tasks.

1. Job analysis

Job analysis helps your HR team identify the essential knowledge, skills and abilities for each role. It also helps determine the core duties performed by each employee. Once a compensation analyst understands each job, they can group similar roles together.

2. Job evaluation

While job analysis focuses on identifying duties and qualifications, job evaluation focuses on determining the role’s responsibilities and impact within the organization.

Every employee plays an important part, but different roles contribute to business goals in different ways. For example, a salesperson may directly generate revenue, while a customer service agent supports customer satisfaction and retention—both are essential, but the roles may be evaluated differently when determining compensation.

Determining the relative worth of each job makes it easier to develop a hierarchy for your pay structure.

3. Strategy development

Finally, develop a compensation strategy. Some options may include lagging the market, leading the market or meeting the market.

Lagging the market means your company will pay less than its competitors. This approach may make sense for your business if you offer a comprehensive benefits package, as prospective employees may be willing to accept slightly lower base compensation in exchange for better benefits.

Leading the market means your company will pay more than its competitors. You might use this approach if you want to attract quality employees away from competing companies.

Meeting the market means offering about the same amount of money as other companies in your industry.

Once you identify an appropriate compensation strategy, you can create a pay structure that aligns with your company’s goals.