Types of Employee Pay Structures and How to Use Them

Every company is different, even with fundamental processes like payroll. Some businesses rely on fixed salaries with little variance, while others thrive using performance-based bonuses and commission.

But regardless of how an employer compensates its people, it needs to be supported by fair, clear and consistent pay structure. Let’s dive into:

• how pay structures work
• what components make up a pay structure
• why strong pay structures engage and motivate talent

What is a pay structure?

A pay structure is the way a company organizes its workers’ pay. This can relate to how pay is determined on either an:

• organizational level, like through salary bands and market benchmarking
• individual level, such as with base pay, bonuses, salaries and hourly wages

Pay structures have many pieces that combine to form a total compensation statement. The right pay structure for a given employer — including the way pay is designed and calculated — depends on the unique circumstances affecting that business. That’s why it’s crucial to:

• understand the different types of pay structures
• craft pay structures intentionally and fairly
• assess and adapt the pay structure to ensure it works for an entire organization

In its simplest form, compensation is what people receive in exchange for their work. Today, employees receive much more than just money, and compensation that offers little beyond competitive pay could harm engagement and retention.

What’s the difference between a pay structure, pay scale and pay band?

A pay structure is a way that an organization designs its compensation strategy for employees. Pay bands represent ranges of pay available to job families within an organization. A pay scale is another term referring to the pay structure that determines an employee’s pay. All three terms are interrelated and, at times, interdependent.

Why do pay structures matter?

Without pay structures, employees would have next to nothing to assure them of fair and equal treatment. Consider these key reasons for why organizations should establish clear pay structures.

Helps control and monitor organizational expenses

Payroll expenses can be a considerable cost for any business. Ideally, pay should be structured to support business functions and employees while keeping overhead aligned with the overall budget. Business leaders can use pay structures to:

• forecast spending
• anticipate the trajectory of company growth
• pivot and create recruitment and retention strategies

Communicating and informing salary expectations

Organizations that use disciplined pay structures can set expectations with employees about their pay. In turn, this helps talent clearly understand how their roles and advancement within the organization will be compensated. Employees with the ambition to grow within their team can see clearly what their future compensation could be and aspire to perform, contribute, grow and, ultimately, lead.

Transparency in pay scales

With companywide structures, leaders can exercise transparency with how pay changes between:

• tiers
• departments
• levels of seniority

Pay transparency may not be right for every business, but it can carry some potential benefits. For example, sharing salary bands and openly communicating how performance, position, tenure and previous experience affect pay could help employees and managers keep the team accountable for fair practices.

Competitive salary structure

When organizations design their pay structures, they may choose to frame their pay within industry averages for the same or similar roles. With that in mind, they may choose to lag, match or lead the industry average.

Lagging means they intentionally pay less than the average. This method may work for organizations that have a strong alignment with values, such as nonprofits or Certified B Corporations that can attract talent through other means, and want to keep their overhead down to better serve their cause.

Matching the average, on the other hand, is just paying essentially the same as competitors. This method may work for organizations that have similar models and do not need to overpay to attract and retain top talent.

Finally, leading the market may be necessary for organizations in tense talent acquisition races that need to attract and retain future leaders.

Creates a space for pay budget and affordability

Designing intentional pay structures allows businesses to gain valuable insight into the life cycle cost of a typical employee. Maintaining uniform pay structures gives decisionmakers greater insight into the big-picture payroll budget. In turn, this allows them to make informed decisions about how each department’s pay affects the organization.

Establishes fair pay bands for salary

Strategically designing, vetting and communicating pay structure sets a precedent of equity and fairness. Teams who don’t build their pay bands using market data and industry best practices or who do not set bands at all may be unintentionally mistreating employees. If pay is decided without a predetermined strategy, managers and leaders may pay their teams based on bias that can lead to discrimination.

How is a pay structure determined?

No one-size-fits-all pay structure exists. For example, certain industries may have different standards in terms of the:

• resources they use
• benefits they offer
• salaries they provide

For instance, a tech startup may immediately offer an equity plan, but an established coffee shop probably won’t do the same. Understanding the unique factors of an organization helps create a pay structure that works for the company’s specific circumstance.

Organizational structure

A solid first step when developing a pay structure is to consider the organizational structure of the business and understand what drives its objectives. Organizations heavy in sales and client acquisition may choose a pay structure with low salaries and high incentives.

A tax accounting firm, on the other hand, may choose to give large bonuses in the middle of May for all accountants who have been with the firm for longer than six months to verify they fulfill client needs during the peak season. And a hotel may offer a shift differential for staff who work overnights, paying them more to incentivize people to take these less desirable hours.

In the end, how a business pays its people must be informed by what the organization does.

Pay bands and pay scales

One common way to parse out and organize pay is by breaking up a workforce into bands. These bands can be based on factors like:

• role
• tenure
• output or productivity
• and more

Leaders can assign pay ranges to each band and pay employees who fall within these brackets accordingly. This allows workers to see a road map of how they can expect their pay to change as they advance through the company.

This also allows leaders to plan and budget for the future, as they can see who on their teams is likely to move up, earn raises or even leave the organization.

Internal and external pay data analysis

Before designing their organization’s compensation, leaders may choose to conduct internal and external pay data analyses to ensure their programs align with the realities of their business environment and their in-house conditions.

External factors may include:

• current market conditions
• the state of the labor market
• competitor pay structures
• non-monetary benefits offered across the industry

Leaders can also conduct an internal analysis to adjust their pay structures. This could involve asking questions like:

• How do the salaries in each department compare to one another?
• Are there sufficient increases to incentivize performance?
• Are there large pay discrepancies between any groups of people that could represent discrimination?
• Are the right behaviors and outcomes being incentivized?
• How likely is their workforce to retire or resign in the coming years?
• How likely are their current teams to be promoted in the near to mid-future?
• How satisfied are their employees with their pay?

What are the common company pay structures?

While pay structures vary, businesses may adopt similar approaches based on industry standards or successful examples. What follows is a few of the most common setups.

Traditional

Traditional pay structures are based on organizational hierarchy, where roles are given increasing amounts of pay as the roles go from entry-level to supervising positions and beyond. This type of pay structure may benefit supply chain organizations and other companies with clear-cut makeups.

Broadband

Like a traditional structure, a broadband salary structure reflects levels of a company, and salaries increase with each rung of the ladder. It differs in that broadband structures have wider ranges and typically group together more roles. This provides the organization with more flexibility when determining salary because they have a broader spectrum, so employees who don’t necessarily move up in title or hierarchy can still achieve raises over the course of their tenure within the organization. Plus, people who come into the organization with much more experience and a larger skill set can see that reflected in their pay more easily than a stricter, traditional structure.

Broadband pay structure may be advantageous for financial institutions and similar companies where several people hold near-identical roles.

Market-based pay

Market-based pay is when an organization pays based on market rates for the same or similar jobs to more effectively compete in their industries.

This method can be seen among franchises because they often hire for roles in very different places geographically. As such, paying based on the local economy is imperative to attract, retain and motivate crucial talent.

Step pay

A step pay program (or “step-rate compensation structure”) is similar to pay bands. The biggest difference is that employees are given a percentage of their pay for achieving predetermined milestones. These structures tend to be used in government organizations and nonprofits.

For example, a governmental employee may receive pay based on both their title and their tenure with the organization, even if they don’t technically change positions or climb the hierarchy. This type of pay is designed to eliminate bias and discrimination by making it very clear how pay is determined and administered.

This type of pay can be useful for professional services, as employers can incentivize the behaviors and outputs they want while keeping their costs commensurate with the work they receive.

Job families

When creating pay structures, organizations may choose to group roles together in job families. Job families can be determined based on:

• seniority
• skills
• experience
• value of a specific role
• education level
• and more

Job families may span departments and functions, so certain bands apply across the company in the same family. This makes it easier to compare compensation from a high level and adjust it accordingly.

Organizing roles into job families — and by extension pay bands — may be most useful in the technology industry. Roles across tech firms may function similarly. Thus, it may be ideal to pay job families congruently to ensure that employees get paid based on their contributions. This also helps protect individuals who change departments or switch roles, ensuring they earn a comparable salary.

Hybrid pay structure

In a hybrid pay structure, employees get paid with a combination of factors — like base salary, bonuses and non-monetary compensation — to create their total compensation. This type of pay structure could benefit dealerships, where employees are given an hourly wage or a salary as well as incentive or commission based on their performance and the sales they close.

What are the components of a pay structure?

Several pieces make up an individual’s pay. For example, employees may receive a yearly salary paid out biweekly and an annual bonus paid out via a lump sum based on either their performance or their company’s success in the preceding year. Here are the types of pay that may make up an employee’s compensation package.

Salary

Salary is an amount of money paid to an employee, typically expressed as an annual sum that is paid out in periods throughout the year. Salaries tend to be paid out:

• monthly
• biweekly (26 times per year)
• bimonthly (24 times per year)

This amount does not fluctuate throughout the year and will only change if the individual’s pay is increased, at which time all future payments will be increased as well.

Wages

Wages refer to the hourly rate that employees earn while completing shifts or that is paid out in increments of time. This may be applied to part-time or full-time employees.

Wages may vary if an employee works different shifts (differential pay) or over the typical 40 hours per week (overtime pay). This type of pay is dependent on how many hours the individual worked within the pay period.

Commission

Commission refers to an amount of money tied to a person’s output, most commonly when that output brings in new business or revenue. A commission may be a percentage of sales tied to:

• customers served or attracted
• overall sales
• tiers of service
• and more

Commissions may be paid out in each paycheck or in lump sums at the end of months, quarters or years.

Commissions incentivize roles that have an impact on an organization’s profits. It’s important to structure commissions so that employees aspire to do their best work and collaborate with their colleagues. Commissions can also create discrepancies between high and low performers, so it’s important for leaders to understand the impact of those differentials and carefully monitor their teams’ attitudes and satisfaction.

Bonuses

Bonuses may be offered to individuals, teams or entire organizations. These sums often reflect targets and goals tied to outcomes that affect company performance. Effective bonus programs include:

• detailed expectations of output
• deadlines
• what each contributor can expect to receive based on their performance or the goals of the bonus program

It’s generally best to make these goals clear so employees know exactly how to gauge their targets and exceed expectations.

Bonuses are great for organizations with clear goals that want to keep their teams rowing in the same direction.

Equity package

Equity packages can encourage employees to take responsibility for the performance of their organization. Equity packages are common in workplaces where higher salaries are not possible, either due to the age or size of the organization.

Companies anticipating growth, revenue or value can offer equity packages to employees, which will ideally grow over the course of their tenure and become more valuable over time. Employers can also offer employees an ownership stake in the company or even equity incentives that only attain cash value if the company is sold or goes public. Types of equity offerings include stock options, appreciation units and phantom equity.

Benefits

Employers can offer their employees a range of benefits to support their lives outside work. Employers may completely pay for these benefits or provide partial support. Companies typically evaluate benefits annually, and changes may be made to add benefits to support their specific demographics and interests. Employers may even remove some offerings if they no longer serve the team. Costs and insurance likely change over time based on market trends and the usage rates among participants.

Some of the most common benefits include:

• health insurance
• dental insurance
• life insurance
• paid time off
• retirement plans (401(k), pension plan, etc.)
• wellness programs (gym memberships, on-site fitness classes, etc.)
• educational support
• commuter benefits

Non-monetary compensation

Not all perks involve direct financial compensation. These benefits include:

• flex schedules
• recognition programs
• career development opportunities
• mentoring and coaching
• volunteer and philanthropy initiatives
• cultural events
• brand recognition
• free access to products
• and more

Employees respond to a range of motivating factors. Companies that only rely on financial compensation may be missing opportunities to truly motivate their teams.

Recognition programs, for example, call attention to employees with exemplary or outstanding performances and can go a long way to provide workers with purpose. Additionally, employees with less visible roles — like administrative or customer support positions — may enjoy exposure to the greater company. Employees can put awards they have earned on their LinkedIn profiles and on their resumes to show their network and potential future employers that they have excelled in their career.

Another form of non-monetary compensation that may have a huge impact on employee effectiveness is mentoring programs. According to Harvard Business Review, 75% of executives credit some part of their success to mentors. Creating effective mentoring programs that reach employees with potential is a great way to grow those individuals, increase their loyalty to the company and improve the morale of the team.

The topic of employee motivation and non-monetary compensation is vast. Read our blog post for more information regarding wellness, philanthropy and professional development benefits.

Narrow-graded pay structures

Narrow-graded pay structures provide a rigid scaffolding for managers and leaders to determine pay for their teams. This format is designed to eliminate bias and discrimination with a small range available to each role and level of an organization.

The positive attributes of this type of pay leave:

• no ambiguity
• less room for discrimination
• clear and communicable rules and expectations
• predictable budgeting costs

Conversely, the fixed structure may cause the organization to lose out on top talent who feel constricted by the immovable pay ceiling.

Broad-graded pay structures

Broad-graded pay structures allow for more flexibility in what an employee can earn based on their band. Managers may have some agency to determine pay for their employees within a broader grade of pay. This flexibility allows leaders to:

• compete for valuable candidates in the marketplace
• acknowledge and compensate top performers on their teams
• act based on their team’s outputs and ambitions

On the other hand, this flexibility could open organizations up to some risks, including an over-budget payroll, discrimination, favoritism and manager-based pay.

Variable pay

Some organizations may choose to pay different amounts of money for work depending on unique circumstances or may use incentive pay to influence employee behavior.

Safety bonus

Teams who work in potentially dangerous environments or with an increased risk of bodily, product or facility harm may be incentivized to follow protocol using a safety bonus. Teams may earn safety bonuses if they perform their jobs without incident or accident and if they strictly adhere to company protocol. Safety bonuses may be paid to specific individuals, entire teams or the entire organization based on the impact each level has on safety goals.

Organizations that implement this type of pay must take great care to ensure their employees do not become incentivized to cover up incidents or accidents to receive this bonus. For example, if a warehouse operator knows their team’s safety bonus is on the line, they may not report an accident in the warehouse. This could be incredibly dangerous and lead to a culture with low accountability and communication.

Shift differential

Teams may choose to incentivize workers to pick up shifts at untraditional times by including a shift differential. Employers can add additional pay to certain shifts, such as:

• overnights
• holidays
• weekends
• extremely busy periods

Restaurant work pay

Restaurants have options when it comes to their pay structure for front-of-house or service workers. Some restaurants may choose to pay based on the tipped minimum wage. Others may choose to pay based on a reasonable wage, but not provide tips or require servers to pool and share tips. Both structures have their relative benefits and drawbacks.

Servers who make less per hour may be incentivized to work hard and provide excellent customer service to ensure they receive tips for their efforts. The pay potential for the servers may be higher, as the money they can make depends on the quality of their service and the generosity of their customers. On the other hand, these same servers may make very little while working slow shifts, and it may be difficult to get people to pick up unfavorable slots.

Servers who get paid a higher hourly rate may be more flexible with the shifts they work, given their more predictable take-home pay. On the other hand, these servers may have a lower earning potential that is tied to the hours they work rather than the service they provide.

The pay structure that restaurants choose will likely be based on their unique circumstance. Like many other industries, there is not a “one size fits all” approach to restaurant pay structures.

Compensation package examples

Use these compensation package examples to better understand common pay structures and how they may appear on job postings.

IT sales:

• $75,000 base pay (paid monthly)
• bonus of $4,000 per quarter if the employee averages 50 outbound calls per day
• commission of 2% of revenue for all sales made
• health insurance paid by company at 75% of the premium
• dental insurance paid by company at 75% of the premium
• 401(k) with company match up to 3%
• 20 days paid time off
• commuter benefits up to $100 per month

Restaurant Server:

• $15 per hour
• $22.50 per hour on Sundays and holidays
• 1 hour of PTO for every 30 hours worked
• annual bonus of $2,000 for every server who has been with the restaurant for the preceding six months paid in October

Explore Paycom’s resources to learn more about pay, benefits and other aspects of compensation.