Compensation Structure: A Guide to Building Fair Pay

A recent SHRM finding shows that organizations still lose employees because pay is not competitive, even after the pandemic and the Great Resignation. In other words, how pay is set up continues to play a big role in a company’s success.

Some companies have not yet realized that having a clear compensation structure is important. It makes pay transparent, ensures fairness, links salaries to roles and responsibilities, and encourages employees to give their best.

In this article, we’ll show what it takes to create fair pay through a strong compensation structure. We’ll also showcase some compensation software solutions that make it easier to manage salaries, track pay, and keep things fair across the team.

Here’s what we’ll cover:

Chapter I. Compensation structure explained

Chapter II. Building job grades and salary ranges

Chapter III. Pricing jobs with market data and geography

Chapter IV. Preventing pay inequity and compression

Chapter V. Structuring raises, promotions, and bonuses

Chapter I. What is compensation structure?

A compensation structure organizes market data to make sure pay is fair and competitive. It also acts as a tool to carry out your compensation strategy in a way that is clear and easy to understand across various parts of the business.

For Elizabeth Maizels, Director of Solutions Consulting at Salary.com, compensation structures have a big role in supporting "pay transparency initiatives" and keeping consistency across the organization.

"It's really going to help find that clear framework for pay decisions. We have a quick reference, we have that range that we can come back to... It also enables open communication about compensation...[and] supports legal compliance."

Furthermore, more organizations now see the importance of having a salary structure. In a survey by WorldatWork, 91% of organizations reported having a salary structure in place, with market-based pay structures being the most common across industries.

Chapter II. Building job grades and salary ranges

Organizations need to know that a strong compensation structure begins with job grades and salary ranges. It forms the foundation of what a business values in its roles and guides how pay is managed. Without them, an organization may find it hard to set the right pay, maintain fairness, and plan raises or promotions.

2.1 Pay structure types

Companies use different ways to set pay. That is why there are several pay structure types that help organize jobs and guide pay decisions. Depending on business needs, a company may use one type or a mix of them.

Here are the common types many organizations use:

Pay structure type	Job grouping	Pay range width	Level or band progression	Best fit
Traditional salary ranges	Jobs in traditional structures are grouped into levels, and each level has a pay range	The range spread (minimum to maximum pay) lands at 40% to 60%	The midpoint difference between levels lands around 10% to 20%	Works well for organizations that want clear levels and predictable progression
Broadband pay structures	Fewer but wider bands are used	Bands often land 100% to 200% wide	These structures cover large career stages and give managers more freedom to reward strong performance	Works well for roles that change often or need varied skills
Market-based pay structures	Jobs are matched to what other companies pay for similar roles	Pay levels land close to the market	Pay levels are updated every year or more often if needed	Keeps the company competitive by aligning pay with the market

2.2 Job grades and salary ranges

After choosing the type of pay structure, the next step is to fill it. This is the main work of setting up pay and has two parts: grouping jobs into levels (grading) and setting pay limits for each level (ranges).

Job grades put jobs with similar responsibility into the same level. This means that jobs from different teams can share a grade if the work is similar. For example, "Grade 1" can include a junior accountant and a junior marketing specialist if both jobs have the same level of responsibility.

While grades show a job’s internal value, salary ranges show its market value. A salary range is the “box” of pay where a job grade sits. Keep in mind that not all salary ranges should be the same, as jobs in the company are different in duties, skills, and level of responsibility.

→ Narrow spreads (30% to 40%)

→ Medium spreads (40% to 50%)

→ Wide spreads (50% to 60%+)

Experts say a good salary range is often 30% to 40%, but this can change based on the job, job level, and industry. Simple jobs typically have smaller ranges, while higher-level or special jobs need bigger ranges to pay for experience and skills.

Chapter III. Pricing jobs with market data and geography

An internal pay structure, no matter how well made, does not work if it is not connected to the real world. Market calibration links your pay to the outside market. It makes sure the company does not pay too much or too little, keeping the budget safe and employees from leaving.

3.1 Market pricing and benchmarking

According to Katie Stukowski, VP of Solutions Consulting at Salary.com, market pricing is used to "determine the external value of a position," and many organizations now rely on it to build competitive pay practices.

"Having a deeper understanding of a job’s worth within a particular industry, company size and geographic location can provide a strategic position from which to value a job within your company."

Collecting market data

A company’s pay system works best when it is built on accurate and useful information. Using the right data helps make pay fair, competitive, and in line with the company’s goals. Experts recommend these:

• Use trusted salary surveys such as Salary.com or WTW

• Identify the right comparison group (data cuts) to understand who you compete with for talent

• Set the pay method: lead, match, or lag the market

Pay method	Market position	What it means for employees
Lead the market	60th to 75th percentile	Pays more than most to attract top talent. Keeps high performers happy but costs more and comes with higher expectations.
Match the market	50th percentile	Pays about the same as other companies. Keeps pay fair, helps retain staff, and fits the budget.
Lag the market	25th percentile	Pays less than most. Employees stay because of perks, culture, or growth opportunities rather than salary.

Chapter IV. Preventing pay inequity and compression

A pay structure must feel fair. According to Get Pay Right: How to Achieve Pay Equity That Works by Kent Plunkett and Heather Bussing, "a good salary structure will have enough room at each level to find and hire the people you need, allowing for a range of experience and pay."

Without proper rules, this cannot happen, and unfair pay or pay compression can hurt company culture and cause legal problems.

4.1 Internal equity and pay compression

Salary.com defines modern pay equity as "equal pay for comparable jobs that is internally equitable, externally competitive, and transparently communicated." So internally, people doing similar jobs should get fair pay based on their skills, experience, and duties.

Basically, pay compression "happens when wages for new hires increase while wages for existing employees stay the same." Remember that when wages rise, it is pretty common to hire new employees at the same or even higher salary than those who have been with the company longer. The result? It reduces the wage range (the compression part).

Signs of pay compression	Ways to fix it
New hires make the same or more than experienced staff	Give long-term employees pay adjustments to keep things fair
Long-term employees feel underpaid or frustrated	Review pay regularly and give raises based on performance
Experienced employees leave for higher pay elsewhere	Offer competitive pay and retention bonuses
Pay is below market for longer-tenured employees	Compare salaries with market rates and adjust as needed
Managers struggle to reward top performers	Widen pay ranges and tie raises to performance

Wage compression can really hurt a company. Studies show that about 80% of employees say it affects retention in some way. And since the game of talent and retention is always changing, some HR teams are now using tools and strategies to stay ahead and keep pay fair.

For example, Salary.com's Pay Equity Analysis helps growing companies and large organizations stop unfair pay and make sure salaries are fair inside the company and competitive with the market.

4.2 Fixing structural inequities

Let's say your organization compression or inequity is found, it's your job to act quick and take corrective action. It is critical to understand that these corrections are distinct from standard annual raises. While a merit increase rewards individual performance, structural fixes are administrative corrections to ensure the integrity of the pay system.

1. Equity adjustments

An equity adjustment is a special, usually off-cycle salary increase. Don't confused it with a bonus or a reward. Its purpose is to make sure an employee is paid fairly compared to their peers and the market.

Equity adjustments are often used in different situations. For example, if a new hire comes in at the same or higher salary than a long-time, high-performing employee in the same role, the tenured employee may get an adjustment to restore a fair pay gap.

4.3 Maintaining fairness over time

Fairness is not something you can set and forget. Even the best pay structures can drift as new employees are hired, others are promoted, and market rates change. Without regular attention, significant pay gaps can appear within a year or two.

To keep pay fair over time, every company should focus on a few key practices:

1. Annual pay audits

   A pay equity audit reviews employee salaries to spot differences among people doing similar work. Experts Plunkett and Bussing note that these audits are often done once a year, but including them in quarterly reporting can help catch pay gaps early.

   While many organizations rely on their own review methods, expert tools can reveal patterns that might otherwise go unnoticed. Salary.com’s Regression & Cohort Analysis makes it easier to see hidden pay gaps, account for factors like experience and performance, and help ensure everyone is paid fairly.

2. Compa-ratio analysis

   While pay audits focus on identifying legal risks, compa-ratio analysis helps spot systemic pay issues and operational problems. A compa-ratio (comparative ratio) shows how an employee’s salary compares to the market midpoint.

   The formula for calculating compa-ratio is:

   Compa-ratio = employee salary ÷ midpoint of range

   A compensation ratio is also referred to interchangeably as a comparison ratio, comp ratio, or compa-ratio, with compa-ratio being the most commonly used term.

   Compa-Ratio	Meaning	Example
   1.0 (100%)	Paid exactly at the market midpoint	Typical salary for role
   0.80 (80%)	Paid below midpoint (entry-level or developing)	New hire or less experienced employee
   1.20 (120%)	Paid above midpoint (expert or premium)	Highly skilled or specialized employee

3. Remediation: The "pay equity budget"

   Finding pay gaps is only half the job. Fixing them is usually the harder part.

   One common mistake is trying to fund pay equity adjustments from the same pool used for annual merit increases. That approach almost always causes problems.

   Picture a manager with a 3% merit budget. If a big chunk of that goes toward correcting a gender pay gap, there is less left for strong performers. Employees start to feel penalized for issues they did not create. Morale drops, and top talent may begin to look elsewhere.

   A better approach is to set aside a separate remediation budget, often around 0.5% to 1% of total payroll, specifically for pay equity fixes. This budget sits outside the merit pool and is used only to close gaps and reduce legal risk.

Chapter V. Structuring raises, promotions, and bonuses

If a salary range is a ladder, this chapter explains how employees climb it. Employees want to know what growth looks like, what earns a raise or promotion, and how bonuses fit into the bigger picture of their pay.

5.1 Pay progression methods

There is no single path to move through a salary range. How pay grows depends on the approach the company chooses, and that choice is shaped by its culture, industry, and values.

Progression type	How it works	Main advantage	Main downside
Step progression systems	Raises are based on time in the role. Employees move up a fixed step grid, usually once a year. Common in unions, government, manufacturing, and K–12 education.	Very predictable and easy to understand. Limited manager discretion helps the process feel fair.	Everyone moves at the same pace, which can frustrate high performers and reduce flexibility in tight budget years.
Merit-based progression	Raises are based on performance and results instead of a standard annual increase. Often guided by a merit matrix.	Better reflects individual contributions while keeping pay increases under control.	Relies on consistent and fair performance evaluations.
Skills- and competency-based progression	Raises are tied to skills and certifications an employee can demonstrate. As skills increase, pay increases too.	Encourages learning and shows a clear link between skills and pay.	Can feel uneven without clear skill standards and definitions.

5.2 Supplemental pay and base pay within structures

Supplemental pay (variable pay) is the "risk/reward" component of compensation. Why? Because it allows a company to control fixed costs while still offering high earning potential for top performers.

For example, annual bonuses are a type of supplemental pay. They are limited to a set percentage of base pay and reward good performance while keeping costs manageable.

At the same time, the way a company balances base pay and supplemental pay says a lot about how it approaches compensation. You may offer lower base salaries but higher bonuses or equity, while others focus on strong base pay and smaller variable rewards.

Strategy	Base pay stance	Bonus stance	Strategic intent
Aggressive growth	Lag (25th percentile)	Lead (75th percentile)	Attract entrepreneurs and risk-takers (common in tech)
Competitive match	Match (50th percentile)	Match (50th percentile)	Balance for talent retention in stable industries
Stability first	Lead (75th percentile)	Lag/No Bonus	Attract employees seeking security and long-term tenure

In startups, supplemental pay often comes as equity, like stock options. Even if the base salary is $30,000 below market, that equity can turn out to be worth far more in the long run. Think of early employees at Facebook or Airbnb; they started with modest salaries, but their stock options eventually became life-changing.

Final note

At the end of the day, compensation structures aren't just numbers on a spreadsheet. They really help people understand how they can grow, what work is rewarded, and where their career is going.

For organizations, remember that a good structure gives your employees a clear path ahead and lets leaders reward great work while keeping costs in check.