Types of Pay Structures and When to Use Them
As you consider what to pay your employees to stay competitive in the market, it’s important to first get a handle on the types of pay structures you're going to deploy.
Understanding the different pay structures and the tools you have to pay your employees is key. You need to make sure you are designing your pay structure to both support your finances and to attract and retain the right talent for your team. The wrong pay structure can crush your run rate or make employees consider other jobs.
What are Pay Structures?
A pay structure, or salary structure, organizes employee salaries into levels or grades by job type, with each level having defined minimum and maximum salary ranges. This includes any framework used to identify how to pay an employee.
As an HR professional this is a place for us to shine as a strategic partner.
Pay structures vary from one organization to the next. Depending on the stage of your business, you may be able to distribute more cash, if you are profitable, while other companies that are still in earlier stages may need to lean on equity more.
Working out a salary structure in advance can help simplify your payroll processing checklist.
Why are Pay Structures Important?
Pay structures matter because they provide a clear, consistent approach to compensating employees. A well-designed structure enhances fairness, supports strategic business goals, and ensures internal and external equity, making it a crucial component of any HR strategy.
Pay structures can also directly influence job satisfaction, performance, retention, and your ability to attract talent.
A strong pay structure helps:
- Ensure fairness and transparency in how compensation decisions are made
- Align pay with industry standards, job responsibilities, and employee performance
- Motivate and retain employees by providing consistent, predictable compensation
- Enhance loyalty and engagement by reducing potential disparities
- Set clear expectations around compensation growth and advancement
- Reward contributions in a structured and scalable way
In short, a thoughtfully crafted pay structure improves morale, supports talent attraction, and reduces risk related to pay discrepancies.
What is a Compensation Philosophy?
Your pay structure should reflect your organization’s compensation philosophy compensation philosophy, i.e., the guiding principles behind how and why you pay your employees.
Here are three real-world examples I’ve seen of compensation philosophy statements and the industries they come from:
- “Pay at top market to attract and retain the best talent in our field.” (Tech)
- “Our pay is fair, competitive and is focused on performance.” (Marketing)
- “Our compensation reflects our values that we are all in this together.” (Startup)
A compensation philosophy doesn’t need to be complex. What matters most is that it aligns with your company culture and clearly communicates your approach to pay.
As an HR professional, your job is to work with leadership to define that philosophy, translate it into a compensation strategy, and build a pay structure that supports it. That includes developing pay bands, benchmarking roles, and conducting competitive market analysis to ensure alignment with your goals.
If your organization chooses to deviate from market pricing, you need to be able to clearly explain why—to candidates, employees, and managers—so it informs hiring decisions, merit increases, promotions, and job changes.
And if not, determine how we will talk about that with our employees and candidates and bring it to life as well as use it in merit conversations, promotions, job changes, hiring.
You also need to train managers on how to talk about it, decide how transparent you're going to be across roles, and make sure the team is clear on how their compensation is decided, why it is structured that way and what the expectations are to achieve their compensation goals.
Ultimately, the clarity and consistency you bring to compensation strategy will set the foundation for trust and transparency in your organization.
Types of Pay Structures
There’s no one-size-fits-all approach to designing a pay structure. The right model for your organization depends on your stage of growth, compensation philosophy, market competitiveness, team composition, and financial flexibility.
This table summarizes the most common types of pay structures, along with guidance on when they make the most sense to use. Plus, I'll explain each option more below.
| Pay Structure Type | Description | When to Use |
| High Equity, Low Cash | Prioritizes stock options or equity over base salary. Common in startups where cash flow is limited but long-term upside is high. | Use this if you're an early-stage company attracting entrepreneurial talent who are comfortable with higher risk and motivated by future equity value. |
| Company-Wide Bonus | Offers a shared bonus tied to company performance metrics like revenue or EBITDA. Offers flexible cash compensation. | Use this if you want to keep base pay stable but reward performance selectively based on overall business success—especially in post-startup or low-margin phases. |
| Multi-Tiered Job Leveling | Breaks roles into multiple levels (e.g., Engineer I–IV) with clear distinctions in responsibility, scope, and pay. Supports structured career growth. | Use this if you’re scaling beyond ~50 employees and need formalized career progression. Best for growing teams and larger organizations. |
| Broadband Pay Structure | Consolidates several levels into wider pay bands, reducing hierarchy and allowing for more growth within roles. | Use this if you want to support internal flexibility, minimize rigid hierarchies, and give experienced employees room to grow laterally or slowly over time. |
High Equity, Low Cash
This is common in earlier stage companies where they don’t have the revenue to support a high payroll yet.
Use this pay structure if you're looking for people with a more entrepreneurial spirit with a tolerance for high risk and high rewards.
Company-Wide Bonus
If your company is past the very early days but maybe not profitable (or barely profitable), leveraging a company wide bonus might help.
Use this structure if you're trying to make total cash compensation (base + bonus) competitive in the market but give the company some flexibility to only pay it out if they hit specific financial goals (like EBIDTA, sales targets, etc.).
Multi-Tiered Job Leveling
Especially if you are a larger company, it’s very possible you have five levels of individual contributors on the engineering team before it breaks into management roles. You may call this just Engineer I, Engineer II, etc or use more descriptive words like Associate Engineer, Engineer, Senior Engineer, Staff Engineer, etc.
It’s important to make sure your job leveling makes sense and it is clear if these are promotional steps (so added responsibilities, more complex work, etc) or just pay grades.
Use this structure if you're scaling beyond 50 employees and you need to formalize career progression paths and pay levels. Be specific about the difference in responsibilities, work and pay grade between levels as you build out bigger teams.
Broadband Pay Structure
On the flip side, you may decide you don’t want as many levels so you can make your salary bands wider. Or in other words, you have it take longer to move up a level.
This is common the higher a person moves in the organization. For example, it takes a lot longer to move from a senior manager position to director or executive than it does to go from associate to an intermediate level position.
Use this pay structure if you are flattening hierarchies or want to provide greater room for employees to evolve their responsibilities within a role.
Why Structure Matters
Each pay structure offers different trade-offs. Some promote agility and shared ownership (like equity-heavy models), while others support career clarity and internal equity (like tiered leveling). The key is choosing a structure that supports both your business goals and employee expectations.
Elements of Pay Structure
HR has to come to the table with recommendations and an outline of the frameworks below and then work with key leaders to design, implement, communicate, revise, and manage the pay structure you decide for your company.
Market Benchmarking
Role specific - The first thing you need to do is make sure you understand what is market value for a role at a company your size.
For example an engineer tends to have a higher pay range than a customer support representative. Often this is based on complexity of the role, the expertise or skill specific background and other factors.
There are some great tools out there that HR professionals can use to get strong market data that will even note size of company, revenue, fundraising stage, etc.
Role Tiers & Career Levels - As part of the benchmarking process, you also want to make sure you are building out tiers or job leveling for each role. In an ideal state you have this across the company so people can understand how different roles are leveled, but it’s most important to do it within a department if you need to start with a simpler process.
You need to know if an associate is more junior than a specialist? What roles are “managers'' versus “directors”? Do you have multiple tiers within a level (example Associate Manager, Manager, Senior Manager)? Are their individual contributor roles that are as senior as functional leaders (like a Principle Software Engineer and a Director of Engineering)?
Not only is this important for compensation management, but also for career development in your organization.
Pay Components
Cash Salary
While this might be the most obvious place to start, depending on the stage of your organization, it’s important to ask these base line questions.
- Are you at a place where you can pay someone a consistent salary?
- Are they full-time or part-time?
- Will you deliver payroll by check or direct deposit?
- Are they exempt or non-exempt (aka overtime eligible)?
- Are they a contractor or an employee (don’t make this decision based on cost, but the scope of the role)?
- How will contractor payroll be managed to ensure compliance and efficiency?
- Is it more of an advisor role where you can just pay in equity, versus any cash?
- Are you going to adjust compensation based on location? What if they move cities, does that change the answer?
Yes, companies pay most roles a base salary, but there are still decisions to be made even if that is the baseline for your company.
Cash Variable Compensation
Depending on the role or the stage of your company, you may want to consider either a bonus or commission.
Like salaries, it’s not an easy yes or no question, but here too, the first two considerations are cash flow and market benchmarking.
It’s worth considering, do you need to tie more cash to a bonus for some or many roles to give you more flexibility and help your run rate as a company? That way the bonuses are only paid out if the company hits certain financial targets.
If you do want to include individual bonuses for some roles, make sure they are tied to goals they feel like they can control and achieve (don’t make them softballs, but make them fair and motivating).
Identify if they are commissions (usually tied directly to sales & revenue goals), non-discretionary bonuses (often tied to direct personal metrics like a client success reps book of business retention) and discretionary bonuses (think leadership bonuses or company bonuses where everyone is tied to a bigger company level goal).
Equity & Stock
This will really depend on the stage the company is in. Whether you are Series A or a public company leads to two totally different equity/stock strategies.
Earlier stage companies often lean heavier on giving equity to help with cash flow and attract people who are excited about the building stage and who want to feel like they have ownership and skin in the game.
Many of the companies that publish market salary data will also include percentages of ownership (aka equity) for roles based on the size and revenue of the company.
Managing Pay Structures for Different Employee Types
Everything we've discussed to this point generally applies to salaried employees up to the senior manager or director level typically.
But the pay structure will look a little bit different when you begin to look at other types of employees, notably executives and hourly employees. Here's are some tips on how you can approach each.
Executives
Handling pay for executives, especially the "C-suite" level, is a bit different from the rest of the company. Their compensation often falls outside the regular pay structure with minimal controls.
Executives bring a wealth of experience and unique skills that significantly drive the company's success, necessitating more flexible pay options. Base salary is just one piece of their pay package, with incentives often making up 50% or more of their pay.
Given this dynamic, the traditional pay structure is less critical for them.
Hourly Employees
For hourly workers, managing pay is more straightforward. These roles typically have less variation in responsibilities, making fixed wages or step-based structures more efficient.
- Fixed Wage/Job Rate: Each job has a set hourly wage, perfect for well-defined roles with minimal variation and quick proficiency.
- Step-Based Pay Structure: This approach uses a schedule of hourly wages that increase based on time in the job, skills gained, or performance. This type of pay increase is common in both union and non-union settings where experience builds proficiency over time.
Keeping it simple and clear ensures fairness and efficiency in managing hourly employee pay.
How to Choose a Pay Structure
The best pay structure for your company depends on a few key factors:
- Business Size: Smaller companies usually need to keep a close eye on spending, while larger companies might offer higher pay to stay competitive.
- Industry: Certain industries fit specific pay structures better. For example, big, stable companies with frequent employee moves might go for a broadband pay structure.
- Location: Where your business is located matters too. Successful companies in your region might use a particular pay structure, so you'll want to look at market data.
- Employee Classification: Think about your workforce mix. If you have many part-time or temporary workers, a traditional bi-weekly pay structure with more control might be the way to go.
Choose A Pay Structure That’s Right For Your Business
You now have the toolbox to create the pay structure that is right for your company. It will evolve.
What you do as a 25-person startup will not be right for you at 500 people. As HR professionals, it’s our role to make sure that there's a process of compensation review and that pay evolves with our business and team.
We are the expert, strategic partner, and influencer when it comes to these decisions at our company. Understanding the tools above, you will find the right pay structure to implement for your company at this stage.
You might also want to check out this list of compensation management tools or compensation benchmarking companies that can help you with many aspects such as salary benchmarking, creating job architectures, and performance-based compensation.
