What is a salary structure? Types, pros, and cons

What is a salary structure?

Put simply, a salary structure is the framework an organization uses to determine employee pay. It establishes general pay ranges for employees in particular roles, departments, or responsibility levels.

Most salary structures rely on pay ranges, which offer flexibility depending on the employee’s skills and credentials. For example, someone just starting their career in a junior position might receive an offer for an amount near the lower end of the pay grade for that role. Their colleague who has succeeded in a similar position for a few years and has additional certifications might earn near the top of the range.

Some structures base compensation on individual merit, while others prioritize standardization and equity. The best way to understand those differences is to examine different types of salary structures in detail, so let’s get the ball rolling.

Traditional salary structures

The traditional salary structure, also called a graded salary structure, assigns compensation based on a hierarchy of roles and responsibilities. Employees’ roles determine their pay grades, and their qualifications determine where they fall within each pay grade.

Take a sales department with three levels of responsibility and seniority:

• Junior sales associate, earning $60,000 to $80,000
• Sales associate, earning $80,000 to $100,000
• Sales lead, earning $100,000 to $120,000

In this simplified example, an entry-level candidate with minimal experience might start in a junior role at around $60,000. An employee who has been in the role for a year and has contributed to several key closings earns in the high $70,000s.

Advantages of traditional salary structures

The traditional pay system is easy to understand, as it is the most common salary structure design. Candidates are accustomed to seeing this range in their compensation research and job postings. Graded salary structures provide transparency and equity while leaving room for individual achievement. Employees know they earn similarly to those in a comparable position but can make more with effort and accomplishment.

Disadvantages of traditional salary structures

The structure of a graded salary system can be too narrow for some organizations. Companies without leveled management and non-management roles might see employees “grow out” of a certain compensation level but not be the right fit for the following position on the ladder. Some companies may not have the resources or time to maintain a complex graded salary system. Monitoring and adjusting salary ranges can be time-consuming, particularly for companies where owners and managers serve multiple roles.

When to consider a traditional graded salary structure

Graded salary structures fit cleanly within market norms, making them ideal for most traditionally structured organizations. If that doesn’t describe your company, don’t worry! You have more options.

Broadband salary structures

A broadband pay structure combines multiple pay grades into a single “band,” with several positions in one band and a wider salary range for each. This structure has fewer pay categories but more room for pay increases.

Take the previous example of a company with three sales roles. In a broadband structure, those roles might become one Sales band with compensation between $60,000 and $120,000.

Companies with broadband structures typically base increases on individual performance and merit. A raise is less likely to come with a title change, a difference that has positive and negative implications.

Advantages of broadbanding

A broadband salary structure makes salary less dependent on job titles by connecting it directly to skill growth and performance. Employees who advance their skill set or contribute significantly to the company can receive immediate compensation benefits without waiting for a promotion.

This system incentivizes upskilling and shows that an employer prioritizes talent development, which today’s employees value highly. According to LinkedIn’s 2024 Workplace Learning Report, 70% of employees say a culture of learning makes them feel more connected to their organization. In the same survey, companies with a strong learning culture showed 57% better retention.

Broadband structures also provide employers with more staffing flexibility. Organizations can shift employee responsibilities and adjust pay accordingly without strictly leveled positions.

Disadvantages of broadbanding

The partial disconnect between pay and position isn’t always a positive. It leaves less room for recognition via promotion, something that employees may have come to expect. Broadbanding also requires significant effort to maintain fairness and transparency. Companies must communicate how employees can earn more so that raises feel equitable.

Finally, broadband pay structures can be more challenging to align with market norms. Resources like Glassdoor and Payscale publish typical pay ranges based on tiered roles, which may not correspond with a company’s band system.

When to consider a broadband salary structure

Broadband pay structures can work well for developing organizations and those with frequently shifting staffing needs. Consider broadband if your company falls into any of the following categories:

• Startups: Broadband structures offer more flexibility for new companies where roles and responsibilities change regularly, such as those in startup mode.
• Small businesses: Organizations with smaller teams can benefit from a slightly looser pay structure.
• Tech companies: The project-based nature of tech lends itself well to the broadband structure, which allows for more mobility within roles.

These examples don’t constitute an exclusive list. If you think a broadband structure could work for your business, it’s worth exploring.

Moving on, it’s time to get familiar with how a market-based structure operates.

Market-based salary structures

While broadband structures focus on individual qualifications, market-based compensation prioritizes external data. This compensation philosophy starts by measuring what other employers offer and then sets pay grades and ranges accordingly.

Some companies with market-based structures set a broader pay range for a specific position and divide that range into multiple grades. For example, a doctor’s office hiring for a medical office manager may set a pay range of $50,000 to $70,000. Within that range, there are four pay grades, each with a range of $5,000, to account for variations in training and experience.

Advantages of market-based compensation

Market-based compensation helps companies stay competitive in terms of talent acquisition. According to a 2024 survey, almost two-thirds of professionals open to new opportunities are in the market because they want to earn more. That’s more than double the second-place answer of
“need a fresh challenge.”

Basing pay on market norms helps companies attract top talent, particularly if they can offer higher-than-average pay. Giving higher salaries can also mean retaining a salaried employee who is browsing for other opportunities but finds that they earn more where they are.

Disadvantages of market-based compensation

Market-based compensation emphasizes fairness broadly but can miss the mark when rewarding those already on staff. Your top talent may be worth more than what you’ve calculated as your market-based range. Market data can also be inaccurate or incomplete. Running an independent analysis can help, but it is often time-consuming and expensive.

When to consider a market-based salary structure

Market-based structures work best for companies with industry-typical staff breakdowns. Conducting and applying market research is more straightforward when other companies have job titles similar to yours.

Let’s shift gears now the step salary structure approach to compensation.

Step salary structures

A step salary structure creates a fixed progression for pay increases within a role, department, or company. These increases are standardized across the board, with seniority often determining progression. One common example is a public school district that increases a teacher’s pay for every year of service. Many municipal employees work under this type of system.

Advantages of step structures

Stability and consistency are the strongest features of a step salary structure. Employees know that if they continue to show up and be of service, their employer will compensate them for their loyalty.

Disadvantages of step structures

In some cases, a step salary structure may discourage high achievement. Because raises happen on a schedule, there’s little monetary incentive for employees to go above and beyond.

When to consider step salary structures

Step structures work best in workplaces where performance is challenging to measure objectively. They also work well when internal knowledge is key and tenure is particularly valuable.

Key factors in choosing the right salary structure

Each salary structure works for different types of organizations. Consider these factors in your decision-making process:

• Organizational structure: It makes a difference whether you have defined roles that match well with salary tiers or need more flexibility.
• Growth stage: More established businesses may do better with traditional and fixed structures.
• Industry and location: Job markets have varying expectations, and aligning with those norms can make you an easier sell to candidates
• Employee categories: The best pay structure can depend on whether you offer salary vs. hourly pay and full-time or part-time positions.

As you learn more about HR, you develop a clearer picture of what compensation structures work in which situations. Take time to make the right decision and use the resources available.