Key Steps in Salary Structure Design: Types and Best Practices

A 2023 report found that 9% of organizations still operate without compensation structures. This is concerning, given its role in achieving pay consistency and fairness.

Many organizations still manage pay manually using Excel or other spreadsheets, which makes the process complex, time-consuming, and prone to human-error. Fortunately, there are tools that can automate and simplify the process.

This article explains salary structure design, its importance, and how to build one in just three steps using Salary.com's Compensation Software.

What is salary structure?

A salary structure is an organized, hierarchical method for managing, understanding, and interpreting pay data. It's a tool that helps implement a compensation strategy in a way that is easily understood by employees.

For example, a retail company uses a salary structure to ensure sales associates start at $15 to $18 per hour, with clear pay increases as they advance to senior roles like store supervisor.

However, salary structures are not one-size-fits-all. Each organization must design a structure that's right for its needs and aligns with its pay strategy.

To simplify this process, many organizations now use Compensation Software to automate salary structure design, maintain pay equity, make data-driven decisions, and adjust pay based on market trends.

Importance of salary structures

Alden Aikins of Salary.com pointed out the importance of salary structures. According to him, when implemented and designed correctly, a salary structure helps an organization:

1. Be externally competitive: Aligning salaries with market rates attracts and retains top talent. A 2021 report found that 63% of workers who quit their jobs that year cited low pay as a key reason.

2. Pay fairly across their organization: Clear salary guidelines prevent pay disparities and improve morale. A study found that employees who perceive inequitable pay are 15% less likely to stay and 13% less engaged.

3. Comply with pay transparency legislation: Structured pay ensures legal compliance and builds trust. Research shows that pay transparency boosts trust, fairness, job satisfaction, and individual performance.

4. Regulate costs and internal spending: A structured salary system helps manage labor costs and budgets efficiently. A report revealed that implementing a base pay structure is essential for controlling labor expenses.

4 types of salary structure

Compensation experts have identified several types of salary structures. But when should each be used?

1. Job-based structure (job ranges)

   This structure assigns a specific pay range to each job within the organization, based on factors such as responsibilities, required skills, and market data. It works best for organizations with clearly defined roles and minimal overlap in job responsibilities.

   Compensation Software's Job Range Wizard helps companies compare internal pay ranges and employee salaries with updated market rates, ensuring job grades are aligned and keeping pay practices fair and competitive.

2. Grade-based structure (grade ranges)

   Grade-based structure groups jobs of similar value into broader pay grades, providing more flexibility in salary administration. This traditional salary structure is ideal for organizations that want to simplify pay management while maintaining internal equity.

   Broadband salary structures are a type of grade-based structure, which offers flexibility by combining multiple job levels into wider salary ranges or pay bands.

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3. Market-based structure

   Market-based pay structures determine salaries based on external market data and salary surveys to remain competitive. This structure was the most common in 2019, used by 65% of organizations. It is well-suited for companies aiming to attract and retain talent in highly competitive industries.

4. Hybrid structure

   Some organizations use a combination of different salary structures to address diverse workforce needs. In fact, 54% of organizations report using more than one pay structure, with 32% utilizing two to four different structures. A hybrid approach is beneficial for companies with varied job functions, locations, or business units requiring different pay strategies.

How do you create a salary structure?

The majority of organizations are still using Excel when designing salary structures, which can be difficult and tedious. In contrast, using Salary.com's Compensation Software makes the process easy and efficient.

Here is how to create a salary structure in three easy steps using the tool:

1. Step 1: Market price your jobs

   Use Compensation Software's market pricing feature to match and price jobs accurately. Set pay markets based on industry, location, and company size. Apply these to specific departments or job families. AI recommendations help find the right salary data for your roles.

2. Step 2: Use the Salary Structure Wizard to build job or grade ranges

   With Compensation Software's drag-and-drop editor, organizations can adjust ranges, move jobs between them, and create new structures. This helps establish salary ranges, set market positioning, and define pay differences between levels.

   One key feature of the tool is its ability to compare internal pay to market rates and estimate the costs of salary adjustments.

3. Step 3: Save the structure as a model or as current

   Once completed, Compensation Software allows organizations to model multiple scenarios quickly. Whether implementing a job range structure for the first time or refining an existing one, different market reference points—such as the 25th, 50th, or 75th percentile—can be evaluated to determine the best fit.

Best practices in maintaining salary structures

After designing a salary structure, keeping it updated is necessary. Elizabeth Maizels of Salary.com shares key tips for maintaining salary structures within an organization:

• Review internal pay regularly

  Check salaries every year or after big changes like mergers to make sure pay is fair and competitive. This helps avoid pay gaps and keeps employees satisfied.

  For instance, after a merger, a company might notice pay differences between employees, so a review helps adjust salaries to match the market.

  Job evaluation and job analysis can help assess whether pay aligns with roles and responsibilities.

• Compare market data for benchmark jobs

  Compare your salaries for key roles with industry data to ensure you’re offering competitive pay, while also considering minimum wage laws. This helps identify and fix any pay gaps and ensures compliance with legal requirements.

  For example, a company may find that their software developers are paid less than the market rate, so they adjust the pay to be more competitive and align with legal wage standards.

• Align salary structures with business and market trends

  Update salaries to match business goals and changes in the economy. This ensures the company stays competitive and can adapt to market shifts.

  For example, a company may raise salaries or offer competitive salaries for IT roles when demand for cybersecurity experts increases in the market.

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• Assess employee pay within ranges

  Make sure employees are paid fairly within their salary range based on their experience, performance, and tenure. This helps maintain fairness and satisfaction.

  If a long-term employee finds they’re paid less than a new hire with similar skills, the company can adjust pay to ensure fairness based on experience.

Salary structure design does not need to be complicated. With Salary.com's Compensation Software, organizations can easily create salary structures with minimal error, ensuring accuracy, consistency, and alignment with market data.