Which Compensation Structure Is Right for Your Company?

Compensation & Benefits See all Choosing a compensation structure

Originally published by Payscale. 

Compensation structures continue to evolve, and they usually do so to help organizations keep current with both market and workforce trends. Some may wonder what compensation structures are. Loosely, “compensation structure” refers to the various ways that companies can organize their pay practices. They provide guidelines for pay that help organizations identify whether their pay is in bounds. The right compensation structure means having guidelines for pay relative to the market or markets where you compete for talent, guidelines that support appropriate internal alignment, and guidelines that ensure compliance.

How have compensation structures developed?

Done right, compensation structures aren’t intended to constrain pay, but to ensure the best fit of resources to organizational objectives. Given the changing nature of work, the workforce, and the competitive landscape, it’s no wonder that compensation structures have adapted.

Broadbands: The structure of yesteryear. Broadbands, pay bands that can span as much as 100 to 300 per cent from minimum to maximum, made a lot of sense at a time when people stayed with their company for life. Sometimes, they even stayed within the same role for their full career. An office manager was an office manager and an engineer was an engineer. At a time when the workforce was motivated by pensions, retirement, and forming work families, broadbands fit.

Step Structures: Where pay moves up from fixed point to fixed point based on a pre-arranged schedule, are also a great example of structures that worked better yesterday than today. They are often based on tenure. While some positions still lend themselves well to step structures, especially in industries where rewarding performance doesn’t make sense (firefighting comes to mind), they fall short for most strategic compensation. Step structures are often too rigid for the flexible needs of today’s companies, depending on industry and position.

Grades and Ranges: Today’s compensation structure. Grades are a set of ranges that are mathematically aligned to one another. Similar jobs are grouped together within grades based on their market rate, level of responsibility, and value to the organization. Ranges are narrower than broadbands, typically around 30 to 60 per cent from minimum to maximum. At a time when employees seek advancement, recognition, and mobility, grades and ranges can help align various levels of positions relative to one another.

What structures are companies using the most?

PayScale conducted a survey of 7,700 business leaders, HR and compensation professionals to determine the current best practices in compensation. We asked a number of questions about how people structure their compensation plans.

Compensation structure types

While just 22 per cent of all organizations use grade-based ranges, 41 per cent of enterprise organizations do. On the other hand, while 22 per cent of all organizations have no structure at all, just seven per cent of enterprise organizations can say the same.

Perhaps more interesting was the 15 per cent of organizations who use a mix of grades and job-based ranges. And while many do so because they inherited a wonky system, plenty of organizations are choosing a mix. The reason ranged from separating jobs in a union environment, to keeping hot jobs competitive to the market, to ensuring flexibility. Some organizations are now using grade structures for the vast majority of their jobs, and then also using job-based ranges for their mission-critical and/or hot jobs.

How do you pick the structure that’s right for your organization?

So now we’re up to the million-dollar question. How do you pick the right structure? As with all things related to comp, HR, organizations, and people, there is no one right answer. There are, however, things to think about:

Are you a growing organization? If you don’t yet have a grade structure, going through the exercise of developing a grade structure can accomplish a few things for your organization. It helps set up an infrastructure for pay so you can make hiring decisions quickly. It helps ensure that you will build your growing organization on a system that is fair and compliant. And maybe most importantly, while setting up a grade structure, your organization will be forced to make hard choices about how you want to prioritize pay. A compensation structure is where the strategy hits the road.

Do you have some critical jobs that you need to treat significantly differently from the rest of the organization? In tech-competitive areas, these are often tech roles. For some it’s sales roles. In medical organizations, it’s doctors. These are all a good case for using a hybrid structure.

Or maybe you’ve been shooting darts at a dartboard. Setting up job-based ranges is a good next step for having some clear guidelines for pay. Then you can begin to clarify how employees enter into and move through and between ranges.

Whatever structure you land on, remember that the most important step is communicating with employees. Let them know what you decide about how to align your pay to your organizational goals. It’s not enough to just pay people, you’ll want to communicate your rationale for pay practices to help engage and motivate your top employees. At the end of the day, pay is about people and results, and we want to get both right in our organizations.

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Mykkah Herner, M.A., CCP, is a compensation and human resources professional with more than 10 years of HR experience. He has designed compensation strategies for over 400 organizations, poising compensation to drive business results.

See also:
The 5 elements of a good incentive plan
Common compensation conversation pitfalls (and how to avoid them)

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