There are various different types of pay structures that can be implemented within an organisation, although the most suitable structure will depend on a number of factors including the nature and size of your business, the composition of the workforce, and the ways in which you want to incentivise and reward that workforce to meet your objectives.
Below we look at some of the most common forms of pay systems, explaining how they differ from one another, as well as their advantages and disadvantages, with advice for employers when deciding on the different types of pay structures most suited to their business.
What do we mean by ‘pay structure’?
A pay structure can be defined as a collection of wage grades, bands or levels that link related jobs within a hierarchy or series. It is a system that defines what each person is paid, or what a particular job role attracts, based upon the value of that job or individual to the business and their effectiveness within that role. For each type of possible pay structure there are a variety of different methods for deciding on and separating employee pay, providing a framework for pay progression and reward strategies.
Pay structures matter because businesses not only need to indicate rates of pay for different jobs or people within an organisation, and develop clear processes for managing pay, they need to ensure that they are consistently paying their staff appropriately for what they do and to reflect their worth to the business. A logically-designed framework within which equitable, fair and consistent reward policies can be implemented will also enable you to encourage the desired behaviours and performance in your workforce to meet your end goals.
The principle objectives of a pay structure are therefore:
- to align your reward strategy with your business strategy
- to help ensure fairness and equity within your organisation
- to develop clear processes for effectively managing pay
- to enable staff to understand how pay is managed within the organisation and what pay opportunities are available to them.
What are the different types of pay structures?
There are a number of different types of pay structures, although many can be distinguished by two key characteristics: the number of grades, bands or levels, and the width or span of each. Each grade, band or level has a pay range or scale with a minimum and a maximum, where the system of grading forms an important part of reward systems within the workplace.
Some of the different options available to employers include:
Individual pay rates
One of the most recognisable types of pay system is known as individual pay rates, or spot salaries or spot rates. With a spot salary there’s a single hourly/weekly pay rate, or a single annual salary, attached to each job, or possibly each person, within an organisation.
This pre-defined approach to pay allows for easy and accurate estimation of hiring viability and employee value. However, there’s no formal structure in place for pay progression, making it more difficult to engage employees, where the only option for development and growth is through direct promotion. Even if there are policies in place for moving to a higher spot rate or for rates to be increased in line with market rates or inflation, this approach risks employees becoming demotivated and dissatisfied.
Strictly speaking, individual pay rates or spot salaries do not constitute a pay structure and, as such, are often either used for low-skilled roles, where the ‘going rate’ or the ’rate for the job’ is well publicised in the market, or for senior positions, where the pay package may need to be designed to attract and/or retain a specific individual for that role.
Individual pay ranges
Individual pay ranges, also known as individual job ranges or salary ranges, differ from individual pay rates, where employees are offered a salary within a pre-defined scale or pay range, rather than a fixed salary. As such, instead of a spot salary, a pay range or salary range is attached to each job or individual employee.
The pay range can vary from job to job but will give an employer more flexibility to increase a person’s pay as a reward for good work. Individual pay ranges can often be considered preferable to individual pay rates as they still provide a clear framework on which to base recruitment and affordability decisions, whilst allowing some formal scope for pay progression. In this way, employees might be hired at the bottom of the pay range, but they may be able to demonstrate over time the value they provide and increase their salary to the top of the range, motivating their level of performance and productivity.
Narrow-graded pay structures
Narrow-graded pay structures are made up of a large number of grades, usually ten or more, into which jobs of broadly equivalent worth are placed. These types of structure are often found in the public sector or services which were once closely aligned.
Progression through each of the grades is frequently by means of service increments, either annual or bi-annually. However, because the grades are narrow, most employees reach the top of the pay range for their grade fairly quickly. As it is difficult to differentiate between successive grades, this can also encourage ‘grade drift’, ie; unjustified upgradings.
Broad-graded pay structures
Broad-graded pay structures have fewer grades than narrow-graded structures, perhaps six to nine, where the salary band within the grade is usually wider. This can help counter or alleviate ‘grade drift’ problems that often arises with multi-graded structures, as there is greater scope for an employee’s pay to progress further along the pay grade. These types of structures are sometimes included within a definition of ‘broadbanding’.
Broadbanding involves the use of an even smaller number of pay bands, often just four or five. This is designed to allow for greater pay flexibility than other more conventional graded structures, where typical broadbanding places no limits on pay progression within each band.
The broadbanding system is useful for a number of reasons, especially when it comes to rewarding higher levels of performance or contribution. It also provides employees with a clear and direct path to their next pay increase, which is extremely effective for motivation, and allows them to move laterally in the business, where changing roles or moving departments becomes much easier if they remain on the same pay scale.
Broadbanding does, however, have its limitations. If an organisation classifies pay in a small number of pay bands, it’s inevitable that the bands will be wide. As such, it’s possible for individuals to move into a more challenging job role without receiving a pay increase, simply because the job grade and pay scale is categorised in the same band. This can be extremely demoralising and demotivating, resulting in poor employee engagement and performance.
With job families, rather than the pay structure containing grades or bands, defined by their number and width, the structure is divided into a number of job families consisting of groups of jobs where the nature and purpose of the work are similar but the work is carried out at different levels of responsibility, knowledge, skill or competence.
Essentially, job families operate by grouping similar occupations or functions within the business together, usually with around six to eight levels. There are separate pay structures for different families — such as sales or IT — where organisations using this structure usually create multiple job families for different departments.
Job families strike a balance between many of the other different types of pay structures, and work extremely well because of their versatility. They provide organisations with both freedom and control, whilst still enabling transparency and progression for employees. Management can easily review and refine the systems of pay within each family without affecting the rest of the business, and staff can see exactly what rewards they will get.
Career families, or career-graded structures, resemble job family structures in that there are a number of different families. However, with this approach, every family employs exactly the same grades and pay ranges for all of the levels included within it. Here the focus is on career mapping and progression, rather than the greater focus on pay of job families.
What are the benefits of introducing pay structures?
Introducing the right pay structure, that meets both the needs of your organisation and your workforce, can provide your business with all kinds of benefits, including:
- Fairness: creating an appropriate pay structure will help to ensure that you treat your workforce fairly. Employees will understand exactly where their role fits into the organisation and that a fair process exists to determine both their job grade and pay, free from unlawful bias. This is especially important in the context of eliminating discriminatory pay practices between men and women, where an employer is under a duty to ensure equal pay for equal work.
- Transparency: having a rational, fair and transparent pay structure in place will enable staff to understand how pay is managed within the organisation. It will also inspire confidence in employees and potential recruits that you’re committed to fair working practices, including equality of pay based on objective factors like fair job evaluations.
- Motivation: understanding the avenues open to career and pay progression is hugely motivating for employees. It allows for open dialogue about what’s required to progress pay or grade within the business and, as such, prevents less productive discussions between employees and line managers with no real focus.
- Engagement: key components to creating employee engagement is an employee feeling fairly treated, understanding what steps can be taken to progress their career, knowing where they sit within the organisation and how their contribution adds to the overall effort. A clearly communicated pay structure supports all these things.
- Supporting management: pay discussions can be difficult conversations for managers to have with with their team or potential new hires. A clear pay structure provides clarity in how to manage pay, supporting better decision-making around pay progression etc.
- Pay budgets: a pay structure creates a basis for pay decisions and affordability. By 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 will ensure you get the most value from it.
How to select and implement a structured pay system
When it comes to selecting and implementing a structured pay system, the right choice for your organisation will depend largely on your sector and unique situation. With so many different types of pay structures to choose from, it can be difficult to determine which is best for your organisation. In some cases, a tailored solution, combining elements of each may be required. Still, for all organisations, regardless of size or sector, the best pay system is often one that balances the strategic and financial needs of the business with the needs of its workforce. It’s also one that provides employees with transparency, fairness and equality.
Even if you have a suitable pay structure already in place, you should regularly review the way that you structure pay and determine salary progression as economic, political, regulatory and technological contexts change. If existing pay arrangements can’t adapt to meet the requirements of both your organisation and workforce moving forward, alternative approaches will be needed. By seeking expert advice, you can explore all available options, finding the right fit for both your business and your staff.
DavidsonMorris’ HR specialists support employers with all aspects of employee remuneration and benefits. Working closely with our employment lawyers, we provide comprehensive guidance on how to approach employee entitlements to minimise legal risk while ensuring commercial goals are achieved and employee engagement is optimised. For help and advice, speak to our experts.
Types of pay structures FAQs
What are the four different types of pay?
There are more than four different types of pay structures to choose from, although some of the most common approaches used by private sector organisations include individual pay ranges, broadbanding, job families and career families.
What are job grade levels?
Job grade levels set the responsibility level and expectations of roles within an organisation. They may be further defined by seniority, job title, knowledge and skills, and are often associated with a pay band.
What are the features of pay structure?
Pay structures are typically distinguished by two key features: the number of grades, levels or bands; and the span of each of these. The span is the percentage increase from the minimum to the maximum salary in the range.
Last updated: 16 July 2021