Dos and Don’ts of Salary Structure Design

A strategically designed salary structure serves as the foundation for effective compensation management. It establishes clear guidelines for pay decisions while balancing internal equity with market competitiveness. This article outlines the essential components, technical considerations, and implementation steps for developing a pay structure that supports organizational objectives.

Key considerations in structure design

Salary structure design requires careful balance between business demands and technical requirements. Organizations must evaluate multiple factors to create a framework that supports both operational needs and talent management goals. 

Business considerations

Basic pay structure begins with evaluating four core business elements:

• Strategic objectives determine how pay supports business goals. Organizations focused on rapid growth require structures emphasizing market competitiveness, while those prioritizing stability may focus on internal equity.
• Competitive practices shape structure parameters based on industry standards. This includes analyzing common range widths, pay levels, and career progression patterns within your sector and target talent market.
• Organizational culture influences structure flexibility. Companies with formal hierarchies typically adopt traditional structures with defined grades, while flat organizations may prefer broader bands supporting lateral movement.
• Affordability calculations set realistic parameters for structure implementation. This requires analysis of current payroll costs, projected increases, and available budget for addressing pay gaps.

Technical considerations

Establishing pay structure relies on four interconnected technical components:

• Number of salary ranges aligned with organizational hierarchy
• Width of ranges for internal progression
• Distance between consecutive grade midpoints
• Overlap between adjacent ranges

These elements work together to create a cohesive system. The number of ranges must reflect actual organizational levels while providing clear career paths. Range widths establish room for growth within positions, while the distance between grades ensures meaningful promotions. The careful calibration of these components prevents common issues like pay compression or excessive internal competition.

Design Characteristics

The foundation of any salary structure rests on specific design metrics that govern its operation. 

• Range spread establishes the boundaries for career growth within a single level, creating room for performance-based increases while maintaining control over total compensation costs.
• Midpoint differentials create meaningful distinctions between grades, supporting clear career progression paths. These differences must balance the need for promotional incentives against overall payroll impact. When properly calibrated, they motivate performance while maintaining internal equity.
• Range overlap supports career development by allowing high performers in lower grades to earn more than new entrants in higher grades. This flexibility helps retain valuable employees who may not be ready for promotion while ensuring fair compensation for demonstrated capability.

Types of Structures

Different organizational needs require distinct structural approaches. 

• Traditional structures feature clearly defined grades that support systematic career progression. These structures work well for organizations with established hierarchies and standardized job functions, providing straightforward paths for advancement while maintaining tight control over pay decisions.
• Broadband structures consolidate multiple grades into wider bands. This approach suits organizations emphasizing career development through lateral movement and skill acquisition. Broadbands offer greater flexibility in managing pay but require robust performance management systems to guide compensation decisions effectively.
• Market-based structures focus on external competitiveness. They align pay ranges directly with market data for specific job families or functions. This model works particularly well in industries with high competition for talent, allowing organizations to respond quickly to market changes while maintaining internal consistency.

Administrative considerations

Effective structure management requires clear policies for special salary situations. A primary concern involves managing salaries that fall outside established ranges. Companies must develop specific guidelines for:

• Above-range salaries resulting from superior performance or market conditions
• Below-range salaries requiring adjustment to maintain compliance and equity
• Time-based protocols for bringing outlier salaries within range

Pay compression presents another critical administrative challenge. It occurs when new hire salaries approach or exceed those of experienced employees due to market pressures. Prevention requires regular analysis of internal pay relationships and proactive adjustments to maintain appropriate differentials based on experience and performance.

The structure must also align with broader compensation programs. This includes establishing clear connections between:

• Base salary position and bonus eligibility
• Grade levels and benefits packages
• Performance ratings and salary increase guidelines

Organizations should review these administrative elements annually to ensure continued effectiveness and alignment with business objectives.

Key steps in developing a salary structure

The development of an effective salary structure follows a systematic process that ensures both market alignment and internal consistency. Each step builds upon the previous one to create a comprehensive framework for compensation decisions.

Step 1: Job evaluation

Job evaluation creates the foundation for structure development through systematic assessment of position requirements. This process begins with evaluating benchmark positions using market data to establish baseline values. Organizations then evaluate remaining positions against these benchmarks, considering factors such as required skills, responsibilities, and impact on business results. The outcome produces a clear job-worth hierarchy that reflects the relative value of each position to the organization.

Step 2: Group similar jobs

Position grouping transforms individual job evaluations into a manageable structure. Analysis of evaluation scores reveals natural clusters of positions with similar values and requirements. These groupings consider both vertical reporting relationships and horizontal career paths. The resulting clusters become the framework for formal salary grades or bands.

Step 3: Create salary ranges

Range development establishes the compensation parameters for each grade level. This critical step requires careful analysis of market data, current employee salaries, and organizational budget constraints. The process determines three key values for each grade:

• Minimum: Entry point for qualified candidates
• Midpoint: Target for fully competent performers
• Maximum: Upper limit reflecting highest sustainable value

Step 4: Assign jobs to ranges

The final implementation phase places positions within appropriate salary ranges based on their evaluated worth. This assignment process weighs both analytical results and practical considerations. Each placement must support career progression opportunities while maintaining competitive market positioning. The completed structure provides a clear framework for managing pay, from entry-level positions through senior roles.

Dos and don’ts of salary structure design

The success of a salary structure depends heavily on both implementation approach and ongoing management. Organizations must balance multiple priorities while avoiding common pitfalls that can undermine structure effectiveness.

Essential practices

A well-designed salary structure requires consistent attention to market dynamics and internal requirements. Organizations should regularly assess market competitiveness through reliable salary surveys and industry benchmarks. This data supports periodic structure adjustments to maintain alignment with both business strategy and market conditions.

Internal equity demands equal focus. Companies must monitor salary relationships between jobs, departments, and career levels. Regular audits help identify potential compression issues or equity concerns before they impact employee engagement or retention.

Implementation requires clear policies and procedures. Management needs specific guidelines for:

• Starting salary determination
• Promotional increases
• Performance-based adjustments
• Market-driven modifications

Practices to avoid

Several common mistakes can quickly erode structure effectiveness. Extended use of off-range salaries creates precedents that weaken the entire framework. When employees remain below range minimums or above maximums without clear justification, it signals potential structural problems requiring immediate attention.

Pay compression represents another significant risk. Allowing new hire salaries to match or exceed those of experienced staff creates internal equity issues. Organizations must maintain appropriate differentials based on skills, experience, and performance to preserve structure integrity.

Midpoint management requires particular care. Creating excessive distances between grade midpoints can make promotions prohibitively expensive. Conversely, insufficient differences between grades fail to reward career progression adequately.

Effective salary structure design combines technical expertise with strategic business alignment. Success requires ongoing monitoring and adjustment to maintain both internal equity and external competitiveness. Organizations that invest in proper structure design and management gain a powerful tool for attracting, retaining, and motivating talent while controlling compensation costs.

The complexity of this process often benefits from expert guidance. By leveraging Talentnet’s payroll services—which streamline salary administration and ensure compliance with evolving regulations—alongside their compensation specialists, organizations can maintain pay structures that align with market trends and business objectives.