Pay structures and pay progression

A pay structure:

• is a collection of grades, levels, or bands,
• links related jobs within a hierarchy or series, and
• provides a framework to implement reward strategies and policies.

They are designed to:

• Align the reward strategy with an employer’s mission, vision, purpose, culture, and its 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.
• Assist in communicating to existing and potential employees how their pay is determined and managed, and what they need to do to progress.

Our 2019 Reward management survey finds that 67% of employers use a pay structure. They are most common in large and public sector employers.

The span of a pay band is the percentage difference between the minimum and maximum salary in the range. For example, if salaries range from £30,000 to £45,000, the span of the pay band is 50%. The wider the span, the greater the progression potential.

‘Differentials’ refer to the percentage difference in pay between the mid-point of one grade and the mid-point of the next higher grade. The differential needs to be large enough to reward taking on more responsibility.

Pay progression is how a person moves to higher pay within a band. It is often regarded as the measure of ‘real’ wage growth. It’s distinct from salary rises linked to either inflation, or a promotion to a higher band.

Organisations use pay progression to:

• Encourage and reward desired employee behaviours.
• Maintain pay competitiveness while controlling wage costs.
• Provide a fair and transparent process to determine individual salary increases.

Progression is usually determined by the:

• Span of each pay band – the degree of width within each grade.
• Number of pay bands within the overall pay structure.

There may be an overlap between the top levels of pay attached to one band and the lower levels of the next grade up. This recognises the greater value of contribution from a highly experienced individual at the top of their band compared to a newly-appointed employee on a learning curve at the lower end of the grade above.

Pay structures have two key characteristics:

• The number of bands within the structure.
• The span of each band.

Below are short definitions of different pay structures. However, definitions vary, and at times approaches may overlap. In fact, a strict definition might exclude the first two categories, because these can be classed as unstructured arrangements.

Individual pay rates, spot rates, spot salaries

There's a single hourly, weekly, or annual pay rate for each job or person. Spot rates are found

among lower-skilled occupations where there’s a need for a simple ‘rate for the job’, or

among more senior positions, where the remuneration package is designed to attract, retain, and motivate a specific person.

There's no formal structure for progression with this approach. However, there may be scope for moving to a higher spot rate, or to increase spot rates and keep pace with market rates or inflation.

Individual pay ranges, individual job ranges, individual salary ranges

These are more sophisticated versions of the above. An employer attaches a pay range to each job or employee. Individual salary ranges may be preferred to individual spot rates because they allow some formal scope for pay progression.

Narrow-graded pay structures

These comprise many grades, usually ten or more, with jobs of broadly equivalent worth slotted into each band. Usually, progression comes in increments linked to service length. Because grades are narrow, most people reach the top of their range quickly. However, this can lead to demands for upgrading and cause 'grade drift' (jobs being ranked more highly than justified).

Pay spines

Pay spines are step-by-step pay points that increase with length of service.

Broadbanding

This uses a small number of pay bands, typically four or five. This allows for greater pay flexibility than narrow-graded structures. A typical arrangement has 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

Somewhere between narrow grades and broadbands. They usually have between six and nine grades. They can help counter grade drift as there’s greater scope for individuals to progress further, without the need for regrading.

Job families

This groups jobs within similar occupations or functions together. Usually there are around six to eight levels, like broad-graded structures. There are separate salary structures for different families. This can help in facilitating higher pay for sought-after workers.

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 emphasise 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. Two inter-related factors contribute to local pay variation:

• Differences in the cost of living.
• Relative tightness of local labour markets.

See Research commissioned by the Office of Manpower Economics.

Progression arrangements should fit an organisation’s strategy and ethos. It’s also important that pay progression is fair and free from unlawful bias – see more on pay fairness.

Types of progression mechanisms include:

Length of service

A person moves through 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 also discriminate indirectly against women. This is because women are more likely to take time off to meet family responsibilities.

Age-related increments

Seemingly outdated, there are still 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. However, the government recently updated its remit for the Low Pay Commission. Over time, all those aged 18 years and over will be entitled to the same minimum rate of pay.

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

Employers link individuals' pay rises to team performance to encourage collaborative working.

Organisational performance

Pay rises are linked to organisational performance (for instance, sales levels or profit).

Competency pay

Employers link a person's pay rise to an assessment of their competencies. This focuses on what the person puts into their job, rather than their achievements. Find out more about competence and competency frameworks.

Skills-based pay

Pay rises are based on acquiring additional skills or specific qualifications. This is to encourage people to undertake appropriate study or training.

Market rates

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.

Where pay arrangements are more complex, the structure itself may be adjusted each year. This is often an inflation-based increase for 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 a higher pay rise than those above it.

Some employers award a cost-of-living increase and then a separate award using one or more of the above methods. Some other employers add these two pay increases together into one pay award. This is particularly common during low inflation.

The CIPD’s 'Pay, performance and transparency' report explores the factors that have had the most influence in increasing base pay, as well as the different ways employers link employee pay with performance.

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's needs, including affordability.
• organisation's mission, vision, and values.
• needs and aspirations of existing and potential employees, in a clear and fair way.

Organisations should regularly review the way they structure pay and determine salary progression as economic, political, regulatory, and technological contexts change. If existing arrangements can’t adapt to meet employer or employee 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 pay band. For example, choosing a market pricing approach, where rates reflect those in the external labour market, or choosing an analytical job evaluation scheme, which 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.

Red-circling

Existing employees’ pay can be protected through ‘red-circling’. This maintains an individual’s pay at its current level when the job is downgraded under a new structure. However, red-circling is problematic as it tends to perpetuate existing pay inequalities. Limiting the red-circling period helps address this issue, but employers should seek legal advice first.

While modern pay structures aim to reward 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 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 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: this involves

  • dividing each pay band into, say, three zones and,

  • specifying that individuals can only progress to the next zone for exceptional reasons. This is particularly useful for employers with a broadband system.

• Cash bonuses: A reference point could be set in the pay range. Beyond this point, cash bonuses might be paid instead of consolidated pay increases.

Books and reports

Armstrong, M. (2023) Armstrong's handbook of reward management practice: improving performance through reward. 7th ed. London: Kogan Page.

Perkins, S.J. and Jones, S.E. (2024) Reward management: alternatives, consequences and contexts. 5th ed. London: Chartered Institute of Personnel and Development.

Visit the CIPD and Kogan Page Bookshop to see all our priced publications currently in print.

Journal articles

Greene, R. (2022) Effectively managing pay budgets, structures and rates. The Journal of Total Rewards. Vol 31, No 2.

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.

Video

The key to effective pay structuring

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.