Pay Grading: Definition and How To Create Them for Employees

Being fairly compensated for their work is pertinent to any employee. You bring passion and diligence to your position and in return, you rely on being paid accordingly.

Pay grades are commonly used to establish a satisfactory market starting salary for particular positions and fields based on various background factors of the employee.

A pay grade is an organized structure within a compensation plan that determines what an employee could potentially earn in a certain role.

Pay Grades and Ranges

How do pay grades work?

Most companies establish pay grades for each job title in the organization. Managers determine employees salary ranges for each job title depending on certain factors like the positions responsibilities, seniority levels, complexity of tasks, education levels and work experience.

The two main factors that typically have the most significant impact on pay grade are the responsibilities and job title of the position. When managers review an employees job title, theyll determine where the title lands in their particular field. For example, the pay range for an entry-level content marketing writer could be from $45,000 to $65,000. This gives the employee an idea of the type of raises they can receive if they continue performing well in their role and take on additional responsibilities.

From there, the employees pay grade could shift as they earn promotions in their field. If they become a senior content marketing writer, their range could move up to $55,000 to $75,000. Some pay grades can have an overlap with higher or lower-level positions, but their high and low points may still differ based on expertise and skill set.

What is a pay grade?

A pay grade is an organized structure within a compensation plan that determines what an employee could potentially earn in a certain role. This is usually a salary range from the lowest number an employee can earn in an entry-level position, to the highest they can eventually receive as they advance with the company over the upcoming years. Pay grades typically provide employees with a clear structure of the raises they can expect to receive if they commit to the company and continue contributing quality work.

How to determine pay grades for employees

To decide the pay grade range to offer your employees, conduct online research on salary averages and carefully review the responsibilities of the role. Follow these steps to determine pay grades for employees:

1. Evaluate the roles responsibilities

An effective way to establish a pay grade is to carefully examine the role and its responsibilities. If the employee must complete high-level, time-consuming or several tasks, they may deserve a higher pay range that properly matches the level of difficulty these tasks entail. As employees grow in their role, learn new skills and complete more advanced and complex tasks, you can consider moving them higher up their pay grade to compensate them for the hard work theyre contributing to the role.

Awarding raises and additional compensation shows employees you notice and appreciate the valuable work theyre contributing to the company and makes them want to continue submitting assignments that enhance the companys overall performance.

2. Conduct market research on salaries for similar roles

You should compare the salaries you offer to similar roles at other companies to ensure the range you provide is still competitive, yet reasonable. Many employees research the average salary of the role theyre applying to, so they may be more likely to accept a role that properly reflects the results they find. Not only can you research salaries of similar positions, but you can also learn average compensation numbers based on factors like company size, industry and revenue numbers.

From there, you can build the salary structure around the market rate. Give it enough flexibility to shift according to the roles tasks and the candidates expertise. It should also leave enough room for the candidate to successfully negotiate without significantly impacting the financial stability of the organization.

3. Review the employees experience, skill set and education levels

Once youve established a flexible and competitive pay grade, cater it toward the strengths and abilities of candidates. For example, an entry-level marketing coordinator candidate with little to no professional experience would receive a lower pay grade than one with two years of experience.

You should also adjust your pay range if employees have any impressive skill sets or achievements, like complex certifications theyve earned that could significantly value the company. Consider raising a candidates pay range as well if theyve earned a higher degree, like a masters degree, since your goal should be to offer compensation that reflects their expertise levels.

4. Decide on a pay range and communicate it to the employee

When you have a stronger idea of the roles responsibilities and the candidates abilities, you can decide on an official pay range to offer. When providing the candidate with a starting salary, begin with the lowest number of the pay range. They may attempt to negotiate the salary, as this happens, try to stay within an appropriate amount of the overall range. If you and the candidate agree on a salary number thats a little over the lowest pay range number, adjust the range to feature their final salary offer as the starting number.

When onboarding the employee, communicate this range to them and explain that the numbers within the range are potential compensation amounts they can receive as raises if they perform well in the role. This gives them a clear structure to work toward and makes them feel confident that theyre working toward a more impressive salary.

5. Adjust the pay range according to promotions

As the candidate continues to grow and advance in their career, you can adjust their pay range to reflect their new job title, complexity of tasks and skill set theyre developing. When they receive a promotion to a new higher-level role, build a new pay grade to reflect this with higher numbers at the beginning and end of the pay range. Communicate this new pay range with them to ensure they better understand the new financial goals theyre working toward.


What is a pay grade in HRM?

A pay grade is a step within a compensation system that defines the amount of pay an employee will receive.

What is the definition of a pay grade?

Definition of pay grade

: a level of compensation for work especially when understood to reflect responsibility and authority “People listen to you regardless of your pay grade,” a Goldman managing director told me. “

How are pay levels calculated?

An Employee Grade is a grouping of the employees with similar positions or values in order to assign compensation rates and salary structures.

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