Why More Companies Are Using a Market-Based Approach to Salary Structures

Organizations create salary structures to attract talented employees, manage their payroll expenditures, and provide fair compensation.

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Organizations create salary structures in order to attract talented employees, manage their payroll expenditures, and provide fair compensation for their employees. There are options when it comes to how to create salary structures; some versions being more complex than others. While there are no hard and fast rules when it comes to salary structures, there are four common types: traditional, market-based, broadband, and step pay structures. We’ll take a look at each structure as well as why most businesses are now using the market-based approach.

What are the four types of salary structures?

Traditional salary structure

A traditional salary structure typically has several narrow salary ranges alongside multiple grades, with individual structures for each type of employee. These structures are often based on specific job functions or types of employees. For example, hourly employees could be in one structure, salaried employees in another, and executives in a third. The advantages of a traditional structure are that it has a fair amount of flexibility but also defined parameters. The disadvantage is that managers have less discretion to give pay raises within this system.

Broadband salary structure

The broadband salary structure groups employees by the type of job they have, such as management, executive, sales, and administrative, rather than into multiple categories for each job type. The salary ranges within each job type can vary widely, with few strict controls in place to tighten the variance. The advantage to this system is flexibility, the disadvantage is the potential for unfair compensation variations within your team.

Step salary structure

A step structure is typically based on employee tenure, rather than performance. A specific job within an organization such as an HR assistant or data entry clerk would start with a base salary and then receive raises annually in most cases. This system is more rigid than traditional or broadband structures, but it is beneficial when internal equity is the priority and/or different performance levels are hard to measure.

Market-based salary structure

Market-based salary structures are based on data obtained from the job market about pay ranges for similar jobs. This is done through paid salary surveys. A salary range is then assigned to each distinct job type based on the survey findings. The pay ranges in a market-based salary structure are typically narrow in order to keep them in line with the external job market.

Why More Companies are Using a Market-Based Approach to Salary Structures

More and more companies are moving to a market-based approach to salary structures rather than a broadband structure. In a 2019 Survey of Salary Structure Policies and Practices conducted by WorldatWork and Deloitte Consulting LLP, broadband structures are declining in popularity; down to 5% of organizations versus 12% who reported using this structure in 2012. By comparison, 55% of organizations are now choosing to use some type of market-based salary structures. Out of those surveyed, 18% are using a pure market pricing approach, also known as “job-based pay ranges.”

In another key finding of the study, 75% of businesses said they now adjust their salary structures annually; up from 70% in 2012. This may indicate that businesses increasingly recognize the need to stay on top of market salary trends in order to attract and retain the best employees.

Regardless of which structure your organization chooses, it is very important to carefully consider which type of salary structure would provide the best competitive positioning within your industry, as well as the best reward system to keep employee engagement and retention high.

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