Learn how to implement a reward strategy that supports organisational objectives
Pay structures offer a framework for wage progression and can help encourage appropriate behaviours and performance, while pay progression describes how employees are able to increase their pay within their salary grade or band.
This factsheet explores the purpose of pay structures and introduces the commonly used types including individual pay ranges, broadbanding, pay spines and job families. It considers local pay structures, identifying the main approaches to regional pay differentiation. It also examines the impact of pay structures on an employee’s ability to progress, in particular the number and span of existing pay bands, as well as the different methods of determining pay progression.
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Pay structures should be designed to balance employer and employee needs. From an organisation’s perspective, they should support its business strategy and reflect its mission, vision and values. From an employee’s perspective, they should provide a fair and transparent framework for salary progression and career development.
Similarly, approaches to pay progression should try and balance both the business needs of the organisation, as well as its mission, vision and values, and reflect the aspirations of its existing and potential employees, in a clear and non-discriminatory way.
An organisation should review on a regular both the way it structures and determines salary progression as the economic, political, regulatory and technological contexts in which it operates changes and consider alternative approaches if existing arrangements are no longer able to adapt to meet its or its employees’ needs.
What is a pay structure?
A pay structure is a collection of wage grades, levels or bands that link related jobs within a hierarchy or series, providing a framework to implement reward strategies and policies.
They are usually designed to:
- align the reward strategy with the business strategy by encouraging required behaviours and performance
- bring order and clarity in managing pay rises and career development
- help ensure fairness and lawfulness, for example by avoiding gender pay discrimination.
What is pay progression?
Pay progression is where an individual reaches higher pay levels within a grade. It’s often regarded as the measure of ‘real’ wage growth. It’s distinct from salary rises linked to inflation or wage increases associated with a formal promotion to a higher band.
Organisations use pay progression to:
- support business strategy by encouraging and rewarding desired employee behaviours
- maintain salary competitiveness while controlling payroll costs within set parameters (including affordability)
- provide a fair and transparent process by which individual wage increases are determined.
Progression is usually determined by:
- the width of each pay band – the degree of pay level variation within each band.
- the number of pay grades within the overall pay structure.
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 to recognise the greater value of the input from a highly experienced/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.
Types of pay structures
Pay structures have two key characteristics:
- the number of grades within the structure
- the span of each band (the percentage difference between the lowest and highest pay rates attached to each grade).
Brief definitions of different pay structures are given below, although definitions do vary and approaches may overlap at times. In fact, a strict definition might exclude the first two categories listed below as they could be considered to be unstructured pay arrangements.
Individual pay rates, spot rates, spot salaries
There is a single hourly, weekly or annual pay rate for each job or person. Spot rates are often found among lower-skilled occupations where there’s a need for a simple ‘rate for the job’. Conversely, they can occur at the other end of the pay scale for more senior positions where the remuneration package is designed to attract, retain and motivate a specific individual.
Using this approach, there is no formal structure for progression, but there may be scope for moving to a higher spot rate or for spot rates to be increased, to keep pace with inflation and/or market rates.
Individual pay ranges, individual job ranges, individual salary ranges
These are a more sophisticated version of spot rates or salaries. Instead of a single rate for the job, a pay range is attached to each job or employee. Individual salary ranges may be preferable to individual pay rates as they allow some formal scope for pay progression.
Narrow-graded pay structures
This comprises a large number of grades, usually ten or more, with jobs of broadly equivalent worth slotted into each grade. Progression usually comes in increments linked to service length. Because grades are narrow, most employees reach the top of the pay range for their grade fairly quickly, potentially leading to demands for upgrading and grade drift (jobs being ranked more highly than justified).
A similar narrow grades, pay spines are based on a series of incremental points that allow for pay progression linked to length of service.
This uses a small number of pay bands, typically four or five, to allow for greater pay flexibility than narrow-graded structures. A classic arrangement would have no pay progression limits within each band, although some employers have re-introduced a greater degree of structure, partly to counter equal pay concerns.
Broad-graded pay structures
Half-way between narrow and broadbands, these typically with between six and nine grades. They can help counter ‘grade drift’ as there’s greater scope for individual employees to progress further along a pay grade, without the need for regrading.
This groups jobs within similar occupations or functions together, usually with around six to eight levels, similar to the number of grades found in broad-graded structures. There are separate pay structures for different families. This may be helpful in facilitating higher rates for highly sought-after workers such as specialist IT staff.
Career families, career-grade structures
This involves the use of a common pay structure across all job families, rather than operating separate pay structures for each family. These arrangements reflect an emphasis on career paths and progression as opposed to the greater pay focus of the job families approach.
Local pay structures
Where pay varies by locality, even within individual occupations. Two inter-related factors contribute to local variation:
- differences in the cost of living
- relative tightness of local labour markets.
Research commissioned by the Office of Manpower Economics found a high level of central control (rather than any significant local-level pay negotiations) and identified six ‘main approaches’ to local pay differentiation in the private sector:
National pay scales with London/South East additions: based on some form of premium for London and the surrounding area.
National pay scales with additions for London/South East and ‘hot spots’: some organisations have added flexibility through the ability to pay more in labour market ‘hot spots’ outside the traditional high-cost areas.
Regional pay bands: operation of geographical pay bands is a variant of the traditional approach.
Zonal pay: prevalent among retailers that have a store in most large towns, it extends the concentric circles of London allowances to typically three to five zones covering the whole of the UK.
Top-up location allowances: some organisations in the retail sector operate with a fairly simple system of top-up allowances in locations deemed to qualify.
Complex localism: more varied local approaches, though these are rare.
Types of pay progression
When setting or reviewing progression arrangements, employers should consider whether the approach fits the business strategy and ethos. It’s also 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 equal pay factsheet.
The types of progression mechanisms include:
Length of service
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’s reached after a certain number of years). This rewards the build-up of expertise in the job and help with employee retention. However, it may discriminate indirectly against women as they are more likely to take time out of the labour market to meet family responsibilities.
Seemingly outdated, legal exceptions remain in place in respect of the UK National Minimum Wage 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.
Individual performance-related pay
Links 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 performance-related pay factsheet.
Team performance pay
This involves linking pay increases to an assessment of team performance 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 achievement), for example customer service or communication skills. Find out more in our competence and competency frameworks factsheet.
This 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 market pricing factsheet.
Inflation-linked pay rises
In basic forms 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 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 to link pay with performance, inflation-based rises are rare and largely confined to unionised environments and/or relatively low-skilled or homogeneous occupational groups.
Where pay arrangements are more complex, such an adjustment may 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 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.
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).
Design issues for pay structures
Key issues in introducing or replacing pay structures include the following.
Aligning pay structures with business needs
It’s important to determine the basis for the grades or bands that are to be incorporated into a new or revised pay structure. This will involve weighing up the pros and cons of differing types of structures (as outlined above) and considering the extent to which each approach may meet business needs, including affordability.
Internal versus external focus
When assessing how to define and place jobs within a band a key consideration is whether to emphasise an external or an internal focus. For example, a market pricing approach where rates reflect those in the external labour market, rather than using an analytical job evaluation scheme that focuses more on internal relationships between jobs within the organisation.
Avoiding unfair discrimination
In light of considerable evidence of gender segregation between and within pay structures, many employers – particularly in the public sector – are making attempts to ‘gender-proof’ pay structures as new arrangements are devised. Read our factsheets on equal pay and gender pay gap reporting for more on sex discrimination reward issues.
The pay of existing employees may be protected through the use of ‘red-circling’ which is maintaining an individual’s pay at its current level when the job is downgraded under a new structure. However, under equal pay legislation, red-circling is problematic as it tends to perpetuate existing pay inequalities. Limiting the red-circling period to, for example, fewer than five years could help address this issue, but first employers should seek legal advice.
Controlling pay progression
While modern pay structures aim to allow scope for rewarding higher levels of performance or contribution, employers still need to control payroll costs.
With service-related progression, control is built in as each individual can only achieve one increment each year, up to a set level. But, because it effectively guarantees progression to the pay scale maximum, 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.
Zones: This involves dividing each pay band into, say, three zones and specifying that individuals can only progress to the next zone for some exceptional reason, 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.
Books and reports
ARMSTRONG, M. (2015) Armstrong's handbook of reward management practice: improving performance through reward. 5th ed. London: Kogan Page.
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: how pay is structured. (2012) IDS Pay Report. No 1103, August . pp12-14.
Building blocks of reward: progression. (2012) IDS Pay Report. No 1104, September. pp11-13.
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.
WATSON, S. (2010) Pay modelling: preparation, precision and perspective. Benefits and Compensation International. Vol 40, No 2, September. pp12-16.
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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