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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 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.  

Why are Pay Structures Important?  

Pay structures matter because they help organizations establish a clear and systematic approach to compensating employees, which directly influences job satisfaction, performance, retention and your ability to attract talent.

A well-defined pay structure helps to:

  • Ensure fairness and transparency in pay
  • Align compensation with industry standards, job roles, and employee performance
  • Motivate employees
  • Enhance loyalty and engagement
  • Provide clear expectations
  • Reward employee contributions appropriately.

Pay structures should align with your overall compensation philosophy

Here are three examples I’ve seen of compensation philosophy statements and the industries they emerged 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)  

It doesn’t have to be complicated, it simply has to reflect your culture and how you are going to design your pay structures.

The goal of any pay structure is to create alignment and clarity so your team knows how, why and what they are paid. As an HR professional, that starts with working with the leadership team on the compensation strategy and then what tools to use to create the pay structure. 

But for the HR team, that is just the start. We then have to go into the market and create the pay bands, establish salary ranges and do the competitive analysis so we know our structure is right for our company and reflects the market.

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.   

We need to train managers on how to talk about it, decide how transparent we are 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.

Types Of Pay Structures

There is no right or wrong way to build your pay structure if you are using the components noted below.   

As we have discussed, it's really more about the stage of your company, your compensation strategy, market competitiveness for your people, the make up of your team and how that all comes together.

Some common examples of different pay structures could be…

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 are looking for people with a more entrepreneurial spirit with a tolerance for high risk and high rewards.    
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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 are trying to make total cash compensation (base plus salary) competitive in the market but give the company some flexibility to only pay it out if they hit specific financial goals (like EBIDTA, Sales, etc).

Multi-tiered 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 in companies greater than 50 employees and 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 and you make your pay band 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.

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?   
  • 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)?
  • 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.

Author's Tip

Author's Tip

Make sure you identify and communicate those financial targets and how achievement will be measured and paid so the team understands at the beginning of the pay cycle.

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.


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 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 an HR professional, 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 that can help you with many aspects such as salary benchmarking, creating job architectures, and performance-based compensation.

Karen Weeks
By Karen Weeks

Karen has focused the last 20+ years on building amazing cultures within organizations so that individuals can ignite their careers. She cares about people's development so much that she is the Global Chief People Officer at Obviously, a VMLY&R company, and founded the coaching business, Shine at Work™. She hosts the career development podcast, also called “Shine at Work”, and is the author of “Setting the Stage: A Guide to Preparing for Any Feedback Conversation”. As a corporate speaker, she enjoys sharing stories and actionable advice so that people can shine at work and in life.