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HR’s Guide to Different Types of Pay Structures

Different approaches to pay structuring for HR

by Elle Mason

Pay structures are one of the most critical components of organizational planning. After all, compensation and pay is directly linked to what attracts, retains and impacts employees. And while, of course, there are other factors related to employee engagement, salary is a significant portion and can help you get the right candidates in the door to begin with. After all, if your structure is significantly out of sync with the market, top talent won’t even be interested in applying.

But pay structures aren’t just for employees – they can also allow organizations to understand how they measure up across the rest of the market. They can be tools for measuring and addressing business performance, rewards, and other forms of staff appreciation.

Ultimately, creating and maintaining the right pay structure is good for both business interests and employees. It can make financial planning easier and more predictable, it can provide fairness and consistency to employees, and it can also be motivating – as employees will understand how high their salary can go and how to get there.

This article will serve as a comprehensive guide to different approaches to pay structuring for HR – including common types of company pay structures, advantages and disadvantages, as well as questions to ask your company when deciding on a pay structure.

To start, there is no single pay or salary structure that you can apply across the board. There are a number of different types, and your choice will depend on a variety of factors. First, let’s review some of the different types.

Types of Pay Structures

Traditional graded pay structures: Pay grades include a minimum and maximum salary, and offer incremental increases between the lowest and highest point of the range. Typically, employees move through this system based on tenure, performance, or experience until the maximum is reached. The range may spread anywhere from 20% to 50% with progressions of 5% to 10%.

Advantages: This model can support internal equity arrangements, by ensuring jobs are paid similar rates if they’re in the same grade.

Disadvantages: This can prevent businesses from paying market rates if a position is highly-specialized or sought after. Additionally, there can be challenges with alignment as employees might hit the maximum before being promoted, or feel limited and unable to progress once they’ve hit the maximum.

Broadbands: Similar to traditional pay grades, broadbands also determine a number of pay grades across role types – and this covers the entire business. For example, they may offer multiple pay grades across non-managerial roles, managerial roles, and executive roles. However, the range is much more expansive, often spreading from 80% to 120% or higher, and there are typically fewer pay bands.

Advantages: Because the range is much broader, businesses have maximum flexibility in being able to customize offers for specialized talent and key positions. Further, fewer pay bands means that employees can typically make lateral moves within the business much more easily – because changing roles or departments don’t necessarily require a salary change if they remain in the same pay grade.

Disadvantages:  In some cases, employees can find themselves feeling shortchanged if they move into a lateral, but more difficult role without a subsequent pay increase. Further, because of a lack of clear band definition, some employees can find themselves overpaid or underpaid according to the market – solely because of how long they’ve remained in the role.

Step structures: With step structures, the pay range is typically divided into small, equal steps, with minor progressions of 5% to 10%. The range often spreads between 20% and 50% and these tend to cover all of the wages across the business – from the lowest-earning employee to the highest-earning employee.

Advantages: This is a clear and simple approach. Loyal employees are typically rewarded through this model which pre-defines what steps get you where. It’s also easy to administer and offers predictable costs.

Disadvantages: Because progression is typically based on loyalty or tenure, it does not necessarily reward an employee at the lower-end who is working exceptionally hard – which may lead to frustration and resentment of higher-earning but less competent peers.

Market-based structures: This typically involves finding out what other companies in the same industry are paying for similar roles, and aligning your pay to these figures, or in other words, “the market.”

Advantages: Employees will typically feel happy to join or stay in the company when they know they’re being paid what they would be elsewhere.

Disadvantages: The market can be somewhat arbitrary or outside of your control. Further, what one company offers may not factor in unique benefits and perks that are specific to your organization.

Here are some questions to consider when reviewing your existing structure, adapted from advice by a key advisor at Keating Advisors, LLC.

  • Does your current base pay structure support both competitiveness in the market and internal equity?
  • Evaluate your salary ranges: how many are there? Are there too few? Too many?
  • Are there clear level definitions in your current structure?
  • Do employees know how they can progress within the structure?
  • Is the structure integrated with other organizational elements such as performance management?
  • Do the current ranges match your organizational compensation approach?

These are critical considerations for determining the pay structure that’s best for your organization. But no matter what you pay structure is, an HRIS can make running payroll easier.

Automated Payroll in Your HRIS – Regardless of your payroll structure, automating your payroll with a consolidated HRIS like GoCo makes it much extremely easy to set up new hires, make employee changes, calculate benefit deductions, make final paycheck calculations, and streamline payroll tasks for your salary structure.

See how GoCo can simplify your HR