Learn about common pay structures, salary bands and benchmarking
Pay progression describes how employees are able to achieve higher pay within their pay level or band. Research suggests that the most popular approach to determining pay progression is to take a number of factors into account, including performance, competencies and market rates. Pay progression systems can help encourage high performance and offer employees a fair and transparent process for pay development.
This factsheet focuses on pay progression within pay bands. It explores the impact of pay structures on an employee’s ability to progress, in particular the number and span of existing pay bands. It outlines the different methods of determining pay progression, such as length of service, team performance and skills-based pay, and discusses methods of controlling pay progression and thus overall payroll costs. Finally, the factsheet offers some considerations for employers setting or reviewing pay progression arrangements.
Approaches to pay progression should, on the one hand, meet both the business needs of the organisation (and to be sufficiently flexible to adapt as those needs change), as well as its mission, vision and values. On the other hand, the approach should reflect the aspirations of its existing and potential employees, in a fair and non-discriminatory way.
Employers should review their systems of pay progression on a regular basis as the economic, political and technological contexts in which it operates changes and consider alternative approaches if existing arrangements no longer meet their or their employees’ needs.
What is pay progression?
Pay progression is the process by which an individual employee reaches higher levels of pay within a grade or band. It’s often regarded as the measure of ‘real’ growth in wages. It’s distinct from salary rises linked to inflation (the ‘cost of living’) and increases associated with a formal promotion to a higher grade or band.
Organisations may put pay progression systems in place to:
- support business strategy by encouraging and rewarding desired employee characteristics or behaviours
- maintain competitiveness of salary while controlling payroll costs within set parameters (including affordability)
- provide employees with a fair and transparent process by which individual wage increases are determined.
The impact of pay structures
Number and width of grades or bands
Pay progression is usually determined by two key factors:
- the span (or width) of each pay band – the degree of pay level variation within each band
- the number of pay grades, levels or bands within the overall pay structure.
The span of each pay grade is sometimes expressed as the percentage increase from the minimum to the maximum salary in the range. For example, if salaries in a grade range from £30,000 to £36,000, it has a span of 20%. The wider the span, the greater the potential for pay progression within a grade.
Many pay structures in UK organisations today have a small number of grades or bands, with pay ranges sometimes as wide as 100% or more (sometimes known as ‘broadbanded’ systems).
Traditional narrow-graded (also known as ‘multi-graded’) structures feature numerous grades with relatively small pay ranges. Progression is often based on length of service, which gives employees a considerable degree of certainty over how their pay will progress in the short term.
Advancement to higher grades or levels
The focus of this factsheet is pay progression within grades, but it’s important to bear in mind the potential for progression via promotion when designing pay structures.
Our report Pay progression: understanding the barriers for the lowest paid looks at the role of HR in helping those employees in low waged jobs advance into higher-paid work.
In a traditional graded pay structure, ‘differentials’ relate to the percentage difference in pay levels between the mid-point of one grade and the mid-point of the adjoining grade. The differential needs to be high enough to reward employees for taking on a post at a higher level of responsibility. In a typical narrow-graded pay structure, for instance, a common differential would be around 20%.
There may be a need for an overlap between the top levels of pay attached to one grade and the lower levels of the next grade up. This might recognise the greater value of the input from a highly experienced or skilled individual at the top end of their grade compared with a newly appointed employee on a learning curve at the lower end of the grade above.
Inflation-linked pay rises
In the most basic form of pay structure or system, such as spot rates (where there is just one pay rate) for manual workers, it may be that a simple ‘cost-of-living’ increase is applied to all pay rates each year, which is simply increasing pay rates for every employee by a percentage broadly in line with inflation. Such arrangements do not provide any scope for ‘real’ pay progression.
As employers seek greater flexibility to link pay with performance and a sharper focus on high performance levels, cost of living pay rises are increasingly rare and largely confined to unionised environments and/or relatively low-skilled or homogeneous occupational groups.
In the case of more complex pay arrangements, an inflation-linked adjustment may well also be made across the structure each year. But this often takes the form of an inflation-based increase to pay levels or grade ranges across a particular pay structure (sometimes excluding certain levels or minimum rates, for example to freeze pay for poor performers), rather than necessarily giving each individual within that structure an identical pay rise. For instance, the pay increase may be linked to performance and position in the salary range with those below the median getting more than those above it. A range of other criteria (see below) may then be used to determine individual employees’ pay progression along the pay ranges attached to each pay grade or band.
Some employers award both a cost of living increase and a separate award using one or more of the methods below, or the two factors may be combined in determining a single pay award (particularly popular at times of low inflation).
Methods of determining pay progression
Length of service
This is a simple form of pay progression where an individual progresses through a number of incremental pay points with each year of service in the organisation (usually up to a maximum point that is reached after a certain number of years). Such arrangements may reward the build-up of expertise in the job and also help with employee retention. However, progression based on length of service may indirectly discriminate against women as they are more likely than men to take time out of the labour market to meet family responsibilities.
Seemingly outdated in an era where age discrimination is outlawed, exceptions remain in place in respect of the National Minimum and Living Wage legislation. The minimum rates are lower for young workers to help them attain their first steps on the employment ladder before progressing to higher levels of pay as they gain in age. To find out more about the National Minimum and Living Wages, see Useful contacts.
Individual performance-related pay
This links individual pay rises with an assessment of an individual employee’s performance by their manager. The idea is to encourage staff to perform to the highest level possible. Find out more in our factsheet on performance-related pay.
Team performance pay
This approach involves linking pay increases to an assessment of performance at team rather than individual level and aims to encourage particular types of behaviour, such as collaborative working.
Taking the link with performance to its highest levels, organisational performance can be used as a criterion for pay progression (for instance, by taking divisional sales levels into account).
This bases pay rises on an assessment of employee competencies in a range of areas (focusing on the worker’s input to the job, rather than performance or achievement), for example customer service or communication skills. Find out in our factsheet on competence and competency frameworks.
This arrangement links pay rises to the acquisition of additional skills or specific qualifications levels, in order to encourage employees to undertake appropriate study or training.
Pay increases are pitched to keep pace with rates for similar jobs or regional pay levels in the external labour market. See more in our factsheet on job evaluation and market pricing.
Coverage of different approaches
According to our 2017 Reward management survey, the most popular approach to determining an employee’s pay progression is to use a number of factors (known as a combination approach). For example, a mix of individual performance and market rates.
The most common criteria used by employers to manage pay progression include:
- individual performance
- employee potential.
The survey also explores how employee performance is assessed and whether the assessment is then used when making pay decisions.
Controlling pay progression
While modern pay structures often aim to allow scope for rewarding higher levels of performance or contribution, employers still need to control overall payroll costs.
Under service-related pay progression arrangements, control is built into the system as each individual can only achieve one increment each year, up to a set level. But, because they effectively guarantee progression to the maximum of the pay scale, employers could still face high wage bills, for example, when employee turnover is low and staff become clustered at the top of each pay grade.
Controlling pay progression is particularly important in more flexible pay structures, such as broadbanding. A variety of techniques may be used including:
Target (or reference) points. Under individual performance (merit) pay arrangements, it's common for ‘satisfactory’ performers to progress to a target point in their pay ranges. Once someone reaches that point, the rate of pay progression may be reduced. For instance, while someone who was deemed a good performer may get a 3% increase if they are below the reference point, they may only get a 2% increase if they are above it.
Zones. The use of zones involves dividing each pay band into, say, three zones and specifying that individuals could only progress to the next zone up for some exceptional reason. This is particularly useful for employers with a broadband system.
Cash bonuses. For example, a reference point could be set at some point in the pay range beyond which cash bonuses might be paid rather than consolidated increases.
Employers should consider the following issues when setting or reviewing pay progression arrangements.
Matching pay progression arrangements with business needs
Any approach towards pay progression needs to fit the organisation’s business strategy and ethos. For example, in a business that is highly dependent on collaborative working, team-based pay progression might be more appropriate than individual performance-related pay.
Equality in arrangements
It's important to ensure that arrangements for pay advancement are free of unfair and/or unlawful bias in relation to an employee’s age, gender or other protected characteristics. See our factsheet on equal pay.
Communicating with employees
Letting employees know how an existing pay progression system affects them can be a complex or sensitive task, as can devising and changing pay progression arrangements. Effective employee involvement and communication is therefore paramount, and employers should pay particular attention to the line managers who will be closely involved in implementing the systems. Find out more in our factsheet on employee communication.
Useful contacts and further reading
Books and reports
ARMSTRONG, M. (2015) Armstrong's handbook of reward management practice: improving performance through reward. 5th ed. London: Kogan Page.
INCOMES DATA SERVICES. (2010) Pay progression. London: Incomes Data Services.
PERKINS, S.J. and WHITE, G. (2016) Reward management: alternatives, consequences and contexts. 3rd ed. London: Chartered Institute of Personnel and Development
Visit the CIPD and Kogan Page Bookshop to see all our priced publications currently in print.
Building blocks of reward: progression. (2012) IDS Pay Report. No 1104, September. pp11-13.
FICKESS, J. (2015) Compensation landscape: a survey shows employees' understanding of their organizations' pay philosophy. Workspan. Vol 58, No 8, August. pp24-26,28.
Organisations base pay progression on multiple factors. (2015) IDS Pay Report. No 1132, January. pp13-17.
Progression pay takes a step back. (2013) Labour Research. Vol 102, No 6, June. pp12-14.
CIPD members can use our online journals to find articles from over 300 journal titles relevant to HR.
Members and People Management subscribers can see articles on the People Management website.
This factsheet was last updated by Charles Cotton.
Charles Cotton: Performance and Reward Adviser
Charles directs the CIPD's performance and reward research agenda. He has recently led research into: how employers can help improve their employees’ understanding of their personal finances; how front line managers make and communicate reward decisions to their employees; how employers manage the risks around reward; how private sector employers can build the business case for workplace pensions; how employees form their attitudes to pay; and how the annual pay review process can become more strategic.
He is also responsible for the CIPD’s public policy reward work and has given evidence to select committees on banking pay, redundancy awards as well as responding to various consultations, such as on pensions, retirement and MPs’ expenses.
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