What are pay structures? (Definition and How To Develop One)

by | Published on May 23, 2022 | Last Updated on Dec 3, 2023 | Academy

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Most companies operate in a specific structure to organize employees’ salaries and streamline their work environment. Salary structure explains what a person can expect at least in their current job. Depending on the company’s plan, financial, operational, and organizational factors all have a say in determining how it pays its employees. In this post, we examine some of the most commonly used salary structures and show how they can be created by employers. To learn more, continue reading.

Tell me the meaning of pay structure?

The pay structure is defined as a collection of salary grades that relate to jobs within a hierarchy or series. This is an organization based on how each individual is paid based on the worth of that job to businesses and their efficiency within those roles. There are many different ways to separate employee pay into different kinds of pay structures and provide the basis for base pay.

What are the different types of pay structures?

There are various kinds of pay structures, although many may be identified from two main traits – the number of ranks or levels and their minimum and maximum salary ranges. All grades and levels carry a salary range, or pay scale, with minimum and maximum pay grade where the systems of grading constitute a vital part of compensation in the workplace. The most common types of base pay structures are:

Traditional Salary Structure / Pay Grading

There are multiple pay grades in a traditional compensation structure with a narrow scope compared to other structures.

  • Salary ranges spread 20–50%
  • Smaller midpoint progressions (5–10%)
  • Multiple pay grades

The advantage of a traditional pay structure is that it supports internal equity because the jobs in the same grade are paid comparable rates. The disadvantages are that employees often reach their maximum salary range before being promoted which can limit them from being paid the market rate.

Broadband

Broadband pay structures are becoming increasingly popular as companies seek to pay employees more in line with market rates. In a broadband pay structure, salary ranges are much wider, often spanning 50-100% of the pay grade. This allows for greater flexibility in pay progression and means that employees are more likely to be paid at or near the market rate.

Instead of using titles, broadband pay schemes divide workers up into categories. Administrative jobs, service occupations, and executive positions are just a few examples of distinct divisions that broadband compensation methods may create. The salary ranges are much wider than those in a typical pay structure because there are fewer pay grades.

  • Wider salary ranges (50-100%)
  • Larger midpoint progressions (10-20%)
  • Fewer pay grades

The advantage of a broadband pay structure is that it supports external equity because employees are more likely to be paid at or near the market rate. The disadvantage is that it can be difficult to compare job worth across the pay grades and there is a greater risk of overpaying or underpaying in some jobs.

Step Pay

A step pay structure is one in which pay increases are given at fixed intervals, typically after employees have served a set period of time in a role or achieved a specific level of performance. Step pay structures are often used in combination with traditional pay grades, with employees moving up a pay grade each time they receive a pay increase.

The advantage of a step pay structure is that it is simple to administer and understand. The disadvantage is that it may not accurately reflect performance since the move up the steps is often based on years of service.

Market-based

Market-based salaries are the most common type and are determined by conducting salary benchmarking of similar employees within the same sector or geography. Market-based salary structure requires some research, such as salary surveys, to obtain a median or average salary for each job. Since a market-based structure follows the latest pay information, the main advantage of using market-aware salaries is that workers should feel their salary is fair and equitable.

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How to structure employee compensation?

Pay structure defines employee compensation for different jobs. This involves establishing pay levels for various jobs and job types, according to market data.

When creating a pay structure, businesses should:

1. Determine what the pay structure will be used for. The pay structure can be used to support different organizational objectives, such as internal equity, external competitiveness, or a combination of both.

2. Gather data on pay for similar jobs in the market. This data can be gathered through salary surveys or other sources.

3. Develop a pay scale that takes into account the company’s budget and the market data. The pay scale should be designed to attract and retain employees in key positions.

4. Establish pay grades and a salary range for different job types. Pay grades can be based on factors such as job complexity, skills required, and experience level.

5. Review the pay structure periodically to ensure it remains competitive and aligned with the company’s objectives. The pay structure should be reviewed at least annually, or more frequently if there are significant changes in the labor market.

Tell me the best compensation structure for you?

When it comes to pay structures, there are a few different options businesses can choose from. In order to determine the best pay structure for a company, businesses should first assess what their objectives are. Are they looking to create internal equity within the company? Attract and retain employees in key jobs? Or be competitive in the market? Once a company understands its objectives, it can then begin to develop a pay structure.

What do you need to get started with structured employee compensation?

The pay structures will help employers attract and retain talent. Compensation systems create an equitable and more predictable way of making compensation determinations.

Conduct job analysis and job evaluation

Internal jobs may not necessarily align with market expectations (for instance the director in your firm may actually become the middle manager in the market). It will help you compare salary levels. In order to start this step you should do:

Salary Benchmarking

Benchmarks help increase your pay competitively. Often, the higher the pay can make hiring the best candidates harder. It is typically conducted in the context of market-segmental salary surveys, primarily based on geographical locations. Salary benchmarking aligns your minimum, mid-point, and maximum salary range for every role in your company to that of the market rate.

How to select the right structured pay system?

When implementing a structured pay system, the appropriate choice for your company depends mainly upon your sector and your situation. There’s a variety of pay structures available to businesses, and it’s often hard to find the best one. In some instances, customized or hybrid solutions are necessary. But for all businesses, regardless of size and business sectors, best pay systems often balance strategic and financial needs with the needs of their workforces and employees. A structured pay system will help achieve transparency, fairness, and equity in terms of employee rights and equity.

How to develop a salary structure?

Once you understand which structure you are going to employ, you can start to develop it through this process.

Look at the structure and salary range at other companies

Even if you do not use a market-based salaries structure, you should be looking into salaries from other companies similar to your own. It is important to compare firms within the same sector to get the best results. For example, using a salary survey from SalaryCube you can find out what your competition is paying for the same job in your company. Analyzing this data can help you determine what needs changing. You can also feel confident about the competitiveness of the positions in your company compared to other organizations.

After a good understanding of your competitive value, you can plan your future salaries as a result. Choose which employee performance you’re looking to raise the amount of. You can even determine when you can give salary increases for the same job. Most companies run annual checks where managers determine if a pay increase should happen to their employees. Market intelligence allows you to decide whether the raised prices you offer are higher or lower than average.

Evaluate your current salaries

As you begin the development of the salary system, evaluate all current salary levels for the person or department who is earning less or more than the average based upon the competitive job. You may be surprised how often the jobs within some departments are misaligned with the same jobs market rate.

Start building your salary structure

Using all of the information you’ve gathered, and determining the best structure for your company you can begin building your salary structures.

Wrapping it up.

One of the benefits of introducing pay structures is that it can help to create a more equitable and predictable way of making compensation determinations. This can be helpful in attracting and retaining talent, as employees will have a better understanding of what they can expect to earn in their current job. Additionally, structures can help to align internal jobs with market rates, making it easier to attract and retain top talent.

When developing structures, employers should keep in mind the needs of their business and their workforce. There is no one-size-fits-all solution, so it’s important to tailor pay structures to the specific needs of your company. Additionally, it’s important to benchmark salaries against those of similar companies in order to ensure competitiveness. Finally, pay structures should be reviewed and updated on a regular basis to ensure they remain aligned with the needs of your business.

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FAQ

What are the types of pay structures?

The four types of pay structures are traditional salary structure (pay grading), broadband, step structures, and market-based.

How many pay structures are there?

There are 4 common types of salary structures.

What is a step pay structure?

A step pay system is one in which pay increases are given at fixed intervals, usually determined by years of service or level of education. Employees move up a set number of steps at each interval, regardless of their performance or pay grade within the company. This type of pay system is often used in government jobs or jobs with union representation.

What is the best salary structure?

The best structure depends on the needs of their business and their workforce.

How do you establish a salary structure?

When developing a pay structure, it is important to consider the needs of both the business and the employees. There is no one-size-fits-all solution, so it’s important to tailor pay structures to the specific needs of your company. Additionally, it’s important to benchmark salaries against those of similar companies in order to ensure competitiveness.

What are the 3 types of salary payments?

There are three types of salary payments: fixed pay, variable pay, and irregular pay.

Fixed pay is a set amount of money that employees receive each month, regardless of how well or poorly they perform their job. This type of pay is common in jobs that are considered to be low-risk, such as administrative positions.

Variable pay is pay that fluctuates based on factors such as job performance or the company’s overall profitability. This type of pay can be a motivator for employees to perform well, as they know that their efforts will be rewarded with a higher salary.

Irregular pay is pay that is not received on a regular schedule, such as bonuses or commissions. This type of pay is often used to reward employees for meeting specific goals or objectives.

What is an example of a pay grade approach?

One common pay grade approach is to tie salaries to specific job roles or grade levels within the company. For instance, entry-level positions might start at pay grade 1, while more senior positions might be pay grade 5 or higher. Within each pay grade, there may be further distinctions based on factors such as experience or performance. This pay grade approach can be helpful in ensuring that pay is fair and consistent across the company.

Another common pay grade approach is to link salaries to specific qualifications or educational requirements. For instance, a job that requires a bachelor’s degree might start at pay grade 4, while a job that requires a master’s degree might start at pay grade 6. This approach can be helpful in ensuring that employees are fairly compensated for their education and experience levels.