What are salary structures?
Salary structures are how companies determine their employees’ pay. The decision takes into account how long an employee has worked for the organization, their rank, merit, and how difficult their work is to perform.
Some salary structures are based on pay grades, which help employees predict what their compensation will look like in a certain role. Pay grades have a minimum, maximum, and midpoint. The minimum is the lowest salary an employee will earn, the midpoint is in the middle, and the maximum is the highest salary an employee can expect.
New hires or current employees up for promotion should negotiate where they stand within the paygrade. New employees often start near the bottom of the salary structure, however, those with valuable experience may expect to work in a leadership role and receive a higher starting salary.
Pay grades can overlap within the salary structure. The most experienced employee at one rank might make the same amount as the least experienced in the rank above.
Companies often turn to compensation management software as a way to develop compensation packages, adjust salary structures, plan for bonuses, and develop a comprehensive budget.
Types of salary structures
There are three main types of salary structures. Each type uses a different method to decide an employee’s salary.
- Market-based: The most common type of salary structure. Organizations base their employees’ compensation on what other companies in the industry pay for the same roles. This research on the median salary for the role in question helps create salary structures accordingly. This method is popular among employees because it provides a salary that aligns with the fair industry standards.
- Traditional: This method uses several pay grades to space out employee raises over time, with the goal of keeping employees from reaching their maximum salary too quickly. Doing so can cost companies top talent, as some employees will go elsewhere for fair pay according to industry standards. Traditional salary structures give companies more control over their employees’ salaries, and some employees view the incremental income increases as motivational.
- Broadbanding: This salary structure is the least common. It uses pay grades like the traditional method, but consolidates them into broader pay bands. This means pay grades will be fewer in number and each will cover a wider salary range. This method prioritizes long-term career development rather than promotions, and it is suitable for companies without many promotion opportunities available.
Benefits of salary structures
Salary structures help companies ensure their employees are being paid what they are worth, fairly, and with ample growth potential. Here are some key benefits to implementing salary structures:
- Financial planning: Leadership will have an easier time creating new quarterly and yearly budgets and deciding on new positions.
- Employee satisfaction: When employees are paid fairly on a consistent basis, they will be happy and confident in their role. They are also more likely to stay at an organization long-term.
- Motivation: Giving employees insight into how they can earn more money motivates them to work toward achieving that goal. When companies lay a path to growth and success, they inspire employees to work harder and grow faster.
Salary structures best practices
Salaries are a vital part of any business. If companies want to hire and retain top talent, they need to pay their employees fairly and offer ample growth opportunities. Here are some best practices to follow when creating salary structures:
- Research the industry: Companies can learn a lot about salary structures by examining how competitors pay their employees. This is a useful research tactic even if the market-based salary structure is not used. Researching the industry shows companies how competitive their offer is and if any adjustments need to be made. This research can be done by asking for compensation history when interviewing a potential job candidate.
- Plan for increases: Fair salary structures inherently require adequate planning. Creating an approach for giving raises and promotions when they are due can help companies navigate these situations and is all part of a solid compensation and benefits strategy.
- Evaluate current salaries: Creating or improving salary structures will likely reveal employees or departments whose pay doesn’t align with the industry average. Subconscious bias can also come up here, as some employees with similar experience and skills might have drastically different salaries. As companies develop their salary structures, they will need to adjust their current employees’ income accordingly. This is commonly done using compensation statements.
Martha Kendall Custard
Martha Kendall Custard is a former freelance writer for G2. She creates specialized, industry specific content for SaaS and software companies. When she isn't freelance writing for various organizations, she is working on her middle grade WIP or playing with her two kitties, Verbena and Baby Cat.
