Pay structure: Types and tips for choosing the right one

A well-thought-out compensation structure can help you budget properly, define clear pay grades, and keep employees motivated. It also ensures you're offering competitive pay that aligns with market data.

But there are a lot of options out there. So, where do you start?

In this guide, we explain what a pay structure is. We also explore different types, like traditional pay grades and broadband structures, and show you how to choose the best fit for your business. Plus, we share real-world examples and practical tips to help you get started.

What is a pay structure? 

A pay structure is a framework that outlines how a business compensates its employees. It sets clear guidelines for pay levels, ensuring fairness and consistency across roles.

Pay structures typically include defined pay grades, salary ranges, and criteria for base salary adjustments. They provide a transparent way for businesses to set pay based on factors like job roles, experience, and market conditions.

Essentially, a well-designed pay structure supports fair compensation, reduces turnover, and helps your business stay aligned with market data.

Pay structures vs. salary bands 

Pay structures and salary bands closely relate, but serve unique purposes within employee compensation.

A pay structure is the overall framework that defines how a company determines compensation for various roles. It provides a systematic approach to facilitate consistency and fairness across the organization.

Salary bands‌ are the specific pay ranges within a pay structure. Each band corresponds to a particular pay grade and includes a minimum, midpoint, and maximum salary. Salary bands give businesses flexibility to adjust pay based on factors like experience, skills, or performance while staying within the broader pay structure.

For example:

• A pay structure might define roles like “Junior,” “Mid-Level,” and “Senior” within a department.
• The salary band for a Mid-Level role might have a salary range of $60,000 to $80,000 per year.
• An employee's base salary falls within that range, reflecting their qualifications and experience.

4 key components of a pay structure 

A solid pay structure relies on several key elements to ensure fair and competitive compensation. Here are four important components that shape how businesses pay their employees:

• Salary: This is a fixed annual amount paid to an employee, usually split into regular paychecks (weekly, bi-weekly, or monthly). Salaries often fit within a salary range tied to specific pay grades and reflect the employee's role, experience, and market conditions.
• Wages: This is an hourly rate paid to employees for the time they work. Wages are common for roles with variable hours or shift work. 
• Bonuses: These are extra payments given for performance, milestones, or company success. They help motivate employees and reward hard work. Including bonuses in your compensation structure can boost morale and encourage productivity.
• Benefits: These cover non-cash perks like health insurance, retirement plans, and paid time off. A strong benefits package can enhance your compensation structure and help attract and retain employees. Competitive benefits show you value your team beyond their base salary.

The importance of pay structures 

Here’s how a well-defined pay structure can benefit your business in practical, tangible ways:

1. Enhances recruitment and retention 

A clear pay structure helps you attract the right talent and keep them engaged for the long term. When job postings include defined pay grades for roles like "Junior Developer" or "Senior Project Manager," candidates know exactly where they fit in your organization and what to expect in terms of compensation. For example, offering a salary range of $70,000 to $90,000 for a Senior Project Manager signals your commitment to competitive pay and transparency.

During interviews, outlining potential career paths and salary ranges within each grade can help motivate employees to stay, improving job satisfaction and reducing turnover.

2. Ensures fair compensation 

A structured pay system eliminates guesswork and reduces bias in compensation decisions. By grouping similar roles into the same pay grades, you can ensure employees performing similar work receive fair and consistent base salaries. For instance, if your marketing team’s mid-level salary band is $60,000 to $75,000, employees with similar experience and responsibilities will earn salaries within this range.

Regularly reviewing your salary ranges against market data can assist you in maintaining fairness and competitiveness, preventing unintentional pay disparities.

3. Simplifies business budget planning 

Pay structures provide a predictable framework for managing payroll expenses. Knowing your salary ranges and pay grades lets you plan for new hires, salary increases, and promotions with confidence. For example, if you plan to hire five new employees at a base salary of $50,000 each, you can confidently budget $250,000 for payroll.

This foresight can help you avoid overspending. It also supports strategic growth and can make it easier to adjust your budget when expanding teams or responding to market changes.

4. Streamline professional development 

Clear pay structures give employees a roadmap for advancing their careers. When you link pay grades to specific skills, certifications, or milestones, employees know exactly what they need to achieve to move up. For example, a customer service representative aiming for a higher pay band might pursue conflict resolution training or leadership courses to qualify for a promotion.

This transparency encourages proactive learning, career planning, and can help HR design effective training programs that align with progression paths and salary ranges.

5 types of pay structure 

Choosing the right pay structure can make a big difference in how you manage compensation. Here are five common types of pay structures, how they work, and examples to make them clearer.

1. Traditional 

A traditional pay structure uses well-defined pay grades with narrow salary ranges. Each pay grade corresponds to specific roles. Employees move through these grades based on experience, performance, or tenure. This structure is common in established industries, like manufacturing or government.

Example: A Grade 5 employee might have a salary range of $45,000 to $55,000, while a Grade 6 role might range from $55,000 to $65,000. Moving from Grade 5 to Grade 6 reflects an increase in responsibility and skills.

2. Broadband 

A broadband pay structure groups multiple roles into wider bands, offering greater flexibility in pay. Instead of having many narrow pay grades, broadbanding consolidates them into fewer, but broader categories. This approach can work well for companies that value flexibility and want to reduce rigid hierarchies.

Example: A company might use a single broadband range of $50,000 to $100,000 to cover roles like junior analysts, analysts, and senior analysts, allowing employees to progress without changing pay bands.

3. Market-based 

A market-based pay structure sets base salaries and salary ranges based on market data for similar roles in the industry. This approach helps businesses stay competitive and attract top talent. It’s ideal for industries where market conditions change frequently, like tech or finance.

Example: If market research shows that software developers typically earn between $80,000 and $100,000, the business sets their salary range accordingly to stay competitive.

4. Job families

In a job family pay structure, businesses group roles by function or department. Each family has its own set of pay grades and salary ranges. This approach can help businesses manage compensation for specialized roles. It also promotes career progression within the same job family.

Example: In an engineering job family, you might have roles like Engineering Intern, Junior Engineer, Senior Engineer, and Lead Engineer. Each has a defined base salary and progression path.

5. Step pay

A step pay structure increases base pay according to predefined steps, such as tenure or achieving certain milestones. Employees move up the steps at regular intervals, like annually. This structure ensures predictable and consistent pay increases and is common in education and public service roles.

Example: A teacher might start at Step 1 with a salary of $40,000. After a year, they move to Step 2 with a salary of $42,000, and so on, up to a maximum step level.

2 pay structure examples  

Job postings often use different pay structures to attract the right talent and clarify compensation expectations. Here are two examples showing how businesses apply pay grades and salary ranges to specific roles.

IT sales pay structure

A business might apply a market-based pay structure to an IT sales position to boost its competitiveness. The posting may include a salary range and additional details about commissions or bonuses. For instance:

• Base salary: $60,000 - $80,000 per year (depending on experience)
• Pay structure: Market-based, aligned with industry standards
• Bonuses: Commission-based bonuses for meeting sales targets
• Pay grades: Grade 4 for entry-level, Grade 5 for experienced representatives

This pay structure example highlights the base pay while offering incentives that reward performance.

Restaurant server pay structure

A restaurant server role typically follows a step pay structure or wage-based system. The posting might outline an hourly rate and opportunities for increases based on tenure or performance. For example:

• Wage: $15 per hour to start
• Pay structure: Step pay with annual increases of $1 per hour
• Tips: Eligible for customer tips
• Pay grades: Grade 1 for new servers, Grade 2 for lead servers

This pay structure example clearly shows how servers can progress in pay over time while also benefiting from tips.

How to choose the right pay structure for your business

Here’s a step-by-step guide to help you choose and implement a compensation structure that works:

Step 1. Consider the business size and industry

Evaluate your company’s size and industry to determine the complexity of your pay structure. A smaller business with fewer employees and straightforward roles may only need a basic system with a few pay ranges. In contrast, larger companies, especially those in industries like tech, healthcare, or finance, often require more detailed pay grades and wider pay bands to accommodate various roles and levels of expertise. The industry also dictates pay expectations; for example, tech firms typically need higher pay bands than retail businesses to remain competitive.

Aligning your pay structure with your business size and industry ensures that your system is both manageable and appropriate.

Example: If you run a 15-person landscaping business, you might stick to three pay levels: Apprentice ($18-$22/hour), Skilled Worker ($22-$28/hour), and Crew Lead ($28-$35/hour). This keeps things simple and clear.

Step 2. Conduct job evaluations 

Analyze each role to understand its responsibilities, required skills, and overall value to your business. Break down each job by key tasks, qualifications, and the level of experience needed. Rank the roles based on their complexity, decision-making responsibilities, and impact on company goals. This process can help you place jobs into the right pay grades and justify differences in pay rates. Consider involving managers and team leads in this process to ensure accurate evaluations and to capture the full scope of each role.

Conducting thorough job evaluations ensures you assign fair and consistent pay. It prevents misunderstandings and gives employees a clear picture of why their role fits within a particular pay grade.

Example: For an accounting team, compare the duties of a Junior Accountant and a Senior Accountant. If the Junior role handles basic data entry and the Senior role manages financial reporting, they belong in different pay grades with different pay rates.

Step 3. Benchmark salaries 

Gather market data to see what competitors pay for similar roles. Use resources like salary surveys, industry reports, or compensation databases to understand typical salary ranges and base salaries for each position. Focus on businesses of similar size, location, and industry to get the most relevant data. After collecting this information, you can compare it to your current pay rates and adjust accordingly to stay competitive.

Benchmarking salaries assures your business offers fair and attractive compensation. Without this step, you risk losing talent to competitors or overpaying, which can strain your budget.

Example: If a salary survey shows that HR coordinators in your area earn between $50,000 and $60,000, you might set your salary range at $52,000-$58,000. 

Step 4. Define pay grades and bands 

Use your job evaluations and salary benchmarking to create clear pay grades and pay bands. Each pay grade should cover roles with similar responsibilities and skill levels. Define a salary range for each grade, including a minimum, midpoint, and maximum. These bands provide room for growth and salary increases as employees gain experience or take on more responsibilities. It's important to be transparent about how employees can advance through the grades and what skills or achievements they need to progress.

Well-defined pay grades and bands give structure to your compensation plan and make career paths clear to employees. This clarity helps manage expectations and supports fair pay practices.

Example:
Grade 1 (Entry-Level) – $40,000 to $50,000
Grade 2 (Mid-Level) – $50,000 to $65,000
Grade 3 (Senior-Level) – $65,000 to $85,000

Rippling: Streamlined pay structures and compensation for your employees 

Rippling’s all-in-one HR platform simplifies pay structure management. With Rippling HCM, you can create and manage pay grades, salary ranges, and base salaries all in one place. The platform operates on a single source of truth, meaning employee data stays consistent across payroll, and headcount planning, too.

Rippling’s integration with Carta allows access to real-time market data from over 40,000 companies. This integration helps you build accurate, customized compensation bands tailored to your budget and talent needs. Features like automated approval chains and role-based permissions ensure your pay rates stay within budget and comply with company policies.

Plus, you can automate tasks like salary increases and off-cycle payroll runs, while confidently managing compliance with federal, state, and local laws. With Rippling in your corner, you can eliminate manual work, reduce errors, and ensure fair and competitive pay structures for your employees.

Pay structure FAQs

What is a job-based pay structure?

A job-based pay structure sets compensation based on the role itself rather than the individual performing it. Each role falls into a specific pay grade with a defined salary range and base salary. This structure ensures you compensate employees fairly based on job responsibilities and market data. For example, a Marketing Coordinator may fall into a pay range of $50,000 to $60,000, regardless of who fills the role.

What tools or resources can help to design and manage a pay structure?

Several tools can simplify pay structure and benefits design. HR software like Rippling help you define pay grades, set salary ranges, and automate salary increases. It can also quote for, compare, and enroll your employees in more than 4,000 plans from the nation’s leading carriers, including Aetna, Humana, and Blue Cross Blue Shield. Rippling offers access to reliable market data through integrations like Carta so you can assure your compensation remains competitive. Conducting regular salary surveys can also help you stay aligned with industry standards.

How can you communicate pay structure changes to employees?

Transparency is key when explaining pay structure changes to employees. Consider holding a company-wide meeting or sending a detailed email outlining the changes. Include information about new pay grades, salary ranges, and the reasons behind the changes. Provide a clear path for salary increases and explain how employees can progress within the new structure. It's also important to invite questions and feedback to make sure everyone understands the updates.

What legal considerations should I be aware of when setting a pay structure?

When setting up a pay structure, ensure you comply with federal, state, and local laws. These include regulations on minimum wage, overtime pay, and equal pay for equal work. Consider how you compensate employees in different locations and avoid discrimination in your types of pay and salary ranges. Staying informed about labor laws and consulting legal experts can help you avoid costly compliance issues.

Does a pay structure apply to contractors?

Pay structures typically apply to employees, not contractors. Businesses pay contractors based on agreed-upon rates or project fees, not pay grades or salary ranges. Using market data helps set fair contractor rates. Misclassifying contractors as employees, or vice versa, creates legal and financial risks. Clearly define the working relationship and consult legal guidelines or experts to stay compliant.

This blog is based on information available to Rippling as of December 16, 2024.

Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.