Knowing the Best Compensation Structure for You

Written by Staff

May 13, 2017

Knowing the Best Compensation Structure for You Hero

It is the basic obligation of companies to pay their workers. But how they pay their workers needs a complex process. In addition, they should a team of experts to create a strong compensation plan.

Also, this plan should show what type of compensation structure is best for the company. To do this, they need the necessary tools and technology. More importantly, they also need to have proper guidance from the top experts within the compensation field.


What is a Compensation Structure?

This is a pay-based outline that businesses use to ensure fair pay for their workers. This tells the worker about the decisions of the company when it comes to their compensation. It shows clear rules for assigning basic pay rates, managing pay increases, and distributing incentives.

An effective compensation structure aims to get rid of unfair pay practices. It usually considers tenure, the industry’s highest and lowest rates, and merit.

Types of Compensation Structure

This outline comes in diverse types. Each type has a different structure from another. Companies can use one or a blend of multiple of these to create their own compensation structure. But this will depend on the needs and goals of the company. Here are the types of compensation structures.

Grade and Range

Compensation experts also refer to this as the Traditional structure. This type has numerous layers and pay grades. Often, these pay grades or ranges have minor differences between them. This type shows a hierarchical system. It allows workers the possibility of promotion from one pay grade to the next.

This type helps align roles with similar ranks and duties into certain pay grades. As a structure ascends, the ranges get wider to suit higher pays due to top level roles. Companies may opt for this type since it is easy to visualize and explain.

The grade and range type suits large companies best. These are companies with well-defined job hierarchies. They often have pay advancements within grades at all levels. Also, this is best for companies wanting flexibility for promotions during the early stages of a worker’s career.



This type of compensation structure is older than other types. But there are still companies that opt to use it. In this type, a business needs to set pay bands. These can have substantial differences from the entry-level to the higher-level pay. As a result, it has fewer pay grades and not many companies opt to use it.

This type focuses more on a worker’s career development than their promotion. This is because for this type, a worker stays in the same pay band longer. But firms can still offer raises within the same pay band without a worker leveling up.

This type is the best option if a company wants to focus more on rewarding their workers. It is also the type to use when job evaluations cannot produce good decisions involving pay grades.


Step structure depends on tenure. This type happens when there is a regular movement upwards due to a pre-set schedule. In addition, it is easy to manage and automate. This is because increase depends on a worker’s tenure.

This type is best for companies who seek predictable job prices. Also, firms that want steady and incremental pay raises would benefit from this structure. This also works for firms with small compensation budgets or those that do not put much focus on a worker’s performance.


Companies also refer to this as a market-based compensation structure. This is because type relies on market research and data. Analysis from market data helps assign pay ranges to specific job roles.

This type is not like other pay structures that have an upward trajectory. Since it relies on market data, pay ranges may shift year to year.

This type is useful for companies with highly competitive roles or ones that are challenging to get a qualified candidate. Firms that do not have a performance-based pay philosophy can also use this. The same goes for firms that prefer to rely on market data for pay information.


Companies need to be careful when creating the right pay structure for their workforce. They must be aware of the various types of pay structures and the factors that go with it. In that way, they can choose the best fit for their workers.

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