Salary structures 101: HR's guide to understanding, developing & applying effectively

How do you keep your employees engaged and motivated? One of the most crucial elements of achieving an inspired workforce is having the proper pay structure. The various pay structures available can be daunting, and finding the right one for your company can be overwhelming. In this blog, we'll discuss the different types of pay structures available and provide the information necessary to make the right decision.

4 common salary structures

Organizations use different salary structures to balance fairness, flexibility, and market competitiveness. Understanding how each model works can help HR teams choose a structure that aligns with business strategy and employee expectations.

1. Graded pay structure

The traditional graded pay structure, a widely adopted compensation model, assigns employees to specific grades or levels based on their roles, responsibilities, and experience within the company. This structure provides a significant advantage of transparency, enabling employees to understand how their pay compares with others in the company, thereby promoting a sense of fairness.

Another key benefit of this model is its support for internal equity arrangements. Ensuring jobs with similar responsibilities and requirements fall within the same pay grade guarantees that employees receive comparable compensation.

However, the traditional graded pay structure also has limitations. Because of its rigid nature, high-performing employees or those in highly specialized or sought-after positions may feel undervalued if their compensation is not commensurate with their contributions or the market value of their skills. Additionally, alignment challenges can arise when employees reach the maximum pay within their grade before they're ready for promotion, potentially leading to stagnation, lack of motivation, or a feeling of being unable to progress.

In deciding to use a traditional graded pay structure, organizations should consider whether the structure's clarity and support for internal equity outweigh potential downsides, such as the risk of high-performing employees leaving due to perceived undervaluation or boredom. It's essential to gauge whether this system would encourage motivation and retention or inadvertently drive high-performing talent to seek opportunities elsewhere.

2. Broadband pay structure

Broadband pay structure, also known as pay banding, is an approach that groups jobs by function and provides a specified wage range for all employees within that group. This structure is similar to traditional pay grades but significantly more flexible, as it allows employees to transition between roles without changing their pay grades. Broadbands typically encompass the entire business and may offer multiple pay grades across non-managerial, managerial, and executive positions.

The range of these broadband pay structures is typically more expansive than traditional ones, often extending from 80% to 120% or higher, and it usually encompasses fewer pay bands. This broader range allows businesses maximum flexibility in customizing offers for specialized talent and critical positions. Furthermore, fewer pay bands mean that employees can make lateral moves within the company much more comfortably, as changing roles or departments doesn't necessarily necessitate a salary adjustment if they remain within the same pay grade.

However, the broadband pay structure can also pose challenges. It can be more difficult to administer and evaluate performance levels accurately due to its broad scope. Additionally, some employees might feel short-changed if they transition to a lateral but more demanding role without a corresponding pay increase. Because of a lack of clear band definition, the system could also lead to instances where employees find themselves overpaid or underpaid relative to the market, depending solely on their tenure in a particular role. As a result, organizations considering a broadband pay structure should weigh whether its flexibility outweighs potential stress on administrators and potential pay disparities among employees.

3. Step structure

Step structures in compensation planning involve predefined steps or levels through which employees advance based on performance or seniority. This system generally divides the pay range into small, equal increments, with minor progressions of about 5% to 10%. The range often spans between 20% and 50%, covering all wages across the business - from the lowest-earning employee to the highest-earning employee.

This structure can be motivating, providing a clear framework for employees to progress within the company, making it particularly beneficial in union-related circumstances. It's also a straightforward approach that rewards loyal employees, as it clearly delineates what steps lead to specific advancements. Its simplicity makes it easy to administer and offers predictable business costs.

However, the step structure has limitations due to its inherent rigidity. It may present challenges in motivating employees to excel beyond their current level because progression is predominantly based on seniority or loyalty rather than merit. Consequently, an employee working exceptionally diligently but at a lower level may not feel adequately rewarded, potentially leading to frustration and resentment towards higher-earning but less competent peers. Therefore, organizations considering a step structure should contemplate whether its clear progression framework and simplicity will foster employee performance and retention, or its rigidity might limit opportunities for employee growth and lead to dissatisfaction among high-performing lower-level employees.

4. Market-based approach

The market-based approach to compensation planning involves evaluating the external job market and adjusting the company's pay structure accordingly. Essentially, it involves researching what other companies in the same industry are paying for similar roles and aligning your pay structure with these figures, or "the market." This approach can be an effective strategy for attracting top talent and maintaining competitiveness within the industry.

One of the key advantages of a market-based structure is its potential to encourage employee satisfaction and retention. When employees understand they're being compensated at a rate comparable to what they'd receive elsewhere, they are typically more inclined to join or stay with the company.

However, the market-based approach can also present challenges. For one, it tends to be more expensive than other pay structures, which could be a significant consideration for some companies. Furthermore, it involves navigating an external market that can be somewhat arbitrary and beyond a company's control.

Lastly, the market-based compensation may not fully account for unique benefits and perks specific to your organization, which could potentially cause disparities between actual and perceived value.

When considering whether to adopt a market-based pay structure, companies should evaluate several critical aspects of their current compensation strategy:

1. Does the current base pay structure support both competitiveness in the market and internal equity?
2. How many salary ranges exist in the current structure? Are there too few or too many?
3. Are there clear-level definitions in the current structure?
4. Do employees understand how they can progress within the structure?
5. Is the pay structure integrated with other organizational elements, such as performance management?
6. Do the current ranges align with the organization's overall compensation approach?

The pros and cons of different pay structures

Now that we've covered the complexities and features of each pay structure, it's time to simplify and summarize the pros and cons of each. Understanding these advantages and disadvantages will guide you toward choosing the best pay structure for your organization. The aim is to balance fairness, transparency, motivation, flexibility, and market competitiveness, all crucial factors in ensuring the satisfaction and retention of your workforce.

Graded pay structure

Pros:

• Assigns employees to specific grades or levels based on their roles, responsibilities, and experience.
• Offers transparency as employees understand how their pay compares to others in the company.
• Supports internal equity arrangements, ensuring jobs with similar requirements are paid similarly.

Cons:

• Rigid nature may undervalue high-performing employees or those in highly specialized or sought-after positions.
• Potential alignment challenges when employees reach the maximum pay within their grade before promotion.
• This may lead to stagnation, lack of motivation, or a feeling of being unable to progress.

Broadband pay structure

Pros:

• Groups work by function and provide a wide wage range for all employees.
• More flexible than traditional pay grades, allowing employees to transition between roles without changing pay grades.
• Offers more expansive ranges, allowing businesses to customize offers for specialized talent and critical positions.

Cons:

• It can be more challenging to administer and evaluate performance levels accurately.
• Employees might feel short-changed if they transition to a lateral but more demanding role without a pay increase.
• Lack of clear band definition might lead to instances where employees are overpaid or underpaid relative to the market.

Step structure

Pros:

• Provides predefined steps or levels through which employees advance based on performance or seniority.
• Clear and motivating framework for employees to progress within the company.
• Rewards loyal employees, is easy to administer, and offers predictable business costs.

Cons:

• Rigidity can present challenges in motivating employees to excel beyond their current level.
• Progression is based predominantly on seniority or loyalty, potentially causing frustration among high-performing lower-level employees.

Market-based approach

Pros:

• Evaluates the external job market and adjusts the company's pay structure accordingly.
• It can attract top talent and keep companies competitive.
• Encourages employee satisfaction and retention when they are compensated at a market-comparable rate.

Cons:

• More expensive than other pay structures.
• The external market can be somewhat arbitrary and beyond a company's control.
• It may not fully account for unique benefits and perks specific to your organization, causing potential disparities between actual and perceived value.

Automated payroll with an HRIS

Automating the payroll process with an HRIS (Human Resource Information System) is critical in streamlining your company's payroll process. The benefits include increased accuracy, simplified administration, and flexibility to manage payroll from one central location.

When evaluating HRIS options, consider cost, functionality, and ease-of-use factors. Therefore, you should ask yourself: Will an HRIS make life easier for the HR department and reduce the administrative burden related to payroll?

Final thoughts

Selecting the right pay structure means carefully weighing the advantages and trade-offs of each model while considering how compensation supports your organization’s culture, goals, and workforce expectations. By clarifying priorities, evaluating available options, and aligning pay structures with long-term strategy, organizations can better motivate employees, support retention, and remain competitive in an evolving labor market.