Human Capital Management

Types of Salary Structure

Whitney Beasley / February 9, 2024 February 9, 2024

Salary structures help inform employees of your organization’s compensation. Having a structure for your pay helps create clarity and encourages good work — employees can advance based on specific requirements and have a reference point for how different companies may value their teams. Understanding and evaluating various pay structure examples will help you find the right system for your organization.

What Is Pay Structure?

A pay structure, also called a compensation structure or salary structure, is a system organizations use to determine and administer employee compensation. Pay is an essential part of a worker-organization relationship — getting the right pay structure influences your organization’s success. It’s a critical component of human resource management, and it plays a vital role in attracting, retaining and motivating employees.

A typical pay structure consists of several key elements:

1. Job evaluation: Jobs within an organization are assessed based on factors like skills, responsibilities and market demand. This process helps in determining the relative value of each position.
2. Salary range: Pay structures establish salary ranges for different job levels or grades. These ranges specify the minimum, midpoint and maximum salaries an employee can earn within a specific job category.
3. Compensation components: Pay structures include various compensation components, like base salary, bonuses, incentives, stock options and benefits. These components are designed to reward and motivate employees based on their performance, experience and other relevant factors.
4. Market data: Organizations often benchmark their pay structures against industry standards and local labor markets to ensure their compensation packages remain competitive.
5. Pay equity: Pay structures help promote pay equity by ensuring that employees with similar qualifications and responsibilities receive fair and comparable compensation.

Types of Pay Structures

Understanding pay structures allows you to select the proper pay structure for your organization. Let’s look at pay structure in compensation management and how each type can affect your organization.

Graded or Traditional

Graded, or traditional, salary structures are a common approach used by organizations to determine and manage employee compensation. These structures are characterized by a clear hierarchy of job grades or levels, each associated with a specific salary range. Graded salary structures are prevalent in many industries — they’re convenient and work well for many organizations.

Employees at a company with a graded structure will usually advance through the salary range over time. Advancements occur due to factors like performance, experience and tenure. This progression helps reward and retain employees as they gain more skills and experience. Graded pay structure examples include roles like Software Engineer I, II or III, with each role having a different salary that increases with each promotion.

Pros of Graded Salary Structures

There are several advantages to graded salary structures, including:

1. Clarity and consistency: Graded salary structures provide a clear framework for both employees and management. Employees understand their potential earnings as they progress in their careers and HR departments have guidelines for administering compensation.
2. Equity: These structures promote pay equity by ensuring that employees with similar qualifications and responsibilities are placed in the same job grades and receive similar compensation.
3. Motivation: Graded structures can be motivational, as employees can advance within their salary range as they gain experience and demonstrate their abilities.
4. Standardization: Graded structures make it easier for HR departments to standardize compensation practices across the organization, helping to minimize disputes and promote fairness.

Cons of Graded Salary Structures

Like many pay structures, there are a few cons to consider:

1. Rigidity: The rigid nature of graded structures can be a disadvantage. Employees might feel restricted by the fixed salary bands and the time it takes to progress through them.
2. Market competition: In fast-changing job markets, graded structures may struggle to keep up with the demand for competitive salaries. Talented individuals might be drawn to organizations offering more flexible compensation packages.
3. Lack of individualization: These structures may not account for the unique skills and contributions of individual employees. Highly skilled or top-performing employees might find their earnings limited by the system.
4. Administrative burden: Managing a graded salary structure can be complex, requiring constant monitoring and adjustments to accommodate employee progression and market fluctuations.

Traditional salary structures offer a systematic and equitable approach to compensation management. However, they might not be suitable for all organizations, especially those in rapidly evolving industries where flexibility and individualized compensation packages are essential. Striking the right balance between the benefit of structured pay and the need to remain competitive is a central challenge for HR professionals and organizational leaders.

Broadband

Broadband salary structures represent an alternative approach to traditional structures. With a broadband compensation strategy, there are fewer pay grades or levels, and the salary ranges are broader, allowing for more compensation flexibility. This approach has gained popularity in some organizations due to its potential benefits, but it also comes with its own set of pros and cons.

In a broadband structure, the essential features include:

• Fewer pay grades: Broadbands typically have fewer pay grades than traditional structures. Instead of many narrowly defined grades, you might have just a few broader bands.
• Wider salary ranges: The salary ranges within each band are more extensive, covering a broader salary range. This flexibility allows organizations to accommodate a wider variety of skills and experiences.
• Reference job evaluation: Job evaluation still occurs, but it tends to be less rigid and less tied to a specific grade. Instead, it serves as a reference point for determining a position’s placement within the broad salary bands.

Pros of Broadband Salary Structures

Here are some of the advantages broadband structures can deliver:

1. Flexibility: Broadbands provide greater flexibility in managing compensation. This can be advantageous for organizations that need to attract and retain specialized talent or respond to rapidly changing job market conditions.
2. Individualization: Broadbands also allow for more individualized compensation, as employees are not as constrained by rigid grade boundaries. Top performers or employees with unique skills can be more appropriately rewarded.
3. Market responsiveness: Broadband structures can be more responsive to market conditions, making it easier for organizations to adjust salaries to remain competitive.
4. Simplicity: With fewer pay grades and broader bands, broadband structures are often simpler to administer, reducing administrative burdens and HR workload.

Cons of Broadband Salary Structure

Weigh the drawbacks of broadband structures as well when considering this system:

1. Potential for inequity: The flexibility in broadband structures can lead to perceptions of pay inequity if not managed carefully. It may be challenging to ensure that compensation remains fair and competitive for all employees.
2. Lack of clarity: With broader salary bands, it may need to be clearer to employees how the compensation aligns with their skills, experience or performance. This can lead to confusion or dissatisfaction.
3. Administration challenges: While broadband structures can reduce administrative complexity, they still require careful oversight to ensure fair and consistent compensation practices.
4. Resistance to change: Employees accustomed to traditional graded structures may resist the shift to broadbands, viewing it as a departure from the familiar.

Using broadband salary structures offers increased flexibility and responsiveness in compensation management. These features can be beneficial for organizations operating in competitive or dynamic job markets. There is a potential for pay inequity and a lack of clarity with this structure. Therefore, careful management and communication are essential to ensure employees perceive the system as fair and equitable.

Market-Based

Market-based pay structures are compensation approaches that rely on external market data to determine salary levels for various job positions within an organization. This method is becoming increasingly popular as it helps organizations align their compensation strategies with the external labor market and industry standards.

Market-based pay structures involve:

• External benchmarking: Organizations collect and analyze salary and compensation data from the external job market. This data may come from industry surveys, labor market reports or competitor’s pay practices.
• Market pricing: Job positions within the organization are assigned salary levels based on where they fall within the external market data. This means that employees are compensated in line with what other companies are paying for similar roles.
• Competitive positioning: The primary goal of market-based pay structures is to position the organization’s salaries competitively, ensuring they can attract and retain talent in a specific job market.

Pros of Market-Based Pay Structures

Opting for market-based structures can provide you with these advantages:

1. Competitive advantage: By aligning salaries with external market data, organizations can maintain a competitive advantage in attracting and retaining top talent. This is especially important in industries where talent shortages are common.
2. Market sensitivity: Market-based pay structures are adaptable and responsive to changes in the labor market. This flexibility ensures that organizations can quickly adjust salaries to remain competitive.
3. Fairness: Employees are likelier to perceive pay fairness when their compensation aligns with industry standards. This can boost morale and reduce turnover.
4. Transparency: External market data adds clarity to compensation practices, making it easier for employees to understand how their pay is determined.

Cons of Market-Based Pay Structures

Always consider the potential cons of a system before investing in it:

1. Costly data collection: Acquiring and maintaining reliable external market data can be expensive and time-consuming. Smaller organizations may struggle to access comprehensive market information.
2. Inflexibility: While market-based structures offer flexibility, they may be less accommodating for unique roles or specific organizational circumstances. This can lead to potential challenges in compensation decisions for non-standard positions.
3. Retention challenges: Over-reliance on external market data may lead to overlooking the need for internal equity and employee retention. In some cases, critical internal talent might not be compensated fairly compared to market standards.
4. Risk of benchmarking errors: Errors or inaccuracies in market data can lead to suboptimal compensation decisions, which could affect an organization’s ability to attract and retain top talent.

Market-based pay structures are designed to keep an organization’s compensation competitive and attractive to external candidates. They offer advantages in terms of fairness and transparency. There are some challenges related to flexibility and data collection that you should be aware of if you choose to implement this strategy. A successful market-based pay structure requires weaving between external market alignment and the organization’s unique needs.

Step Structure

Step structures are another type of compensation model you may see. These structures define compensation based on predetermined pay grades with incremental steps within each grade. Employees start at the initial step and progress to higher steps based on factors like performance, experience or time in service. They typically receive salary increases as they work through the steps. Step structures provide a good, if less flexible, structure for organizations to work from.

Pros of Step Structures

Let’s look at the advantages of these structures:

1. Transparency: Step structures offer a high level of transparency and predictability for employees and management. Employees know exactly when and how they’ll receive salary increases, making it easier to plan their finances.
2. Equity: These structures promote pay equity by establishing salary increments within grades. Employees with similar qualifications and experience receive equivalent raises, which can reduce perceived wage disparities.
3. Motivation: The prospect of predictable salary increases can be a motivational tool for employees. They’re encouraged to progress through the steps, which are often linked to factors like performance or tenure.
4. Budget control: Step structures help organizations control labor costs. Salary increases are clearly defined and budgeted for, which makes long-term financial planning more predictable.

Cons of Step Structures

Here are some of the disadvantages that might come with this structure:

1. Rigidity: The structured nature of step systems can be seen as rigid and may limit an organization’s ability to respond to market dynamics or individual employee contributions. High-performing employees may find it frustrating if their compensation doesn’t reflect their merit.
2. Market competitiveness: In highly competitive job markets or industries with rapidly changing compensation trends, step structures may struggle to keep up with the need for competitive strategies, especially for critical positions.
3. Limited customization: These structures may not allow much customization in tailoring compensation to individual skills or experience. This may be a disadvantage for organizations seeking to recognize and reward specialized expertise.
4. Compression: Over time, step structures can lead to salary compression, where new hires earn salaries similar to or even higher than those of long-term employees, potentially causing internal equity issues.

Step structures deliver excellent transparency and predictability, which can work well for organizations with stable workforces and budgetary constraints like the public sector. However, they can be inflexible and may not easily adapt to market-driven changes or accommodate high-performing employees.

How to Choose the Best Pay Structure for Your Business

Choosing the best pay structure for your business is a critical decision that can impact your ability to attract, retain and motivate employees while managing labor costs effectively. Here are some tips to help you make this important choice:

1. Assess your business needs: Begin by evaluating your organization’s specific requirements, industry and workforce. Consider factors like your industry’s competitiveness, the skills and experience needed for your roles and your budget constraints.
2. Analyze your workforce: Understand your current employees’ expectations and the type of talent you want to attract. Factors like the job market, demographics of your workforce and the importance of performance-based incentives should be considered.
3. Consider legal and regulatory compliance: Ensure your chosen pay structure complies with relevant labor laws and regulations. Particular attention should be given to issues like equal pay, minimum wage laws and overtime regulations.
4. Be transparent: Regardless of the pay structure you choose, clear communication with your employees is essential. Ensure your team understands how their compensation is determined and why your organization has adopted a specific structure.
5. Consult with experts: Contacting professionals can help you quickly pinpoint a good pay structure for your business. Professionals have the experience to help tailor your system to your needs and can offer advice for a smoother transition and more effective structure.

Get Help Determining Your Pay Structure From Experts

Getting started with a pay structure can be overwhelming, especially if your organization is building its system from the ground up. At Exude Human Capital, we understand the ins and outs of salary structures, allowing us to help you develop a comprehensive system tailored to your unique needs. Let us help you create an effective strategy for compensation — get started with us online and advance your organization today!