Learn how to implement a reward strategy that supports organisational objectives
Pay structures offer employees a framework for progression and can help to encourage appropriate behaviours and performance. As part of a reward strategy, a successful pay structure will be transparent, fair and flexible, and most effectual when it aligns with the organisation’s strategy and its values.
This factsheet explores the purpose of pay structures and offers an introduction to the commonly used types, including individual pay ranges, broadbanding, pay spines and job families. It takes a closer look at the issues HR professionals need to consider when designing pay structures, such as red circling or avoiding discrimination. Finally, it covers local pay structures, identifying the main approaches to regional pay differentiation.
Pay structures should be designed carefully 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 them with a clear and non-discriminatory framework for pay progression and career development.
Pay structures need to be sufficiently flexible so that they can help staff and the employer adapt to changing economic, technical and regulatory environments, and be kept under regular review.
Where appropriate, pay structures should take into account any need for regional variations, such as in London or other local ‘hotspots’.
What is a pay structure?
A pay structure is a collection of pay grades, levels or bands that links related jobs within a hierarchy or series. It provides a framework to implement reward strategies and policies within an organisation.
Pay structures are usually designed to:
- align reward strategy with the organisation’s strategy by encouraging required employee behaviours and performance
- bring order and clarity to an organisation and its employees in managing pay rises and career progression
- help ensure fairness and lawfulness, for example by avoiding gender pay discrimination.
Some smaller organisations manage without any form of pay structure, but typically once an organisation reaches around 200 employees, such arrangements become essential as a framework for reward management.
Different types of pay structure are linked with varying types of pay progression arrangements. See more on incremental pay in our factsheet on pay progression.
Types of pay structures
Awareness of ‘single-status’ arrangements and their benefits has been growing in recent decades. These are single, integrated pay and benefits systems covering an organisation’s entire workforce. They replace older systems that might have operated with separate structures for, say, manual and white-collar staff.
However, it’s not unusual for organisations to have separate pay arrangements for certain types of employees. For example, senior executives usually have their pay determined by a special remuneration committee. Listen to our podcast which explores the growing issue of CEO pay. Our report Executive reward: a review of the drivers and consequences examines academic research into top pay between 2007 and 2013 to highlight the findings and consider the implications for practice. Findings from more recent studies show that the gap between CEO pay and other employees’ pay has grown until lately and that CEO reward practice has reached a crisis point. We set out our recommendations in the 2015 report The power and pitfalls of executive reward: a behavioural perspective. More recently, and produced together with the High Pay Centre, our report reviewing FTSE 100 executive pay packages between the financial years 2015 and 2016, shows that rewards at the top have dropped by almost a fifth, but still remain high.
Although the number of pay structures has been consolidated in recent years, they have generally become more complex. In part, this can be explained by structural changes to the economy (including a decline in the manufacturing base and in collective bargaining, and the emergence of an increasingly skilled and occupationally diverse workforce) but also by employers’ increasing quest for flexibility and high performance, which demands greater individualisation of pay.
Pay structures have two key characteristics:
- the number of grades, levels or bands within the structure
- the width, or span, of each grade – that is the percentage difference between the lowest and highest pay rates attached to each grade or band.
Brief definitions of different pay structures are set out below, although definitions do vary and approaches may overlap at times. In fact, a strict definition of pay structures 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
Under these arrangements, there is a single hourly or weekly pay rate or a single annual salary attached to each job (or possibly to each person) in an organisation. In essence, there's only one job to a grade.
Spot rates are often found among lower-skilled occupations where there's a need for a simple ‘rate for the job’. Conversely, spot salaries also often occur at the other end of the scale for more senior positions, such as senior managers or directors, where the remuneration package may need to be designed to attract or retain a specific individual. Spot rates are also relatively common in small firms.
Using this approach, there is no formal structure in place for pay 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 or market rates.
Individual pay ranges, individual job ranges, individual salary ranges
These range-based approaches are a more sophisticated version of spot rates or spot salaries. Instead of a single rate for the job, a pay range is attached to each job or individual 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 approach is common in the public sector. It comprises a large number of grades, typically 10 or more, with jobs of broadly equivalent worth slotted into each of the grades. Pay progression usually comes in increments linked to length of service. Because the grades are very 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 approach to narrow grades, pay spines are based on a series of incremental points that usually allow for pay progression linked to length of service. Such arrangements are traditionally found in local government, or voluntary organisations with pay structures that mirror local government arrangements.
This approach uses a small number of pay bands, typically four or five, to allow for greater pay flexibility than traditional graded structures. A classic broadbanding arrangement would place no limits on pay progression within each band, although some employers have re-introduced a greater degree of structure into such systems, partly to counter concerns over equal pay issues.
Broad-graded pay structures
These are half-way between narrow and broadbands, typically with between six and nine grades. They can help counter the problem of ‘grade drift’ as there’s greater scope for individual employees to progress further along a pay grade, without the need for upgrading.
This system 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 (for example, one for sales staff, one for IT staff and so on). This approach may be helpful in facilitating higher rates for highly sought-after workers such as specialist IT staff.
Career families, career-grade structures
A variation on the theme of job families, this system involves the use of a common pay structure across all job families, rather than operating separate pay structures for each family. These arrangements tend to reflect an emphasis on career paths and progression as opposed to the greater pay focus of the job families approach.
Incidence of arrangements among employers
Our 2017 Reward management survey report provides details of the types of pay structure arrangements that employers use. Overall, the most popular approaches are:
- individual pay rates/ranges and spot salaries
- narrow grades
- pay spines.
However, there are variations by sector and occupational group. For instance, pay spines, which provide a greater degree of control and certainty, are common at all levels in the public sector, while individual pay rates, ranges or ‘spot’ salaries, which facilitate greater flexibility, are more typical of the private sector.
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
A key consideration when assessing how to define and place jobs within a pay structure 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. See our factsheet on job evaluation and market pricing.
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 equal pay factsheet for more on sex discrimination issues and reward.
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 pay structure. However, under equal pay legislation red-circling is problematic as it tends to perpetuate existing pay inequalities. Limiting the period of red-circling to, for example, fewer than five years could help address this issue, but employers should seek legal advice before doing this.
Local pay structures
In certain locations, employers may need to build an element of local pay into their structures. Official statistics illustrate that pay levels can vary by locality, even within individual occupations. Two inter-related factors contribute to local pay variation:
- differences in the cost of living
- the relative tightness of local labour markets.
In the UK, the main degree of variation relates to London and the South East, where both the cost of living and earnings tend to be significantly higher than in the rest of the country. Variations between other regions tend to be fairly small, although there are certain other ‘hotspots’ (Aberdeen, for example).
Research commissioned by the Office of Manpower Economics has 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: the dominant approach, 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: a variant of the traditional approach is the operation of gepgraphical pay bands by certain banks.
Zonal pay: these pay systems, prevalent among retailers that have a store in most large towns, tend to extend 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 for these.
Complex localism: more varied approaches, which might be characterised as ‘complex localism’, are extremely rare.
The issue of local pay is also often raised in relation to the public sector, where some analysts believe national agreements allow insufficient flexibility to match local labour market conditions.
Books and reports
ARMSTRONG, M. (2015) Armstrong's handbook of reward management practice: improving performance through reward. 5th ed. London: Kogan Page.
HOLMES, E. and OAKLEY, M. (2012) Local pay, local growth: reforming pay setting in the public sector. London: Policy Exchange.
INCOMES DATA SERVICES. (2009) Job families. HR studies. London: IDS.
LANGLEY, A. (2011) Employee reward structures. 4th ed. London: Spiramus Press.
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 2012 pp12-14.
CARLSEN, J. and MANNY, B. (2009) Why a job family approach? Workspan. Vol 52, No 8, August. pp65-66,68,70,72-73.
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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