Today, a company’s compensation structure, also known as pay structure, is critical to pay equity, workforce planning, and attracting and retaining the best talent. Having a consistent, formalized structure in place provides a clear picture of what each job is worth, and determines how employees are compensated for increased responsibilities or tenure.
4 key ways to structure compensation
There are four basic types of pay structures: traditional pay grades, broadbands, step structure, and market-based pay ranges. The “best” option is the one that most closely aligns with your organization’s goals, philosophy, market and job types.
1. Traditional pay grades
Traditional pay grades separate the salary range for specific jobs titles into levels, increasing the earning potential as employees move up the levels incrementally. The ranges in this structure are typically narrow, from 30 percent to 60 percent, with fewer opportunities for managers to award pay raises. However, this structure does prevent employees from hitting their salary caps too quickly in their tenure, which may decrease turnover.
2. Broadband structure
Broadbands are based on occupation type instead of a specific job title. This approach has much wider ranges for each pay grade level, with pay bands that can span from 100 percent to 300 percent from maximum to minimum. Although this approach gives managers more flexibility to award pay increases, that fact, along with the broader ranges associated with this structure, could lead to pay inequities without the right oversight.
3. Step structure
Step structures are used to define pay rate increases from fixed point to fixed point, on a pre-determined schedule, typically based on tenure, up to a maximum amount. This approach is typically applied to some unionized positions, like teachers, or certain roles, like firefighters, where it’s hard to base compensation on specific, quantifiable goals.
4. Market-based structure
With market-based pay structures, salary ranges are determined by analyzing market data for similar jobs in specific markets. This data-driven approach, which can be used for pay grades and pay ranges, bases compensation on what competing companies in the same industry in the same locations or regions are currently paying for similar positions.
For job-based pay ranges, a salary range is assigned to each position based on survey data. For grade-based ranges, a pay range is assigned to a grouping of jobs of similar worth by using the aggregated market data for all the associated jobs.
Analyzing your options
While market-based structures are considered the most modern approach because they take advantage of current market data and new technologies, any of the four models could be the “right” model, depending on what your organization does, the diversity of the jobs you manage and your size. For some organizations, using a hybrid model that applies different structures to different occupational groups makes the most sense.
If you’re a smaller organization, a clear compensation structure positions you to more effectively plan, budget and position to scale your workforce, when the time comes. If you’re a larger organization, it enables you to attract and retain top talent, and track wage growth. And, for every organization, having a clear, well communicated compensation philosophy, strategy and structure is the tenet of fair, equitable pay practices.
While most companies recognize the value of having a compensation strategy and structure in place, many still haven’t gotten these initiatives out of the holding pattern.
According to Payscale’s 2022 Compensation Best Practices Survey, although 73 percent of the 5,578 respondents believed compensation is a key driver of employee engagement, only 61 percent of participants have some sort of compensation structure in place or use market data to set pay. The good news is that most of those respondents that don’t currently have compensation structures are taking steps to put these in place.
They recognize that the viability of their organizations could depend on it.
5 tips for success
Although every company’s compensation structure will look a little different, all start with these best practices:
1. Take the time to look at your own organization, job types and growth trajectory. Do you have critical jobs that are core to your company’s success that you want to treat differently? Will you be ramping up hiring of certain positions in the coming years?
2. Study market data from multiple data sources, and make sure you’re using current information. It is common for organizations to participate in salary surveys to gain access to data on what other companies are paying talent by job title. While the information is good, because these surveys take a year or more to compile and distribute, they don’t always accurately reflect current conditions—particularly in volatile labor markets like the one we’re experiencing now.
That’s why it’s important to use at least three sources, which should include multiple salary surveys in conjunction company-sourced data, third-party data and other available sources. Organizations can also pay a subscription to access crowdsourced employee-reported salary data or HR-reported aggregated market data to make this process easier, and ensure they’re working with validated, current information.
3. Use the data to create a salary range for each position, and guidelines for each compensation scenario, including identifying where new hires enter ranges, policies for promotions, to how employees can move within the ranges. This ensures consistency and fair practices.
4. Remember that your compensation structure is a continuum. Invest the time and resources to stay on top of current trends and your competitive landscape, and make sure your compensation structure is flexible enough to adapt with the times.
5. Finally, don’t keep the good news to yourself. Whatever compensation structure you choose, clearly communicating that to your managers and employees is critical to engagement and retention. The more transparent you are on how they are paid and how they advance, the more engaged and motivated employees will be.
