Pay Structures Matter

Pay structures are a critical tool for ensuring pay levels for jobs within an organization are externally competitive and internally fair, form the underlying framework of pay systems, and define the link between employee pay and job value.

A pay structure consists of a pay range or series of pay ranges, commonly referred to as pay grades, for jobs based on market and internal value. The pay range contains a minimum, midpoint, and maximum rate of pay, also known as control points. The midpoint represents the market value for jobs within the competitive peer group. Salary survey data for benchmark jobs is used for setting the control points for each pay range in a market-based structure.

Pay System Goals

When strategically designed and appropriately administered, pay structures are an effective management tool for supporting the organization’s pay strategy. They enhance the organization’s ability to manage human resources more effectively and achieve the following objectives:

• Establish market-competitive pay levels for recruitment and retention of top talent
• Manage internal equity by controlling pay variance between employees in the same or similar position and same pay grade
• Provide meaningful career progression by ensuring jobs with more responsibility are paid noticeably more
• Define pay limits and control payroll costs to avoid overpayment of salaries

Pay Range Width

The difference between the maximum and the minimum is the range width. The range width controls the pay variance between employees doing the same or similar work. All pay ranges in a pay structure may not have the same range width. Pay ranges can be set anywhere from a 10 percent to a 50 percent width between the highest and lowest rates.

Normally, the range width for most jobs should not exceed 50 percent. The tighter the spread of the pay range, the more control the organization has paying competitive rates and controlling pay equity. Conversely, the wider the spread of the pay range, the less control an organization has over internal equity, competitive entry rates, and payroll costs.

Design Characteristics

Traditional pay structure designs in the private sector typically have wider pay ranges for management and executive jobs and narrower pay ranges for entry level jobs. This approach reflects the higher learning curve and greater variance in employee skills and performance for management jobs. Employees in entry level jobs typically master job skills faster and have greater opportunities, over time, for job advancement.

School district pay structure design usually has an inverse pattern from traditional pay structures with wider pay ranges for entry level jobs and narrower pay ranges for upper level jobs. The difference between traditional and school pay structure design is caused by a difference in values and pay strategy. The pay strategy in traditional pay structures is to compress employee pay around the market rate.

School districts typically value years of service above other factors. Teacher pay is a common example of the “equal pay for equal years of service” pay strategy, and often this strategy or a hybrid is repeated for other job groups even if not appropriate. As a result, these pay structures tend to be wider than those in traditional pay structures.

Pay structures provide human resources the appropriate tools for managing employee pay in a more fair and systematic process. As with any system, pay structures need to be evaluated regularly and periodically adjusted to maintain alignment with the market and the organization’s pay strategy for recruiting and retaining talent.