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What is Employee Compensation Structure: Benefits & Best Practices

How you pay your employees is part of a bigger overall mission to attract and retain the best talent. What options are available for companies who want to stay competitive in the job market? See why the compensation guidelines you currently have in place and how new businesses can create a structure from scratch.

What is Employee Compensation Structure?

Also known as a “wage structure” or “salary structure,” a compensation structure is the strategy you use to determine how each employee in your company is paid. It considers information like the length of employment, industry minimums and maximums, and merit.

Developing a clear plan and communicating it to job candidates is vital to getting the right workers on board. It’s also a significant aspect of your company culture; having everyone know how they will be compensated can clear up confusion and potentially limit legal issues. When people know their compensation structure, they feel empowered to work harder for pay increases as well.

What Are the Common Compensation Structures?

There are three basic types of pay structures:

  • Traditional, or graded pay
  • Market-based, or benchmarked pricing
  • Broadband

Market-based is most popular, and broadband is the least used. Here is a more detailed description of each pay structure and how it can be applied in today’s companies.

Traditional Structure

In this compensation category, numerous pay grades are assigned per position. As an employee moves up based on performance, merit, or time at the position, they move up to the next pay grade.

The salary increase from one pay grade to the next is typically incremental(typically an increase of$1K-3K). This ensures that even a high-performing employee doesn’t hit the maximum pay limit for their position too quickly.

How do you determine when it’s time to move an employee on to the next grade? That should be well documented in your compensation structure. Performance metrics can play a role, such as sales goals for your sales teams or accuracy ratings for your QA teams. It’s ultimately up to you to decide which metrics to include, however, and some pay grade movement may be more personalized, especially in customer-facing jobs or positions that prioritize soft skills over KPIs.

Market-Based Structure

A market-based structure is exactly what it sounds like. By researching market data based on what other employers are paying for similar job positions, you can determine what you should pay. This structure still uses pay grades, and it can be set at a minimum that’s on par with what your competitors pay. This is the most popular system, and it can alleviate anxiety over not paying your workers enough to retain them.

Tips for researching positions include:

  • Use a combination of government data sources, such as the Bureau of Labor Statistics, job listings, and sites like Glassdoor to get a variety of wage examples.
  • Crowd-sourced sites may not be accurate, and extreme outliers should be questioned before adding them to your averages.
  • Compare similar positions based on more than just the title. Many jobs have identical titles and aren’t the same function at all. Likewise, the same job may be called different things in different industries or in different areas of the country. Make sure you are comparing the same job.

The market data you collect can become the basis for both your base salary and your salary caps.

Broadband Structure

In this lesser-used compensation plan, there are fewer pay grades and the overall salary ranges are bigger. There is more flexibility to give raises within the same pay grade without also moving an employee up one level.

One drawback to this method is that decisions may appear arbitrary to employees and others who don’t understand how the compensation plan is decided. You will need to work harder to document how you make pay choices, so that you avoid discriminatory practices in deciding who receives a raise and who doesn’t.

Why Do You Need a Structured Employee Compensation?

To cut out emotional complexities and ensure fairness among your employees, a structure employee compensation program is necessary. It’s also a useful tool to motivate teams to meet and exceed the goals that will result in achieving those higher pay tiers. A compensation structure can attract good workers to your organization, too.

How to Set Up a Compensation Structure

If you don’t already have a compensation structure in place, or yours is outdated or ineffective, start with these steps to creating the right plan for your company needs.

1. Establish Value for Each Position

Determine what each job title in your company is worth. You will likely want to use market pricing (including that research we mentioned above) to figure out what a particular job description should get paid. If you haven’t refreshed your salaries in a while, be prepared for some surprises. Also remember to compare job duties and responsibilities and not rely on job titles alone.

2. Consider the Company’s Competitive Posture

Where does your business compare to the rest of the pack? Do you pay more than other companies in your industry? Or do you pay less? If there is a considerable difference in pay, why? You may find that your attempts to pay more than others isn’t getting you a good ROI. You could also discover that your workers are grossly underpaid for the unique talents they provide.

3. Define Compensable Leverage for Your Company

Once you decide how attractive your base salary is for new workers, you need to determine your “compensable leverage.” This term refers to salary rate increases and how they match up to market averages.

When an entry-level programmer moves up a pay grade, are they still getting paid competitively? The difference between pay grades should be influenced somewhat by the market, so that those progressing through the ranks of your business still feel like they are fairly compensated along their career path. 

4. Look at External Inequalities

Ideally, every employee, in every position, feels that they are being compensated fairly. Sometimes, some positions are being paid differently (in comparison to market rates) than others. If your sales team is earning close to what other sales professionals in the same industries are making, but your customer service reps aren’t, this can cause a rift among workers and lead to employees dissatisfaction.

While no one sets out to have these types of inconsistencies, they can happen when the market changes quickly and your pay practices haven’t caught up. Take this time to compare all of your positions against the market.

5. Create Your Company Salary Structure

You’re now ready to make that compensation plan. Use the data you collected to make pay grades, including starting wages and salary caps for every position in your business. Another alternative is to group job titles that have the same pay rates into one group for easier tracking and documentation.

6. Match Current Employee Pay to Your New Structure

With a new plan in place, you’ll need to implement it for existing workers. You’ll likely find that some employees are underpaid, with others making more than what they should under the new plan. For those who are underpaid, put them on track to earn what they should as soon as it is financially possible. If the gap is small, you can bump them up right away. Other gaps may take multiple pay raises to get the job done.

If you’re overpaying a worker, commit to freezing their salary until they are on par with the new plan. This may cause some friction, especially if a pay raise was promised or expected. Don’t hesitate to reward them in other ways so that they still feel appreciated.

How Do You Pick the Structure That’s Right for Your Company?

The easy way to choose is to do some research into other companies in your industry, of similar size, and in your geographic area. Aside from that, you can choose the one that’s best suited to help you grow over time, as well as attract and retain top talent. Whatever you end up with, be sure to put it in writing and communicate the new plan (and its benefits) to teams as soon as you are ready to set it into action.

Your compensation structure is just one element to creating a workplace culture that new employees can’t wait to join. Learn how Comeet help with the rest.


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