Types of Pay Structures

Types of Pay Structures

Pay structures, also known as salary structures, set out the different levels of pay for jobs, or groups of jobs, by reference to:

  • Their relative internal value, as established by job evaluation;
  • External relativities, via market rate surveys; and
  • Where appropriate, negotiated rates for the job.

The main characteristics of pay structures are that they:

  • Indicate rates of pay for different jobs;
  • Provide scope for pay progression via performance, competence, contribution, skill or service; and
  • Contain pay ranges for jobs grouped into grades, individual jobs or job families.

Pay structures are important in an organization because they:

  • Establish a logically designed framework within which equitable, fair and consistent reward policies can be implemented;
  • Determine levels of pay for jobs and people;
  • Form a basis for the effective management of relativities;
  • Help monitor and control the implementation of pay practices; and
  • Communicate the pay opportunities available to employees.

The most important types of pay structures, or salary structures are:

1. Narrow-graded structure

A narrow-graded structure consists of a sequence of job grades into which jobs of broadly equivalent value are placed. There may be ten or more grades and long-established structures, especially in the public sector. Grades may be defined by a bracket of job evaluation points so that any job for which the job evaluation score falls within the point’s bracket for a grade would be allocated to that grade. Alternatively, grades may be defined by grade definitions or profiles, which provide the information required to match jobs set out under job demand factor headings (analytical matching). This information can be supplemented by reference to benchmark jobs that have been already graded as part of the structure design exercise.

2. Broad-graded structures

Broad-graded structures have six to nine grades. They may include ‘reference points’ or ‘market anchors’, which indicate the rate of pay for a fully competent performer in the grade and are aligned to market rates in accordance with ‘market stance’ policy.

The grades and pay ranges are defined and managed in the same way as narrow-graded structures except that the increased width of the grades means that organizations sometimes introduce mechanisms to control progression in the grade so that staffs do not inevitably reach its upper pay limit. Broad-graded structures are used to overcome or at least alleviate the grade drift problem endemic in multi-graded structures.

If the grades are defined, it is easier to differentiate them, and matching (comparing role profiles with grade definitions or profiles to find the best fit) becomes more accurate. But it may be difficult to control progression and this would increase the costs of operating them, although these costs could be offset by better control of grade drift.

3. Broad-banded (pay ranges) structures

Broad-banded structures compress multi-graded structures into four or five ‘bands’. The process of developing broad banded structures is called ‘broad-banding’. For example, all teaching jobs in universities are reduced to three broad grades namely, Professor, lecturer and tutorial fellow.

Bands are unstructured and pay is managed much more flexibly than in a conventional graded structure (no limits may be defined for progression, which depended on competence and the assumption of wider role responsibilities) and much more attention is paid to market rates that governed what were in effect the spot rates for jobs within bands.

Each grade or band has a pay range or scale with a minimum and a maximum. It also has a reference point. The reference point is the market rate i.e. the going rate for the job in the market and is equivalent to the mid-point or the maximum of the range depending on the pay progression method used.

4. Job family structures

Job families consist of jobs in a function or occupation such as marketing, operations, finance, IT, HR, administration or support services, which are related through the activities carried out and the basic knowledge and skills required, but in which the levels of responsibility, knowledge, skill or competence levels required differ.

In a job family structure, different job families are identified and the successive levels in each family are defined by reference to the key activities carried out and the knowledge and skills or competences required to perform them effectively.

They therefore define career paths i.e. what people have to know and be able to do to advance their career within a family and to develop career opportunities in other families. Typically, job families have between six and eight levels as in broad-graded structures.

5. Career family structures

Career family structures resemble job family structures in that there are a number of different ‘families’. The difference is that in career family, jobs in the corresponding levels across each of the career families are within the same size range and, if an analytical job evaluation scheme is used, this is defined by the same range of scores.

Similarly, the pay ranges in corresponding levels across the career families are the same.

In effect, a career structure is a single graded structure in which each grade has been divided into families. Career family structures focus on career mapping and career development as part of an integrated approach to human resource management. This is as important a feature of career families as the pay structure element, possibly even more so.

6. Pay spines

Pay spines consist of a series of incremental ‘pay points’ extending from the lowest to the highest paid jobs covered by the structure. They may be standardized from the top to the bottom of the spine, or the increments may vary at different levels, sometimes widening towards the top.

Job grades are aligned to the pay spine and the pay ranges for the grades are defined by the relevant scale of pay points.

The width of grades can vary and job families may have different pay spines.

Progression through a grade is based on service, although an increasing number of organizations provide scope for accelerating increments or providing additional increments above the top of the scale for the grade to reward merit.

7. Spot rates

Some organizations do not have a graded structure at all for any jobs or for certain jobs such as directors. Instead they use ‘spot rates’. They may also be called the ‘rate for the job’, more typically for manual jobs where there is a defined skilled or semiskilled market rate that may be negotiated with a trade union. Spot rates are quite often used in retail firms for customer service staff.

Spot rates are sometimes attached to a person rather than a job. Unless they are negotiated, rates of pay and therefore relativities are governed by market rates and managerial judgement. Spot rates are not located within grades and there is no defined scope for progression while on the spot rate.

There may, however, be scope for moving on to higher spot rates as skill, competence or contribution increases. Job holders may be eligible for incentive bonuses on top of the spot rate.

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