Pay structures: what they are and how to use them

Published: May 29, 2024 | by Natasha K. A. Wiebusch, Brightmine Marketing Content Manager

A pay structure is an essential piece of any compensation strategy. It helps an organization plan its budget, establish compensation priorities and compete with other organizations for key talent.

Several types of pay structures exist, however, and it’s vital to choose the right one for your organization. The type of structure that works for one of your competitors may not work for you.

In this article, we review what a pay structure is, the common types of structures and how to navigate them in your own organization.

What is a pay structure?

A pay structure is how an organization organizes its pay to employees. It provides a systematic way for organizations to set base pay and salary ranges for individual jobs.

At the global level, a pay structure reflects the way an organization spreads pay across the organization. At the individual level, it reflects how the organization has organized its compensation package (e.g., base salary and bonus).

Types of pay structures

The following are common types of pay structures to be aware of:

Benefits

Pay structures ensure pay aligns with the compensation philosophy and help compensation professionals make pay decisions efficiently and consistently. They also have other important benefits:

Budgeting and planning

All employers want to offer competitive pay and motivating pay increases. However, they must also consider their own limitations. Pay structures help balance these two important factors by providing a clear view of total pay. They also help establish pay priorities within budget by setting pay grades, pay ranges and pay levels.

In addition to taking care of the bottom line, pay structures support efforts to plan for the future. That is, HR leaders need to prepare for both internal and external developments that may impact pay. This may include company growth, financial performance, changes in the economy (e.g., inflation), technological advances or new competition. With a well-planned structure, leaders can account for these changes in a competitive and responsible way.

Talent attraction and retention

Competitive pay is still the most important factor employees consider when looking for a new job. Because of the influence pay still has on talent attraction and retention, it’s paramount that employers get it right.

Pay structures, together with market data, support this effort by providing a clear mechanism for setting competitive pay. For individual employees, it helps create competitive options that are within budget, motivating, and aligned with the compensation philosophy.

Fair pay and transparency

Employee pay structures support consistent and objective pay decisions. By providing boundaries such as pay levels and maximum salaries, they ensure individual pay decisions don’t create outliers. For example, a set salary range ensures any approved raises stay within range for the job role.

A structure also helps increase transparency by creating consistent salary ranges and maximums that the company can disclose.

Challenges

Establishing the right pay structure is not without challenges. At the outset, it can be difficult to consider the many factors involved in creating or changing your structure. Important factors include the following:

• Salary benchmarks.
• Budget.
• Talent needs and competition.
• Business strategy.
• Business performance and growth.
• Changes in the market or economy.

These factors should influence how the organization structures pay and pay increases, but they can be hard to track.

Another challenge involved in creating the right structure is navigating competing priorities. For example, increasing compensation to compete for talent may compete with increasing investments in research and development.

Priorities may also compete within HR. For example, you may create a pay structure that raises base pay for new starters. Though this is great for attracting top talent, it often causes pay compression. That is, it narrows the pay gap between new employees and experienced employees.

Best practices

No silver bullet exists for navigating the challenges of creating and maintaining pay structures. However, best practices for choosing and maintaining a structure can help.

Include relevant stakeholders

A pay structure is important to the whole business. How much the organization pays directly impacts budget and what type of talent it can attract. It also communicates what the company’s priorities are.

Accordingly, it’s helpful to keep relevant stakeholders in the loop and/or involved in creating or changing a pay structure. In addition to members of the HR team, relevant stakeholders may include:

• The C-suite.
• Local or in-house counsel.
• Senior managers.
• Employment resource group leadership.
• Other leadership members involved in setting pay and pay increases.

Use high-quality data

Regardless of which type of pay structure you choose to implement, it’s important to understand how your pay compares to the market. Without information about the market, you run the risk of not paying employees enough, which will lead to turnover. It may also result in overpayment, which will harm the bottom line. This is particularly important in a tight labor market and for job skills that are in extremely high demand.

Regular salary benchmarking offers the insight you need to understand your market position. This can inform which pay structure you use and how you set, for example, your pay grades and ranges. Specifically, salary benchmarking software can help you compare pay across the organization and in specific job roles.

The key, however, is high-quality data. High-quality salary benchmarking data needs to be recent, robust and specific in order to provide accurate results. So, take the time you need to vet your data source(s).

Evaluate jobs regularly

Job evaluations allow you to understand what knowledge, skills and abilities a specific job role requires. Over time, they can change as the result of new technology or changes in the company or the market. These changes may require adjustments to the pay structure, such as an increase in base pay for new skills requirements.

Evaluating new positions in the organization and comparing them with existing roles in the pay structure is especially important. Often, organizations will create a new role and set the starting pay based on the job title they’ve selected. If they do this without evaluating the job duties, they’ll run the risk of creating unfair pay.

Create a communication plan

It should come as no wonder why pay is so important to employees. How much you pay an employee may determine whether they can afford a home, pay for childcare, or pay off a health care bill. Pay can also influence a person’s self-esteem.

For this reason, employers changing their pay structure should prepare a formal communication plan. A formal plan will ensure leaders communicate pay changes consistently and with empathy.