Designing Compensation Structures: Which Is Right for You?

by Stephan Duncan - May 23, 2019
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A compensation structure (or salary structure) is a hierarchal group of jobs that are assigned to salary ranges within an organization. Salary structures are composed of pay grades that reflect the value of a job within both the internal organization and external job market.

Compensation structures help simplify fair pay and market pricing analyses, making it easier to evaluate pay across job groups. As the market changes, HR professionals can adjust their compensation structures to assure that employees within the same pay structure are paid equitably compared to their peers.

There are several types of compensation structures. Knowing how each compensation structure works and when it’s appropriate to use each will help you manage pay and assure employees are paid equitably over time.

Grade Range Compensation Structures (a.k.a. Traditional Structures)

Grade range compensation structures help align jobs which are considered similar in terms of responsibilities and rank into specific pay grades. When an employee is promoted, they can be moved from one pay grade to the next. As employees learn new skills and take on new roles with additional responsibilities, they’ll have opportunities to move to superseding pay grades, increasing pay (and pay potential) along the way.

As grade-range compensation structures ascend, salary ranges get wider to accommodate higher salaries that come with upper-level jobs. A traditional pay structure is easy to manage and communicate because you can visualize how a large number of grades show distinct levels of responsibility.

Grade Range compensation structures are best when:

  • Your organization is large, well-defined, and has extended management hierarchies.
  • Pay progression within grades occur at all levels of the organization.
  • You want the flexibility to offer more frequent level changes and promotions earlier into an employee’s career.

Broadband Compensation Structures

Broadband pay structures consolidate the many grades found in a traditional salary structure into a few wider salary bands. In broadband pay structures, the salary ranges are wider than in grade-range compensation structures. Broadband pay structures tend to place greater emphasis on career development rather than job promotion, since employees stay within a single band for much longer.

Because broadband compensation structures have a greater minimum to maximum salary range spread, the grade range is larger to accommodate salaries for additional jobs within it. In other words, the total number of grades in the structure is noticeably smaller. Each band shows a wider salary range spread, larger midpoint progression between each salary grade, and less overlap between grades when it comes to differing jobs with similar pay.

Broadband compensation structures are best when:

  • Job evaluation alone doesn’t drive decisions for grades.
  • You want to focus on rewarding people for skill acquisition.
  • You need greater flexibility for pay determination and management.

Job Range Compensation Structures

Job range structures put each individual job into their own unique salary grades by mapping the pay ranges for jobs at their market rate.

When creating this type of pay structure, you have to be confident that you’re matching and pricing your organization’s jobs accurately. This structure is best suited when there are enough employees within a role for it to have its own range. For example, if you have a whole team of business development reps, you may be able to place them into their own job range.

Job range compensation structures are best when:

  • You have many hot jobs whose market prices move quickly due to increased market demands.
  • You highly emphasize market competitiveness.
  • You can accurately match and price jobs in your organization.

Step Compensation Structures

When pay rates move up regularly based on a pre-set schedule, it is called stepping. Step structures are typically based on tenure and work best in industries where rewarding performance is less applicable than tenure. For example, an employee with 5 years of experience would make more than an employee with 4 years of experience.

Step structures are easy to manage and automate because their pay increases are based entirely on employee tenure. These compensation structures result in all employees receiving salary increases at a fixed rate. If your organization has a smaller compensation budget, or you prefer not to base your compensation philosophy entirely on individual performance, a step structure is a good choice. Civil service roles, such as first responders, often use a step structure.

Step based compensation structures are best when:

  • You want your job prices to be predictable.
  • Performance-based progression isn’t a priority for your compensation.
  • Your company-wide pay increases are incremental and steady.

Market-Based Compensation Structures

Market-based compensation structures are built solely on what the market is paying for similar jobs. Larger organizations who use these compensation structures tend to have wider salary ranges within each grade, whereas smaller organizations have smaller salary ranges. The salaries for market-based structures are influenced by data sources such as salary surveys, ensuring precise job pricing within each grade.

Market based compensation structures are best when:

  • You prefer to rely on the market for salary information.
  • You don’t have a performance-based pay philosophy.
  • You have a well-defined organization, but want to be flexible with pay determinations.

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