Pay structures offer a framework for wage progression and can help encourage appropriate behaviours and performance. Pay progression describes how employees are able to increase their pay either within or outside a pay structure.
This factsheet explores the purpose of pay structures and introduces the commonly used types. 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, as well as the ways to determine pay progression.
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. It provides a framework to implement reward strategies and policies.
They are usually designed to:
- Align the reward strategy with the employer’s mission, vision, purpose and culture, and 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 pay discrimination.
Sixty per cent of employers questioned for our 2019 Reward management survey use a pay structure. They are most common in large and public sector employers.
The span of each grade is the percentage increase from the minimum to the maximum salary in the range. For example, if salaries range from £30,000 to £36,000, the grade span is 20%. The wider the span, the greater the potential for progression.
‘Differentials’ refer to the percentage difference in pay between the mid-point of one grade and the mid-point of the adjoining grade. The differential needs to be high enough to reward taking more responsibility.
What is pay progression?
Pay progression is how an individual moves to 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:
- Encourage and reward 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.
- Number of pay grades within the overall pay structure.
There may need to be an overlap between the top levels of pay attached to one grade and the lower levels of the next grade up. This recognises the greater value of the input from a highly experienced/skilled individual at the top of their grade compared to 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.
There are short definitions of different pay structures below, although definitions vary and approaches may overlap at times. In fact, a strict definition might exclude the first two categories listed as they could be classified as 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’. They can also occur for more senior positions where the remuneration package is designed to attract, retain and motivate a specific individual.
In this approach, there’s 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 more sophisticated versions 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 preferred to individual pay rates as they allow some formal scope for pay progression.
Narrow-graded pay structures
These comprise 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 range fairly quickly, potentially leading to demands for upgrading and 'grade drift' (jobs being ranked more highly than justified).
Similar to 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 have 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 broad-graded structures. There are separate pay structures for different families. This approach can help in facilitating higher rates for highly sought-after workers such as specialist IT staff.
Career families, career-grade structures
These use a common pay structure across all job families, rather than operating separate pay structures for each family. They show an emphasis on career paths and progression rather than the greater pay focus of the job families approach.
Local pay structures
This is where pay varies according to the workplace location, even within individual occupations. Two inter-related factors contribute to local pay 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: using some form of premium for London and the surrounding area.
National pay scales with additions for London/South East and ‘hot spots’: giving added flexibility by paying more in labour-market ‘hot spots’ outside traditional high-cost areas.
Regional pay bands: using geographical boundaries.
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: 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
Progression arrangements should fit and organisation’s strategy and ethos. It’s also important that arrangements for pay advancement are fair and free from unlawful bias due to an employee’s age, gender, ethnicity or other protected characteristics under UK law – see more on pay fairness.
Types of progression mechanisms include:
Length of service
An individual progresses through a number of incremental pay points with each year of service (usually up to a maximum point after a certain number of years). This rewards the build-up of expertise in the job and helps employee retention. However, it may discriminate indirectly against women as they are more likely to take time out to meet family responsibilities.
Seemingly outdated, there are some legal exceptions in place in respect of the UK's National Minimum Wage and Living Wage laws. Minimum rates are lower for young workers to help them in their first steps on the employment ladder before progressing to higher levels of pay. The rates usually change every April.
Individual performance-related pay
Pay rises are linked to an individual employee’s performance. The aim is to encourage staff to perform to the highest level possible. Find out more about performance-related pay.
Team performance pay
Pay rises are linked to team performance to encourage particular types of behaviour, such as collaborative working.
Pay rises are linked to organisational performance (for instance, by taking divisional sales levels into account).
Pay rises are based on an assessment of employee competencies in various ways, focusing on the worker’s input to the job, rather than achievement, for example customer service or communication skills. Find out more about competence and competency frameworks.
Pay rises are based on acquiring additional skills or specific qualifications to encourage employees to undertake appropriate study or training.
Pay rises are pitched to keep pace with rates for similar jobs or regional pay levels in the external labour market. See more on market pricing.
Inflation-linked pay rises
In simple pay structures, a cost-of-living increase may be applied each year. Such arrangements don't provide any scope for ‘real’ pay progression.
But as employers seek to link pay with performance, inflation-based rises are rarer and largely confined to unionised environments and/or relatively low-skilled or homogeneous occupational groups.
Where pay arrangements are more complex, the structure itself may be adjusted each year. This is often an inflation-based increase to some pay levels or grade ranges (sometimes excluding certain levels or minimum rates, for example to freeze pay for poor performers), rather than giving everyone 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 a cost-of-living increase and a separate award using one or more of the methods above, or the two increases 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:
Aligning pay structures with business and employee needs
It’s important to understand the basis for any grades or bands being incorporated into a new or revised pay structure. This involves weighing up the pros and cons of differing types of structure, including how closely they:
- Meet the business needs, including affordability.
- Support the organisation's mission, vision and values.
- Meet the needs and aspirations of existing and potential employees, in a clear and fair way.
An organisation should regularly review the way it structures pay and determines salary progression as economic, political, regulatory and technological contexts change. If existing arrangements can’t adapt to meet its or its employees’ requirements, alternative approaches will be needed.
Internal versus external focus
Whether to emphasise an external or an internal focus is key when defining and placing jobs within a band. For example, choosing a market pricing approach, where rates reflect those in the external labour market, rather than an analytical job evaluation scheme that focuses more on internal relationships between jobs within the organisation.
Avoiding unfair discrimination
Given the considerable evidence of gender segregation between and within pay structures, many UK employers, particularly in the public sector, are attempting to ‘gender-proof’ pay structures as new arrangements are devised. Read more on pay fairness.
Existing employees’ pay can be protected through ‘red-circling’ which maintains 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 could help address this issue, but employers should seek legal advice first.
Controlling pay progression
While modern pay structures aim to allow rewarding higher levels of performance or contribution, employers still need to control payroll costs.
With service-related progression, control is built in as everyone 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 flexible pay structures, such as broadbanding. A variety of techniques may be used, including:
Target (or reference) points: Under individual performance pay arrangements, it’s common for ‘satisfactory’ performers to progress to a target point in their pay range. Once at that point, the rate of pay progression reduces.
Zones: 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: A reference point could be set in the pay range beyond which cash bonuses might be paid rather than consolidated pay increases.
Books and reports
ARMSTRONG, M. (2019) Armstrong's handbook of reward management practice: improving performance through reward. 6th ed. London: Kogan Page.
PERKINS, S.J. and WHITE, G. (2020) Reward management: alternatives, consequences and contexts. 4th ed. London: Chartered Institute of Personnel and Development.
Visit the CIPD and Kogan Page Bookshop to see all our priced publications currently in print.
HILL, B. (2019) The promised land: the optimal pay structure for 2020. Workspan. November/December. pp34-39.
HOWLETT, E. (2019) Most employees have never had their pay explained to them. People Management (online). 3 December.
JEFFREY, R. (2019) How much should you really pay your people?People Management (online). 11 July.
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: Senior 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.