Types of Pay Structure: Essential Guide

A pay structure is a framework that outlines how employees are compensated within an organisation. It provides a systematic approach to setting salaries, ensuring consistency, fairness, and alignment with business objectives.

There are various different types of pay structure that can be implemented within an organisation, although the most suitable structure will depend on a number of factors including the nature and size of your business, the composition of the workforce, and the ways in which you want to incentivise and reward that workforce to meet your objectives.

Choosing an appropriate pay structure involves several considerations. Employers must ensure that pay arrangements are competitive within their industry to attract skilled employees while remaining sustainable for the business. A well-structured pay system should offer clear pathways for salary progression, helping to motivate staff and support retention. However, overly rigid structures may limit flexibility and hinder the ability to reward exceptional performance effectively.

In this guide, we look at some of the most common forms of pay systems, explaining how they differ from one another, as well as their advantages and disadvantages, with advice for employers when deciding on the different types of pay structures most suited to their business.

 

What do we mean by ‘pay structure’?

 

A pay structure can be defined as a collection of wage grades, bands or levels that link related jobs within a hierarchy or series. It is a system that defines what each person is paid, or what a particular job role attracts, based upon the value of that job or individual to the business and their effectiveness within that role. For each type of possible pay structure there are a variety of different methods for deciding on and separating employee pay, providing a framework for pay progression and reward strategies.

Pay structures matter because businesses not only need to indicate rates of pay for different jobs or people within an organisation, and develop clear processes for managing pay, they need to ensure that they are consistently paying their staff appropriately for what they do and to reflect their worth to the business. A logically-designed framework within which equitable, fair and consistent reward policies can be implemented will also enable you to encourage the desired behaviours and performance in your workforce to meet your end goals.

The principle objectives of a pay structure are therefore:

 

• to align your reward strategy with your business strategy
• to help ensure fairness and equity within your organisation
• to develop clear processes for effectively managing pay
• to enable staff to understand how pay is managed within the organisation and what pay opportunities are available to them.

 

 

What are the different types of pay structure?

 

There are a number of different types of pay structures, although many can be distinguished by two key characteristics: the number of grades, bands or levels, and the width or span of each. Each grade, band or level has a pay range or scale with a minimum and a maximum, where the system of grading forms an important part of reward systems within the workplace.

Some of the different options available to employers include:

 

Market-Based Pay Structure

 

A market-based pay structure determines employee salaries based on prevailing market rates and benchmarking against competitors. Regular analysis of market data allows businesses to remain competitive and attract top talent while ensuring salaries are in line with industry standards. Keeping pay aligned with the broader job market helps maintain fairness and competitiveness, although the need for frequent adjustments can make administration challenging and time-consuming.

 

Individual Pay Rates

 

One of the most recognisable types of pay system is known as individual pay rates, also referred to as spot salaries or spot rates. With a spot salary, there is a single hourly or weekly pay rate, or a single annual salary, attached to each job or possibly each person within an organisation.

This predefined approach allows for easy and accurate estimation of hiring viability and employee value. However, the absence of a formal pay progression structure can make it more difficult to engage employees, as their only option for development and growth is through direct promotion. Even if policies exist for moving to a higher spot rate or adjusting rates in line with market changes, employees may become demotivated and dissatisfied.

Strictly speaking, individual pay rates or spot salaries do not constitute a pay structure and are often used for low-skilled roles where market rates are widely known or for senior positions requiring tailored pay packages to attract and retain specific individuals.

 

Individual Pay Ranges

 

Individual pay ranges, also known as salary ranges, differ from individual pay rates as they provide a pre-defined scale rather than a fixed salary. Instead of a set amount, employees are offered a salary within a specific range.

These ranges can vary by job but offer employers more flexibility to increase pay based on performance and contribution. Individual pay ranges provide a clear framework for recruitment and budgeting while allowing formal pay progression. Employees may start at the lower end of the range and, through performance, work their way to the top, creating motivation and a clear path for career development.

 

Narrow-Graded Pay Structures

 

Narrow-graded pay structures consist of a large number of grades, usually ten or more, into which jobs of similar value are placed. These structures are commonly found in the public sector or closely regulated industries.

Progression through grades often occurs via service increments, such as annual or bi-annual increases. However, due to the narrow range within each grade, employees tend to reach the top quickly. Additionally, the small differences between grades can lead to grade drift, where roles are unjustifiably upgraded.

 

Broad-Graded Pay Structures

 

Broad-graded pay structures contain fewer grades, typically six to nine, with wider salary bands within each grade. This approach can help mitigate the grade drift issue seen in narrow-graded structures by providing more room for salary growth within each grade.

These structures offer greater flexibility, allowing employees to progress further within a given pay band without needing immediate promotion to the next grade. Broad grading balances structure with flexibility, making it suitable for organisations seeking to offer career development while maintaining control over pay progression.

 

Step Pay Structure

 

A step pay structure offers a predefined pathway for salary progression, typically based on tenure or specific performance milestones. Employees move through a series of pay steps at regular intervals, which creates a transparent and predictable pay increase system. Frequently used in public sector roles and unionised workplaces, this structure provides a fair and consistent approach to pay progression. However, it may not effectively reward employees who exceed expectations or those who develop new skills rapidly.

 

Broadbanding

 

Broadbanding uses an even smaller number of pay bands, often just four or five, to allow for greater pay flexibility compared to conventional graded structures. In this system, there are typically no limits on pay progression within each band.

This approach is beneficial for rewarding higher levels of performance or contribution and provides a clear progression pathway for employees. It also facilitates lateral movement within the organisation, as changing roles does not necessarily require moving into a new pay grade.

Despite its flexibility, broadbanding has limitations. Wide bands may result in employees taking on more challenging roles without receiving a pay increase, which can be demotivating and lead to disengagement.

 

Skill-Based Pay Structure

 

A skill-based pay structure links employee remuneration to the skills they acquire and utilise in their role. Increasing pay based on the development of new skills encourages continuous learning and professional growth. Employees benefit from clear incentives to expand their expertise, while businesses gain a more versatile and capable workforce. Managing a skill-based system effectively requires robust evaluation processes to assess employee competencies accurately.

 

Competency-Based Pay Structure

 

A competency-based pay structure is similar to skill-based pay but focuses on broader competencies such as leadership, communication, and problem-solving abilities. Employees receive compensation based on their demonstrated competencies rather than just technical skills. Encouraging the development of these attributes aligns pay with long-term organisational goals and fosters a culture of professional development. However, assessing competencies can be subjective, making it difficult to apply consistent evaluation criteria.

 

Performance-Based Pay Structure

 

A performance-based pay structure ties compensation directly to individual, team, or organisational performance. Bonuses, commissions, and other incentive schemes are often used to reward employees for achieving specific targets or contributing to business success. Offering financial incentives based on performance can motivate employees to achieve high standards, but it may also lead to increased pressure and competition within the workforce. Striking the right balance is essential to ensure long-term motivation without creating undue stress.

 

Time-Based Pay Structure

 

A time-based pay structure determines employee wages based on the number of hours worked. This approach is commonly used for hourly-paid staff in industries such as hospitality, retail, and contract work. Employees are compensated for their time rather than their output or skill level, which ensures fairness for those working shifts or variable hours. Despite its simplicity, a time-based approach does not always reward productivity or efficiency, potentially leading to inconsistencies in employee motivation.

 

Commission-Based Pay Structure

 

A commission-based pay structure provides compensation based primarily on sales or performance outcomes. This structure is widely used in sales-related roles where employees earn a percentage of revenue generated through their efforts. The opportunity to earn high rewards can drive motivation and performance, but fluctuating income levels may create financial instability for employees. Offering a base salary alongside commission earnings can help balance income consistency with performance incentives.

 

Hybrid Pay Structure

 

A hybrid pay structure combines elements of various pay models to create a tailored approach that meets the needs of both employees and the organisation. For example, a combination of a base salary with performance-based bonuses can provide financial stability while encouraging high performance. Hybrid structures offer flexibility and can be customised for different roles within the company. Managing such a system effectively requires careful planning to ensure fairness and consistency across the workforce.

 

Job Families

 

Job family structures divide roles into distinct groups where the nature and purpose of the work are similar but responsibilities vary by level. This structure usually consists of six to eight levels within each family, such as sales or IT.

Grouping jobs in this way provides transparency and allows for tailored pay structures within each family. Employers can refine pay systems without affecting the broader organisation, and employees can see clear career progression pathways.

 

Career Families

 

Career family structures resemble job family structures but apply the same grading and pay ranges across all families within the organisation. This approach focuses on career mapping and development rather than purely on pay.

By standardising grades across different functions, employees have a clear and consistent understanding of their potential career trajectory, supporting long-term professional development.

 

What are the benefits of introducing pay structures?

 

Introducing the right pay structure, that meets both the needs of your organisation and your workforce, can provide your business with all kinds of benefits, including:

 

• Fairness: creating an appropriate pay structure will help to ensure that you treat your workforce fairly. Employees will understand exactly where their role fits into the organisation and that a fair process exists to determine both their job grade and pay, free from unlawful bias. This is especially important in the context of eliminating discriminatory pay practices between men and women, where an employer is under a duty to ensure equal pay for equal work.
• Transparency: having a rational, fair and transparent pay structure in place will enable staff to understand how pay is managed within the organisation. It will also inspire confidence in employees and potential recruits that you’re committed to fair working practices, including equality of pay based on objective factors like fair job evaluations.
• Motivation: understanding the avenues open to career and pay progression is hugely motivating for employees. It allows for open dialogue about what’s required to progress pay or grade within the business and, as such, prevents less productive discussions between employees and line managers with no real focus.
• Engagement: key components to creating employee engagement is an employee feeling fairly treated, understanding what steps can be taken to progress their career, knowing where they sit within the organisation and how their contribution adds to the overall effort. A clearly communicated pay structure supports all these things.
• Supporting management: pay discussions can be difficult conversations for managers to have with with their team or potential new hires. A clear pay structure provides clarity in how to manage pay, supporting better decision-making around pay progression etc.
• Pay budgets: a pay structure creates a basis for pay decisions and affordability. By understanding where your employees fit against the pay structure – within, above or below the band – informs your pay decisions and allows for effective allocation of pay budgets. If not always saving you money, it will ensure you get the most value from it.

 

 

How to select and implement a structured pay system

 

When it comes to selecting and implementing a structured pay system, the right choice for your organisation will depend largely on your sector and unique situation. With so many different types of pay structures to choose from, it can be difficult to determine which is best for your organisation. In some cases, a tailored solution, combining elements of each may be required. Still, for all organisations, regardless of size or sector, the best pay system is often one that balances the strategic and financial needs of the business with the needs of its workforce. It’s also one that provides employees with transparency, fairness and equality.

Even if you have a suitable pay structure already in place, you should regularly review the way that you structure pay and determine salary progression as economic, political, regulatory and technological contexts change. If existing pay arrangements can’t adapt to meet the requirements of both your organisation and workforce moving forward, alternative approaches will be needed. By seeking expert advice, you can explore all available options, finding the right fit for both your business and your staff.

 

Need assistance?

 

DavidsonMorris’ HR specialists support employers with all aspects of employee remuneration and benefits. Working closely with our employment lawyers, we provide comprehensive guidance on how to approach employee entitlements to minimise legal risk while ensuring commercial goals are achieved and employee engagement is optimised. For help and advice, speak to our experts.

 

Types of pay structures FAQs

 

What is the purpose of a pay structure?

A pay structure provides a clear framework for how employees are compensated within an organisation. It helps ensure fairness, consistency, and transparency in salary decisions while supporting business objectives such as attracting and retaining talent.

 

How can an employer choose the right pay structure?

Selecting the most suitable pay structure depends on various factors, including the organisation’s goals, industry standards, employee expectations, and budget constraints. Employers should consider whether they require flexibility, a clear progression framework, or performance-based incentives to align with their business strategy.

 

Is it necessary to review pay structures regularly?

Regular reviews of pay structures are important to keep them aligned with market conditions, inflation, and evolving business needs. Periodic benchmarking against industry trends can help maintain competitiveness and employee satisfaction.

 

What are the benefits of using a performance-based pay structure?

A performance-based pay structure can motivate employees to achieve specific targets and contribute to business success. It helps create a results-driven culture and can reward high-performing individuals or teams. However, it should be implemented carefully to avoid excessive pressure or unhealthy competition.

 

Are broadband pay structures suitable for all organisations?

Broadband pay structures offer flexibility and can be effective in organisations that value skill development and lateral career movement. However, they may not be suitable for businesses that require clearly defined pay progression steps or operate in heavily regulated industries.

 

How do market-based pay structures work?

Market-based pay structures determine employee salaries by comparing them to similar roles in the industry or region. Employers conduct salary benchmarking to ensure that their pay rates remain competitive and attract the right talent while staying within budget.

 

Can employees influence their pay within a skill-based pay structure?

Employees in a skill-based pay structure can influence their earnings by acquiring and applying new skills relevant to their role. This encourages continuous learning and can lead to greater job satisfaction and career growth.

 

Do pay structures impact employee retention?

A well-designed pay structure can positively influence employee retention by providing clarity on pay progression, recognising performance, and ensuring fairness. Competitive and transparent pay practices contribute to job satisfaction and loyalty.

 

What are the risks of using a commission-based pay structure?

While commission-based pay structures can incentivise high performance, they may lead to inconsistent earnings for employees and potential financial instability. Employers should consider offering a base salary alongside commission to provide greater financial security.

 

Is a hybrid pay structure a good option for growing businesses?

A hybrid pay structure can be an excellent option for growing businesses, as it combines elements of different pay models to create a tailored approach that meets evolving business and employee needs. It offers flexibility while maintaining a balance between fixed and variable pay components.

 

Glossary

 

Term	Definition
Pay Structure	A framework that determines how employees are compensated based on factors such as job role, experience, and market conditions.
Spot Salary	A fixed salary assigned to a job role without variation based on experience or performance.
Pay Band	A defined range of pay for a particular job grade or level within an organisation.
Graded Structure	A structured system with multiple levels, each containing a salary range, offering clear progression routes.
Broadbanding	A pay structure with a small number of broad bands, providing flexibility in salary progression and career development.
Job Families	A grouping of similar job roles within an organisation, offering tailored pay structures and career paths.
Career Families	A system where all job families follow the same grading and pay scales, focusing on career development.
Pay Progression	The process by which an employee’s salary increases based on experience, skills, or performance.
Market-Based Pay	A pay system where salaries are determined by market research and industry standards.
Performance-Based Pay	A system linking compensation to individual, team, or company performance, often through bonuses or incentives.
Salary Range	A pre-defined scale within which an employee’s salary can increase over time.
Grade Drift	The tendency for roles to be unjustifiably upgraded due to narrow grading differences.
Service Increments	Scheduled increases in pay based on tenure or pre-determined milestones.
Commission-Based Pay	A pay structure that rewards employees based on their sales or business performance.
Hybrid Pay Structure	A combination of different pay structures to create a customised approach that suits an organisation’s needs.