Types of Pay Structures and When To Use Them

A pay structure is a system that defines what each individual and job role is paid based upon their value to the business and effectiveness in their role. For each type of pay structure, there are a variety of different methods for deciding upon and separating employee pay, each with its own advantages and disadvantages.

In this guide, the Paydata team explores each of the common types of pay structure, explaining how they differ from one another and outlining when they might be most appropriate for your business.

Pay structures, also called salary structures, are organized levels, or grades, of employee salaries divided by job type. Pay structures typically incorporate salary ranges for each pay grade, meaning each pay grade is bracketed by a minimum and maximum salary amount.

Introduction to Pay Structures

Why are pay structures important?

Pay structures are important for the following reasons:

What are pay structures?

Pay structures, also called salary structures, are organized levels, or grades, of employee salaries divided by job type. Pay structures typically incorporate salary ranges for each pay grade, meaning each pay grade is bracketed by a minimum and maximum salary amount. Companies use external and internal compensation data analysis to determine their pay structures.

Common types of pay structures

Here are the most common types of pay structures:

Traditional

Traditional pay structures are divided into multiple pay grades. In a traditional structure, there are more pay grades, and the pay grades are narrower in scope than in other types of structures.

Types of employees, like marketing associates or customer service agents, may be given a salary range, and pay grades are determined based on that range. For instance, a company may decide that the salary range for new sales associates is $40,000-$50,000 per year, depending on experience. The pay grades can be broken down as follows:

Traditional pay structures are more controlled than other types of pay structures due to the slim pay grades. In these systems, managers have fewer opportunities to offer raises. However, traditional pay structures prevent employees from reaching their maximum salaries too quickly, which can help with employee retention if they know they have room for growth.

Broadband

Broadband pay structures divide employees into types instead of specific titles. For example, broadband structures may create divisions for administrative jobs, service jobs and executive jobs. The salary ranges are wider than those of a traditional pay structure with fewer pay grades.

This structure offers greater flexibility for pay raises but less control over pay differences between employees with the same job type. Employers may risk offering an employee a maximum salary too early in their career, which limits earning potential. Managers should have open communication with top executives concerning when and how to raise employee pay to avoid this challenge.

Consider an IT company that uses a broadband pay structure. The company could establish a salary range for developers of $50,000-$80,000 per year and use the following pay grades:

Market-based

Market-based pay structures determine salary ranges and pay grades based on a current market analysis of comparable positions and salaries. Salary ranges are designated for specific jobs as opposed to job type. For instance, an organization using a market-based pay structure may analyze data for average salaries of a hotel restaurant manager and create a salary range in line with these figures.

Salary ranges may be larger using a market-based pay structure, like in broadband structures, but the pay grades are often narrower, as in traditional pay structures. Consider a hospital that uses a market-based pay structure. The organization may conduct research itself or outsource this research to determine the average salary ranges for pediatric nurses, oncology nurses, neurosurgeons and hospital pharmacists. An accounting firm may use this data to create a salary range for corporate accountants that is $65,000-$90,000 with the following pay grades:

Step pay

Step pay structures incorporate clearly defined pay progressions for certain jobs within an organization. The pay increases often result from time with the company and adequate performance. Industries may use the step pay structure when detailed performance analysis is difficult. Law enforcement and government agencies often use step pay structures.

Consider a school district creating a step-pay structure for teachers that includes salary for new teachers with regular increases every two years the teacher works in the school district until reaching the salary maximum, as shown below:

Hybrid

Some companies choose to use multiple pay structures within their organization. They may delegate pay structures by department, job type or salary ranges.

How to choose a pay structure for your business

The type of pay structure you choose for your company may depend on several factors, including:

FAQ

What are 4 common pay structures?

The Four Major Types of Direct Compensation: Hourly, Salary, Commission, Bonuses. When asking about compensation, most people want to know about direct compensation, particularly base pay and variable pay. The four major types of direct compensation are hourly wages, salary, commission and bonuses.

What is the purpose of a pay structure?

A pay structure creates a basis for pay decisions and allocation. Understanding where your employees fit against the pay structure – within, above or below the band – informs your pay decisions and allows for effective allocation of pay budgets. If not always saving you money, it ensures you get the most value from it.

How do you determine pay structure?

How to Establish Salary Ranges
  1. Step 1: Determine the Organization’s Compensation Philosophy. …
  2. Step 2: Conduct a Job Analysis. …
  3. Step 3: Group into Job Families. …
  4. Step 4: Rank Positions Using a Job Evaluation Method. …
  5. Step 5: Conduct Market Research. …
  6. Step 6: Create Job Grades. …
  7. Step 7: Create a Salary Range Based on Research.

What are the three types of pay?

Three methods employers use to compensate employees include salary, hourly wage and commission.

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