Pay structures: what they are and how to use them
Learn how a competitive and sustainable pay structure can help you attract and retain talent, prevent inequities and protect your bottom line.
Published: 29 May 2024 | by Natasha K. A. Wiebusch, Brightmine Marketing Content Manager
A pay structure is an essential piece of any reward strategy. It helps an organisation plan its budget, establish reward priorities and compete with other organisations for key talent.
Several types of pay structures exist, however, and it’s vital to choose the right one for your organisation. The type of structure that works for one of your competitors may not work for you.
In this article, we review what a pay structure is, the common types of structures and how to navigate them in your own organisation.
In this resource:
What is a pay structure?
A pay structure is how an organisation organises its pay to employees. It provides a systematic way for organisations to set basic pay levels or rates and pay ranges for individual jobs.
At the global level, a pay structure reflects the way an organisation spreads pay across the organisation. At the individual level, it reflects how the organisation has organised its reward package (e.g., basic salary and bonus).
Types of pay structures
The following are common types of pay structures to be aware of:
Individual pay rate
An individual pay rate structure, also called a spot rate, simply has one pay rate for each job role. This type of structure is usually used for unskilled occupations. Though an employer may increase pay over time, employees do not have a set structure for progression.
Individual pay range
An individual pay range structure is very much like individual pay rates in that there is no formal structure for progression. However, an individual pay range structure sets a pay range for each position instead of a single rate. This provides the organisation with some level of discretion to set initial pay an allow for some progression.
Narrow-graded pay structure
Under a narrow-graded pay structure, pay is organised into several narrow grades. Pay increases based on specific achievements, such as years of service with the organisation. Public entities and non-profits often use this type of pay structure, as they help employers control and predict costs. They’re also common in organisations that provide professional services. Narrow-graded structures usually have 10 or more levels (or grades).
Job families
A job families structure groups job roles that have similar responsibilities and characteristics. This structure usually has six to eight levels, and pay progressions are based on increased skill level, experience or level of responsibility. In a job families structure, organisations have the flexibility to set pay for different departments and markets.
Broadband
Like job families structures, broadband salary structures generally follow a graded pay scale and group jobs together based on shared characteristics. However, a broadband structure groups even more jobs together and has fewer pay levels (around five).
As a result, a broadband structure generally has larger pay ranges. This offers more flexibility to employers to, for example, offer higher pay for high-value skills or priority needs. It also allows employers to give more pay increases over time without having to change an employee’s job title.
Market-based
A marked-based pay structure focuses on competing with other organisations for talent. Under this structure, organisations set pay based on the market. That is, they leverage salary benchmarking data to determine what competitors are paying. Then, they set their own pay to be competitive with competitors in their market.
Since the market-based structure allows the market to determine salaries, it’s best for organisations that are able to benchmark salaries often.
Hybrid approach
Organisations can also use multiple different types of pay structures for different business areas or markets. Using multiple approaches is much more common in large organisations and organisations that have multiple unique functions or services. For example, and organisation may use a graded pay structure for a less competitive job role and a market-based structure for highly competitive role.
Benefits
Pay structures ensure pay aligns with the reward strategy and help reward professionals make pay decisions efficiently and consistently. They also have other important benefits:
Budgeting and planning
All employers want to offer competitive pay and motivating pay increases. However, they must also consider their own limitations. Pay structures help balance these two important factors by providing a clear view of total pay. They also help establish pay priorities within budget by setting pay grades, pay bands and pay levels.
In addition to taking care of the bottom line, pay structures support efforts to plan for the future. That is, HR leaders need to prepare for both internal and external developments that may impact pay. This may include company growth, financial performance, changes in the economy (e.g., inflation), technological advances or new competition. With a well-planned structure, leaders can account for these changes in a competitive and responsible way.
Talent attraction and retention
Competitive pay is still the most important factor employees consider when looking for a new job. Because of the influence pay still has on talent attraction and retention, it’s paramount that employers get it right.
Pay structures, together with market data, support this effort by providing a clear mechanism for setting competitive pay. For individual employees, it helps create competitive options that are within budget, motivating, and aligned with the reward strategy.
Fair pay and transparency
Employee pay structures support consistent and objective pay decisions. By providing boundaries such as pay levels and maximum salaries, they ensure individual pay decisions don’t create outliers. For example, a set salary range ensures any approved pay increases stay within range for the job role.
A structure also helps increase transparency by creating consistent salary ranges and maximums that the company can disclose.
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Challenges
Establishing the right pay structure is not without challenges. At the outset, it can be difficult to consider the many factors involved in creating or changing your structure. Important factors include the following:
- Salary benchmarks.
- Budget.
- Talent needs and competition.
- Business strategy.
- Business performance and growth.
- Changes in the market or economy.
These factors should influence how the organisation structures pay and pay increases, but they can be hard to track.
Another challenge involved in creating the right structure is navigating competing priorities. For example, increasing pay to compete for talent may compete with increasing investments in research and development.
Priorities may also compete within HR. For example, you may create a pay structure that raises the basic salary for new starters. Though this is great for attracting top talent, it often causes pay compression. That is, it narrows the pay gap between new employees and experienced employees.
Best practices
No silver bullet exists for navigating the challenges of creating and maintaining pay structures. However, best practices for choosing and maintaining a structure can help.
Include relevant stakeholders
A pay structure is important to the whole business. How much the organisation pays directly impacts budget and what type of talent it can attract. It also communicates what the company’s priorities are.
Accordingly, it’s helpful to keep relevant stakeholders in the loop and/or involved in creating or changing a pay structure. In addition to members of the HR team, relevant stakeholders may include:
- The C-suite.
- Local or in-house counsel.
- Senior managers.
- Employment resource group leadership.
- Other leadership members involved in setting pay and pay increases.
Use high-quality data
Regardless of which type of pay structure you choose to implement, it’s important to understand how your pay compares to the market. Without information about the market, you run the risk of not paying employees enough, which will lead to labour turnover. It may also result in overpayment, which will harm the bottom line. This is particularly important in a tight labour market and for job skills that are in extremely high demand.
Regular salary benchmarking offers the insight you need to understand your market position. This can inform which pay structure you use and how you set, for example, your pay grades and ranges. Specifically, salary benchmarking software can help you compare pay across the organisation and in specific job roles.
The key, however, is high-quality data. High-quality salary benchmarking data needs to be recent, robust and specific in order to provide accurate results. So, take the time you need to vet your data source(s).
Evaluate jobs regularly
Job evaluations allow you to understand what knowledge, skills and abilities a specific job role requires. Over time, they can change as the result of new technology or changes in the company or the market. These changes may require adjustments to the pay structure, such as an increase in the basic salary for new skills requirements.
Evaluating new positions in the organisation and comparing them with existing roles in the pay structure is especially important. Often, organisations will create a new role and set the starting pay based on the job title they’ve selected. If they do this without evaluating the job duties, they’ll run the risk of creating unfair pay.
Create a communication plan
It should come as no wonder why pay is so important to employees. How much you pay an employee may determine whether they can pay for child care, pay rent or afford other bills. Pay can also influence a person’s self-esteem.
For this reason, employers changing their pay structure should prepare a formal communication plan. A formal plan will ensure leaders communicate pay changes consistently and with empathy.
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About the author
Natasha K. A. Wiebusch
Marketing Content Manager, Brightmine
Natasha K. A. Wiebusch is the marketing content manager at Brightmine. Before transitioning to the marketing team, she covered a variety of topics as a Brightmine legal editor, including benefits, compensation, workplace flexibility, and the future of work.
Natasha holds a Bachelor of Science in communication science and rhetorical studies from the University of Wisconsin – Madison and a juris doctor from the University of Wisconsin Law School. Prior to joining Brightmine, Natasha was a practicing attorney and HR compliance and training specialist.
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