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Published on: Reward

The Most Popular Types of Pay Structures Explained

One of the most crucial considerations for any employer is how to pay their employees fairly and equitably. Get your remuneration strategy right, and you will be able to attract and retain the top talent for your business. 

The path of progression will be consistent and transparent, providing motivation and engagement for your employees. Plus, you will be equipped to make accurate financial projections and stay within your budget.

But choosing and implementing the right type of pay structure can be challenging. With so many variations, how do you know which one is right for your organisation?

The best way to start the process is to get acquainted with the different types of pay structures.

In this article, you will learn about each type and find out the essential steps for creating a pay structure within your business.

The Most Popular Types of Pay Structures Explained

Different Types of Pay Structures?

An estimated 60% of UK employers use a pay structure. Most often, these remunerations strategies are used in larger companies and public sector organisations.

Each type of pay structure has different characteristics. Some fit well with hierarchal organisations, while others may be better suited to more dynamic arrangements.

The right structure for your business will depend on a range of factors, including your current payment system, your industry, the size of your business, and your company vision.

Here’s an overview of the main pay structures:

  • Single Grade/Individual Job Structure

Each job or person within an organisation is attached to a single pay rate, often hourly or weekly. 

This is often used for lower-skilled jobs where the popular market rate is widely known; however, it may also occur in more senior positions, where a remuneration package needs to be designed to attract a specific individual.

There is no formal structure for pay progression; however, pay rates are likely to increase in line with inflation.

  • Individual Pay Ranges

Instead of a fixed salary for each individual, every job is attached to a pre-defined pay range. 

This range can vary between roles but provides employers with more flexibility to increase pay as a reward for good work

Individual pay ranges are often preferred over individual rates as they provide more scope for pay progression.

  • Narrow-Graded Structure

Typically made up of ten or more different grades, with jobs slotted into each grade. 

Progression is usually linked to the length of service, with employees moving up through the grades in increments of six or twelve months.

The disadvantage of this type of pay structure is that employees can potentially reach the top of the range quite rapidly, leading to demands for upgrading.

  • Broadbanding

In broadbanding pay structures, there are fewer grades (or bands) – typically four or five. Each band has a broader range of pay rates and can cover a wide range of different job types.

This design allows for greater flexibility than more traditional graded structures.

Historically, broadbanding allowed for unlimited progression. However, this can lead to concerns over pay equity, so there are usually upper limits to each band.

Broadbanding systems are useful for rewarding higher levels of performance. They also provide employees with a clear path to their next pay increase, which can be highly motivating. 

The downside is that there is less control over pay differences between employees with the same job type. 

  • Job Families

In this type of pay structure, jobs with similar functions are grouped into families. For example, sales staff may be in one family, with IT staff in another.

Each family has six to eight levels, similar to the broadbanding grades. Within each family, there are different pay structures.

This versatile approach is useful for implementing higher rates for specialist staff or highly sought-after workers. 

Job family pay structures provide freedom and control while still offering transparency and a clear path for progression. It’s also easy for organisations to review and adjust each family without affecting the rest of the business.

  • Career families

As with job families, the career family pay structure groups different roles into families. However, in this case, every family uses the same pay ranges for all the levels it contains.

There are generally four or five bands covering all roles within an organisation. Each role is grouped into a different career band. 

This pay structure emphasises career mapping and progression rather than the focus on greater pay provided by the job families approach.

  • Pay Spine

Pay spine pay structures are similar to narrow grades. There is a series of incremental pay points that allow for progression based on the length of service. 

This type of pay structure is often found in local government.

How do You Create a Pay Structure?

Selecting the right pay structure for your organisation requires a comprehensive understanding of your organisation and industry. 

There is no cookie-cutter solution for deciding which type will fit your business. You may decide on one of the above or come up with a tailored solution using different elements from each.

Below are some of the most crucial steps to choosing and creating a pay structure:

  1. Review your current situation

You need a thorough understanding of how things stand. What are the current pay rates and job roles? How do your employees progress? What reward strategies are currently in place? 

Start by reviewing your current pay structures. Look at them objectively to assess if they are working well or need adapting.

  1. Create a dedicated team

Redesigning your pay structures is no small task. Ideally, you should assign the task to a project manager and provide them with a support team. This could be an existing member of your HR team or an external HR consultant who can work closely with your management team.

  1. Determine your budget

Ensure you have set aside adequate funds to cover the cost of those involved in assessing and creating your pay structures. You may also need to pay for external consultants or market research.

There are likely to be costs involved in implementing new pay structures too, so ensure you have your figures in order before getting ahead of yourself.

  1. Think about transparency

Ideally, full transparency is the best approach, where you inform your employees about the process from the beginning, keeping communication consistent and clear, and allowing them the opportunity to provide feedback and voice any concerns. But be careful with this – if you tell the business what you are doing you need to be confident you will be in a position to share the outcome at the end. If you don’t know your current situation, especially how people are paid vs where they should be paid, it might be too costly to tidy up straight away, in which case a phased approach to transparency might be needed.

  1. Conduct a job evaluation

This is one of the most vital aspects of designing a new pay structure. Regardless of the system you choose to use, you will need to comprehensively assess each role in order to place it in a fair comparative framework.

  1. Decide on the details of your pay structure

By now, you will have a clear idea of which pay structure will fit with your organisation. However, you will still need to tailor it by deciding on the details, such as how many grades it will contain and what ranges each grade will cover.

  1. Transition to the new structure

How will you transition each employee to the new structure? Will you do this all at once during the annual pay review, or will you roll it out in stages? 

Remember to prioritise fairness as you create and implement the new structure to ensure that no employees or groups of employees are disadvantaged by the process.

Making Sure it Fits

Whatever pay structure you select, you must be certain that it supports your overall talent strategy, which includes recruitment and hiring, promotions, and performance management. 

A misaligned pay structure can result in low engagement, high turnover, complicated HR management, and decreased profitability. So, it’s essential to invest your resources wisely to ensure the best solution for your business.

If you need help with creating the right pay structure for your organisation, then contact me for guidance and support.