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A pay structure is a system that defines what each individual and job role is paid based upon their value to the business and effectiveness in their role. For each type of pay structure, there are a variety of different methods for deciding upon and separating employee pay, each with its own advantages and disadvantages.

In this guide, the Paydata team explores each of the common types of pay structure, explaining how they differ from one another and outlining when they might be most appropriate for your business.

Why do pay structures matter?

First things first, it’s essential to recognise the importance of pay structures.

There are two central reasons why pay structures matter. The first is that businesses need to ensure they are consistently paying staff appropriately for what they do and what they are worth to the business. Each pay structure can take different factors into account to calculate appropriate pay rewards, from utilising market averages to measuring performance within different functions of the business. The right choice for your business will depend largely on your sector and situation. Selecting the right pay structure that supports your culture and organisational model is incredibly important.

The second reason is how pay impacts employees. Employee engagement and satisfaction is a challenging topic filled with fine nuances and details, but payment and remuneration play a large part. All employees want a clear, understandable path to both career and pay progression. Defined goals and the knowledge that achieving them will result in employees receiving monetary rewards for their efforts provide a framework for motivating the entire workforce. The presence of this clarity is a direct outcome of a business’ transparent pay structure.

For all organisations, the best system is the one that balances the business’ financial needs with the needs of employees. With a suitable pay structure in place, organisations can pay their employees appropriately whilst simultaneously increasing staff retention, satisfaction and productivity.

The most common types of pay structure

Pay structures and systems are vast and varied, with some businesses combining structures to create bespoke solutions. Regardless of the approach that organisations opt for, they can usually be categorised into one of the following four types of pay structure.

Individual Pay Rates/Ranges

Firmly positioned as the most recognisable type of pay structure, individual pay rates involve a fixed salary based on each employee’s job role within the organisation. This salary can be paid annually or hourly and offers a rigid payment system.

The advantage of this approach is that it gives the organisation a pre-defined approach to wages and salary, enabling easy and accurate estimation of hiring viability and employee value. However, this approach makes it more difficult to engage employees, as it offers less room for any form of payment progression within their job role. The only avenue for development and growth is through a direct promotion which can be quite challenging to achieve. This risks employees becoming demotivated and dissatisfied, whilst failing to reach their productivity potential.

However, for smaller organisations, individual pay rates might be the only viable option. In addition, there is a solution to the employee engagement and progression problem, in the form of individual pay ranges. These differ from individual pay rates, with employees being offered a salary within a predefined scale (a pay range), rather than a fixed salary. The pay range varies from job to job but gives the business more freedom to increase an employee’s pay as a reward for good work. Similarly, employees understand that whilst they might be hired at the bottom of the pay range, over time, they may be able to show the value they provide and increase their salary to the top of the range, motivating them to become more efficient and productive.

Pay ranges offer much more versatility than pay rates whilst still giving businesses a framework on which to base their decisions. On the whole, they are a reliable choice for the majority of organisations.

Broadbanding

Broadbanding offers a very different approach to the individually-focused systems discussed so far. It involves grouping broadly comparable jobs into a handful of pay grades.

It is important to explain what pay grades are and how they work: pay grades feature a minimum and maximum salary available, with incremental increases between the minimum and maximum. Employees begin at the bottom of the pay grade and through impressive performance, length of service or experience, individuals move up the increments throughout the pay grade until they reach the maximum.

Broadbanding is almost entirely based on this system, with employers devising a handful of pay grades, each with multiple increments, to cover the entire business. Most organisations which utilise broadbanding create multiple pay grades for each of the management levels, including non-managerial job roles, managerial job roles and executive job roles. The pay ranges within each of the pay grades are usually decided based on the median of the average wages, with suitable room above and below to enable growth and development.

The broadbanding system is useful for a variety of reasons.

Firstly, there is significantly faster communication between the top level of management and the bottom level of employees because the hierarchy within the organisation is significantly flatter. This is perfect for organisations that are in a state of rapid change as it allows them to be agile, shifting systems and procedures much more quickly and effectively, as opposed to a more traditional structure.

Employees also benefit from being able to move laterally in the business more easily. Changing job roles or moving departments becomes much easier for employers and employees if they remain in the same pay grade, as neither needs to be concerned about salary changes. Similarly, staff have a very clear path to their next pay increase which is extremely effective for motivation. The broadbanding system is perfect for performance or evaluation-driven pay systems because it enables employers to quickly calculate remuneration and rewards for effective performance.

However, broadbanding does have its flaws. Whilst job roles of a similar authority and workload are generally recognised in the same pay grade, it is possible for individuals to move into a more challenging job role without receiving a pay increase, simply because the job is categorised as being in the same band. This can be demoralising and demotivating, resulting in poor engagement.

Another concern is that with broadbanding systems which reward loyalty, there is a chance that staff who stay in the same job role find themselves overpaid for their work based on the market average, particularly if there is no maximum salary for their pay grade. This can be unhealthy from a business finance perspective and can lead to a feeling of injustice between employees who do not understand why they do not have parity of pay.

Finally, broadbanding demands responsiveness and awareness from managers to increase pay appropriately based on market data. If pay grades remain stagnant and are not adapted to market trends, then it can quickly lead to underpaid staff and high employee turnover. In general, this pay structure is used in the public sector, but could be appropriate for organisations entering a period of change or procedural shift to introduce consistency and fairness.

Pay Spine

A pay spine is a company-wide pay structure that is especially effective due to its simplicity and clarity. Pay spines cover all wages within the organisation, from the lowest entry-level salary through to senior managerial or even executive pay levels. The spine is made up of individual pay points, each associated with a predefined salary and incremental increases. Each job role is then assigned a range of pay points which can be reached by staff within that position, usually based on loyalty.

The advantages of this system are that the path to payment increases are clear for employees, ensuring that they know exactly where they are going and how to get there. However, progression is often loyalty-based rather than representative of skill, meaning that staff can become resentful of higher-paid colleagues if they feel they work harder. This can be balanced through the use of an additional evaluation system for increasing pay points as well as loyalty, but it is dependent on your organisation’s sector, industry and culture.

Job Families

Finally, job families are a pay structure which strikes a balance between many of the other common pay systems. Job families operate by grouping similar roles together and separating each individual role based on knowledge and seniority.

Organisations utilising this structure usually create multiple job families for different departments. Transitioning from one role to the next would usually be achieved through a combination of experience, knowledge, and loyalty, depending on the business’ choice of focus.

Job families work extremely well because they enable tight control of salary whilst still making progression attainable and clear. Management can easily review and refine the payment systems within each family without affecting the rest of the company and staff members can see exactly what they will get for going above and beyond, as well as how to reach an increased pay packet.

Job families are versatile and, once implemented, they provide organisations with freedom and control whilst still enabling transparency and progression for staff.

Which is the right pay structure for your business?

Ultimately, pay structures vary based on industry, company vision and current payment system. The right pay structure for your business depends on a wide range of factors. Having worked in reward and HR since 1997, the Paydata team has extensive experience in creating reward schemes and payment structures for businesses operating across a variety of sectors. We hope this guide is useful in outlining the various options available. If you are assessing which is the right payment scheme for your organisation or would like professional guidance to ensure its successful design and implementation, explore our pay review and analysis services or get in touch with our team today.


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