Many factors like budgets, operations, and other organisational considerations play a vital role in determining a company’s payment and payroll strategy. For instance, small companies may not be able to pay the higher wages that large companies are able to but may choose to promote employees quicker than large companies and vice versa. Here are three common payroll structures that organisations use and how they work.
Traditional
This type of pay structure is divided into multiple pay grades and is narrower in scope than other types of pay structures. Under a traditional pay structure, there is a relatively small distance between each pay range. As a result, this pay structure type is second in terms of popularity and usage by organisations.
Traditional pay structures are more controlled than other types of pay structures due to their narrow pay grades. This prevents employees from reaching their maximum salary potential quickly and helps retains them longer as they see more room for incremental increase.
A traditional pay structure provides a hierarchical system that allows employees to be easily promoted from one pay grade to another. When this payroll system is designed right, this pay structure will also recognise different pay rates for good performance and even guarantee a reasonable level of control over salary expenditure.
Under this pay structure, organisations use various metrics such as the length of employment and performance to determine an employee’s pay rise. To avoid confusion, they also set a minimum and maximum salary range for each employee group.
Pros
- Facilitates higher employee retention
- Easy to execute and control
- More room for salary increment and promotions
Cons
- Salary increment can be biased on factors such as age and length of employment
- Employees can be easily demotivated as they can’t reach their maximum salary potential quickly
- Not an attractive salary structure for potential millennial job candidates
Broadband
This pay structure divides employees into types instead of specific titles. For example, broadband pay structures will have divisions for administrative jobs, executive jobs and service jobs. These salary ranges are much wider than those under a traditional pay structure with fewer pay grades.
One of the main advantages of this pay structure type is that it offers greater flexibility for pay raises. However, the organisation can have poorer control over the pay difference between employees of the same job, resulting in inequalities. This is why this pay structure type is third in terms of popularity and only a few companies use it.
Under this pay structure, employers can sometimes offer an employee a maximum salary too early in their career, limiting their earning potential. This may dissatisfy employees’ sooner, as their raise may not satisfy them in the long run, causing them to leave the organisation.
Pros
- More flexible than other pay structures
- Can easily attract potential job candidates as the structure offers quick salary increments
- Motivate employees easily
Cons
- Employees can reach their maximum salary potential too quickly
- Requires good financial stability to execute the pay structures
- As employees can reach their maximum salary potential too quickly, their probability of leaving the company is also increased.
Market-based
This pay structure determines salary ranges based on the current market analysis and industry standards of comparable positions. This structure bases its salary ranges on the job roles. For example, an organisation may use this pay structure to analyse the data for the average salaries of hotel managers and create a salary range within these figures. It placed first in terms of popularity around the world, as the majority of the organisations use this pay structure and makes an excellent fit for global payroll solutions.
It’s a combination of both traditional and broadband salary structures which is why salary ranges under this pay structure can be as low as a traditional structure and as high as a broadband pay structure. An external audit through an outsourced payroll company is one of the best ways to accurately identify and determine salary ranges or pay levels for each job position.
Pros
- Offers competitive salaries
- Easy to attract high talent
- Promotes higher employee retention
Cons
- Requires good financial status
- Not suitable for all businesses
- Can be expensive to maintain
As you can see, the different pay structure types each have their own pros and cons. The one that best suits your business will depend on your business’s type, scale, goals, vision and overall financial status.
