“That’s above my pay grade” might come to mind when thinking about salary structures. And yes, pay grades are part of salary structures. Still, they’re just one aspect of this fundamental — and, to the detriment of employee engagement (1), often opaque — element of the compensation planning process.
As employees become more open to talking about salary (2) with their colleagues and peers, and job hopping becomes the norm for the millennial workforce (3), salary structuring is something that growing organizations should be eager to explore and discuss.
But we’re not just here to explain why you need to develop a salary structure for your company. We also want to leave you with actionable steps and insights to help you put one in place.
What is a salary structure?
A salary structure is a compensation framework that organizes company positions into a series of tiered pay grades or salary ranges. The three most common types are market-based, traditional, and broadband salary structures. A company’s chosen model usually depends on size, compensation philosophy, business objectives, and how competitive the industry is.
Salary structures should also evolve with time. That means organizations must review their salary ranges regularly to ensure they still align with their mission, objectives, and growth stage. For young companies and those in a growth stage, adopting an intentionally developed salary structure can help you stay competitive while keeping your salary expenditure within budget.
“Never build your pay structure as a set-in-stone plan. You should revise your pay structure annually to ensure it’s on par with the job market and accepted among your employees. Some companies revise their compensation plans every 3-5 years, but I find that too much changes in that time.
Over the course of a year, I’ve seen my company grow, market conditions change, inflation rise, wages increase, and pay equity laws get amended. All of these factors make a large impact on expectations for compensation. With this in mind, you should always design your salary structure with room for growth. ”
— David Aylor, owner of David Aylor Law Offices
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Types of salary structures
There are three main types of salary structures companies can adopt to compensate employees — but that doesn’t mean you should have a “pick one” mindset.
Let’s break down how each of these structures works so you can take what best suits your company, leave what doesn’t, and understand how you can tailor them to fit your company’s unique needs.
Traditional salary structure
The system of dividing employee salaries into position-based pay grades comes from traditional salary structures. That means that, for one role — suppose it’s a junior accountant role — two employees could be paid at different levels, or pay grades, depending on professional factors like experience, seniority, credentials, or skills.
So, someone new to your accounting firm and fresh out of university might make a salary in the first paid grade. However, another junior accountant who’s been with your firm for two years and just passed their CPA exam could earn a salary in the fourth or fifth pay grade.
With this kind of structure (unlike with broadbanding), salaries for given roles are broken down into multiple, rather narrow pay grades with a small margin between the maximum and minimum salaries.
The multiple pay grades and narrow salary ranges ensure that employees don’t hit their maximum salary for the position too quickly. Companies also opt for this system as a retention strategy to show that there’s room for growth.
Let’s look at some example annual pay grades for the same role within the same company:
- Pay grade 1: US$45-47,000
- Pay grade 2: US$47-49,000
- Pay grade 3: US$49-51,000
- Pay grade 4: US$51-53,000
- Pay grade 5: US$53-55,000
Market-based salary structure
In a market-based salary structure, companies use market data from similar industries and roles to develop each salary range. This is probably the most common salary structure, as it helps companies stay on par with competitors, attracting and retaining talent.
However, while taking market data into account is important, there’s an emerging sentiment that relying exclusively on market data to make salary decisions isn’t always the best practice. There are a few reasons for this:
- The market can be volatile, and changes can be unpredictable
- Market data doesn’t always take your company size, values, pay equity, or compensation philosophy into account
- Smaller organizations in the growth stage often lack representation in salary survey data
Creating a salary structure should be a holistic process; if taking a market-based approach, consider that market data, while useful, warrants an objective assessment in balance with fiscal responsibility and business goals.
Broadband salary structure
In a broadband structure (also referred to as broadbanding), the salary range for a role is broken down into fewer pay grades with wider ranges between the minimum and maximum rates.
Unlike in a traditional salary structure, a company that chooses broadbanding may assign only two or three pay grades for a given role; there are also more significant differences between your maximum and minimum salaries than you’ll find in a traditional salary structure.
While broadbanding can give the impression of fewer promotion opportunities, one advantage of this approach is its flexibility and potential for better internal equity. This is especially helpful for employers that want to move from a strict organizational hierarchy to a more horizontal structure with seamless internal promotion opportunities, as broadbanding reduces the number of apparent “tiers” that exist in a traditional structure.
Employees may also enjoy the feeling that, because they might share the same pay grade as someone with more seniority or experience, they’re equally valued and respected team members.
“The advantage of broadbanding is its greater emphasis on career development and progression compared with traditional salary structures. Broadbanding is suited for organizations that wish to respond quickly to changes in recruiting markets and want to have a flatter, less hierarchical organizational structure.”
— Dean Kaplan, president of The Kaplan Group
But broadband salary structures can also lead to more internal inequity. While managers have more discretion over how much to pay an employee, the wider salary range can also mean there aren’t as many built-in steps to ensure that two employees with the same role and background aren’t paid vastly different amounts.
For employers that don’t take the time to review their compensation decisions for fairness, this could lead to one worker being paid more for the same role — but for subjective (and possibly biased) reasons.
Ultimately, broadbanding can be an effective way to organize your salary structure as long as managers, HR professionals, and leadership are aware of its potential shortcomings.
How to develop a salary/pay structure
As part of your employee compensation plan, your company’s pay scales are central to your ability to attract, retain, motivate, and reward talent. How to develop your salary structure depends on what style you decide to adopt and how you customize it, but here are some essential steps you can take to create one for your organization.
1. Define your compensation philosophy & strategy
A compensation philosophy is a formal statement explaining the “why” behind your company’s approach to compensation. It should guide all your future decisions around compensation while promoting transparency within your company and financial flexibility.
And while your compensation philosophy should be there to help you make judgments around compensation as a whole (including topics like total rewards and benefits), it can also help you drill down into the connection between your salary structure and your business objectives.
Suppose you run a small software development startup. Your compensation philosophy statement might highlight that you pay software developers salaries between the 75th and 80th percentile because of how central they are to your company’s success and your previous experiences hiring for those roles. Meanwhile, you may decide to offer salaries for other positions within the 50th to 70th percentile.
Your compensation philosophy is also key to establishing how incentive pay works at your company. It also gives you space to explain how you’ll navigate pay raises and whether you’ll base them on factors like time with the company, performance, or embodiment of company values.
2. Perform a job cost analysis
Conducting a job cost analysis (also known as “job costing”) helps you weigh how much you pay employees against how profitable they are for your company. And if you haven’t done one already, it’s time to ask yourself what your average profit-per-project expectations are.
If you’re currently exceeding your set profit-per-project goals — let’s say you want to make 50% profit, and you consistently make around 65% — it may mean you’re underpaying your people. In that case, it might be time to probe further into the data to determine which teams or departments are most profitable and why.
Once you’ve worked out your current cost per employee, you should also do some market research to see how other companies value similar roles.
3. Compare your average salaries to your competitors’
Analyzing your competitive posture is one of the most useful aspects of a market-based approach to salary structuring, especially if you’ve committed to paying higher-than-market rates for some or all of your positions in your compensation philosophy.
If attracting and retaining top talent is your current goal, and your median salaries are lower than the market average, you need to update your pay structure or your overall compensation plan to account for that difference.
4. Determine your company’s pay raise margin
Your company’s pay raise margin (also called your compensable leverage) is the average percentage you increase employee salaries yearly You’ll also want to compare this metric with pay raise margins for similar jobs on the market.
If your pay raise margin is similar to or higher than your industry’s average, your pay raises are competitive and may not need adjustment. If they’re lower, consider increasing them to improve your competitive posture, or think about what rewards and incentives you’ll offer instead — like opportunities for continuous development or other types of bonuses throughout the year.
5. Check for any outliers
Finally, do an equity check to ensure there aren’t inconsistencies across departments and teams. If you have employees or even entire teams earning significantly more than their colleagues or market averages, do some investigating. Make sure that any increases in compensation have been made based on appropriate criteria like performance, experience, or whether someone’s role is central to your company’s business strategy.
6. Create your company’s salary structure
Once you’ve fine-tuned your structure, apply it to your current staff. This is when you should offer salary increases to employees who are earning below your defined minimums.
And what about workers earning above your maximums? A recommended practice, in this case, is freezing the employee’s next salary raise until any shifts in the market justify an increase.
You may, like many companies, decide the best time to roll out pay increases or have conversations around compensation is during annual performance reviews. The performance review salary increase doesn’t have to be an uncomfortable practice. It can, in fact, empower managers and employees to have more open conversations about compensation and assure people that the organization is putting thought into its decisions.
Finally, communicate your salary structure and process to your staff. Ensure employees understand where they fall in a given salary range and how that will change as they grow with your organization.
When it comes to compensation, transparency is key; employees are more likely to feel their input matters when you take the time to explain the “what” and the “how” behind the organization’s salary structure.
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Benefits of a salary structure
A robust salary structure can have substantial cultural, organizational, and economic benefits for your company. The right salary structure can help you:
- Set fair, clear guidelines to guide compensation decisions: When done right, your compensation plan and salary structure can help create trust and psychological safety within your company. And with two out of three workers reporting a belief that compensation should be part of their companies’ DEI (diversity, equity, and inclusion) initiatives, organizations need structured salary plans that are straightforward, simple to implement, and easy to talk about with employees company-wide.
- Better allocate resources and make budgeting easier: While creating a salary structure can require an unexpected mixture of quantitative analysis and creative decision-making, putting one in place will make budgetary considerations easier. After all, you’ll have a solid grasp of where you can make financial compromises and where you can’t.
- Contribute to an open, transparent company culture: 79% of employees want more employer transparency around salaries, and for a good reason. Creating and sharing a salary structure with your company keeps you from making subjective and unwise compensation decisions and can support accountability around pay. (And, by the way, a company committed to transparency is likely to have better employee engagement and more positive scores on engagement surveys and their employee NPS).
- Help with career planning and progression: The pay grades system embedded in typical salary structure frameworks can help managers and HR professionals responsibly usher employees along their career development journey and advise staff during career development talks.
- Stay competitive in a tight labor market: When sought-after talent researches your company’s salaries and compares your organization with competitors (which they will), a well-designed salary structure will show you recognize that employees deserve to be rewarded for their efforts with monetary compensation.
- Increase employee motivation and satisfaction: According to a recent report from SHRM ranking factors for employee satisfaction, compensation came second only to respectful treatment of employees. And overall, people aren’t just interested in more money for money’s sake: they want to know they’re being paid fairly and can expect increases in compensation as part of their growth within your company.
⭐ Along with compensation, growth opportunities are a huge motivator for employees. Don’t let your employees stagnate: Check out our guide for developing career progression frameworks for your company.
Set up scalable compensation processes with Leapsome
Your company’s compensation planning process — from salary to benefits and incentives — isn’t just about keeping you financially viable from year to year. Your approach to compensation is also critical to your ability to retain and attract great talent. And you need great people if you want to grow!
And Leapsome’s here to grow with you. Our tools for compensation and promotions can help your team simplify the salary structure process and evolve — no matter what stage your compensation management strategy is at.
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