Pay grading – designing your structure and setting pay bands

The choice of pay grading structure will depend on a number of factors including the size of your organisation and the number of individuals it employs. Key considerations include the number of grades or bands used, the width of the pay ranges within those grades or bands, and allocating employees to the structure.

To help plan for these crucial stages, we share our insights on the factors to consider.

How many bands should be used in a pay grading structure?

One of the most critical elements in designing your pay grading structure is creating the system of internal grades, bands or levels. Grade ultimately determines the pay range available to each individual.

Allocate a grade that is too high and spend is higher than needed; too low and pay is not commensurate with the role: both scenarios potentially leading to significant internal issues.

Creating the grades involves grouping employees into distinct bands based on equivalency of role – so staff deemed to be operating at the same level within the organisation’s hierarchy. Cendex uses a series of job levels that are assigned to staff, to denote level of seniority within the organisation. These start at Level 10 for the Chief Executive and include levels for Directors, Senior Managers, Managers, Professional and Technical staff and operational and ancillary staff.

It’s important here to consider how many grades you need and that really depends on the complexity of your organisation’s structure. A relatively simple, flat structure, will probably require a smaller number of grades than one that is larger and more hierarchical.

In some cases you may assign all 13 Cendex job levels to employees and translate these like-for-like into 13 grades or bands. Where levels are deemed to be sufficiently similar, they can be merged to form a single internal grade, so the 13 levels could be condensed down into a smaller number of grades. Where levels are merged into a single internal grade, different points on the pay range can be utilised to reflect differing levels of seniority, if required.

In other organisations that may not have as many differing levels of staff, the grades may look much simpler – not all organisations have multiple tiers of management and may just have a couple of layers of management supporting a limited number of operational staff, operating across a small number of different levels. If employees are coded to just 5 Cendex levels, for example, then these may be translated to 5 like-for-like internal grades.

One additional thing to consider though is not just the current staff population and their levels, but any short to mid-term plans that may impact the organisational structure – so if currently you only have two tiers of management but are planning to evolve and include a third tier, then it makes sense to build in scope for this expansion to your pay grading structure during the design phase.

How many points should each band have?

The pay range is just that – a range. This requires a start and end point, so a minimum of two points in the range. However, a range based just on two points is loose and unstructured and may not provide the clarity in salary progression you are aiming for. It also provides no framework to inform hiring decisions and decisions around pay adjustments and can still subject to challenge, eg if all staff are positioned at random between two points, it is difficult to demonstrate pay equity, and if all employees are positioned at one of the two points, there is little scope for salary progression after a single increase in pay from point 1 to point 2.

Using additional points within the pay range helps to eliminate very broad bands for a grade. A 3-point range immediately provides more clarity around how employees can progress across the range, from starting salaries (point 1) though to those established in role (point 2) and then those exceeding the expectations of the role (point 3). Adding additional points to a range can add more structure and provides a clearer framework for employees to progress through the different points in the range. They can also allow for more flexibility – so in a 5-point range being able to move into the second point during recruitment if certain clear criteria are met (eg market data indicates that the role in question does command a premium and it is felt that the standard recruitment zone is not sufficient) can be very beneficial in keeping pace with market trends. The additional point or points at the top of the range also allow for flexibility in rewarding outstanding individual contributions – again, where clear criteria are met.

How should I select the best comparator group for market benchmarks?

Using the most appropriate market data for your organisation is very important – lack of alignment with the market puts you in a vulnerable position when it comes to both recruiting and retaining staff. Put simply – correct market data ensures market alignment for the ranges available to each employee.

Cendex data, taken directly from our groundbreaking platform, is based on employer payroll data and has been thoroughly audited and validated. It is also extremely current – updated on a monthly basis.

How should the market be defined?

It is important to carefully consider how you define your market. There is no single source of truth here and how you define your market is critical in ensuring you end up with a system that will work for you, both in terms of reflecting the right levels of pay for the market in which you operate as well in terms of affordability.

If you are a small charity in the north-west, you almost certainly do not want to be using national data for all UK regions, from all industry sectors as your market data – this would include a whole range of data from organisations who have little in common with you and the resulting rates will not necessarily reflect your market. Similarly, if you are a large financial institution, you may not want to be basing your pay ranges on data that includes very small organisations operating in sectors that are vastly different to your own.

In considering how you define your market first consider your recruitment pool – so where do you tend to recruit? Is it from other organisations in the same or similar industries? Also consider where you are losing staff to? If for example, you are losing staff to the public sector then you might want to consider public sector pay rates when setting your own pay ranges, to ensure you remain competitive and prevent higher than necessary rates of turnover.

Which reward position should be used?

Once you have defined your market, you then need to decide which measure to use or rather, which reward position to use in the range associated with each grade. If you have a defined pay policy this may already be established – do you aim to be a median payer or an upper quartile payer? If you make assurances to staff that no-one will be paid below market median, then the start of your pay range for each grade should be the market median, so that might be the market median for London based charities, if this is how you have defined your market.

If pay policy is not so explicit then a certain percentage either side of your chosen measure is worth considering, so if you build your range around the market median (the most commonly used metric) – then in the case of a 3 point range, you would have the market median as your mid-point and then position points 1 and 3 as a certain percentage either side of median (such as 5% either side but you could use 10, 15 or 20% or even vary it and set the start of the range as say 10% below median but the start at 15% above).

You may also use different reward positions for different grades – so for example, grades more impacted by the cost-of-living crisis could be positioned at a slightly higher percentage of market median than higher grades that are less likely to be impacted.

How do we assign roles to the pay grading structure?

Designing a scheme on paper is one thing – implementing it in real life is a very different proposition.

One important consideration is how and where to position incumbent employees within the new scheme.

The position of each employee within the range can be assigned via validation against the external market, meaning that niche roles may command a higher position within the pay range than other roles, so niche technical experts may occupy point 4 on a 5-point scheme to reflect the premium commanded by their role, as indicated by market data.

We can also consider whether any of the steps through the points in the range are automatic or incremental? So do all new employees starting at point 1 in a 5-point range progress automatically to point 2 after the successful completion of a probationary period, for example. Is progression beyond this then linked to the outcomes of an annual appraisal system?

A misconception of current market position is where many schemes fall down. Where organisations assert that they pay market median but do not routinely benchmark against the market to check this, they may find that when they link their grades to a range around market median, they discover a significant proportion of staff fall outside the range they have set, meaning that the cost to actually implement may be prohibitive.

It is vital to have buy-in from internal stakeholders for this very reason – it is usually beneficial to have the ongoing support of the finance function in particular and those responsible for signing off on any increased costs resulting from this exercise through all stages of the system design. Not doing so risks a great deal of time being wasted on the design and build of a scheme which may ultimately be rejected for lack of internal stakeholder buy in.

Where the scheme design does appear to be out of budget, based on the distribution of current employees across the proposed pay ranges, a pragmatic approach needs to be taken – there are three main things to consider at this stage:

– Some outliers are to be expected. However, it is worth considering whether the job level is correct for roles that appear to be outliers – too high or too low a level and the pay range will be out of kilter for the role and there will be more outliers.

– Consider the the breadth of the range – you may wish to start at market median but if you cannot afford to, you may need to consider starting your range at a percentage below median. If you’re already doing this, then consider adjusting the percentage variations, so starting at 10% below median rather than 5% for example.

– Consider the market data – you may wish to benchmark against the Inner London market, but if you cannot afford to then could you further refine the market data, perhaps by considering London and the South East.

When it comes to implementing your scheme, as a general rule no employee should see basic pay decrease as a result of a new scheme. For general guidance, if current employee salaries:

– fall below the starting salary for their assigned grade – salaries should be increased to at least the starting position;

– Sit above the maximum salary for their assigned grade – they could be frozen until this is no longer the case or paid the amount above the grade as a non-consolidated lump sum; or

– falls within the range assigned, then they should stay unchanged until next scheduled review.

A system will only be successful if the rules governing its use are followed internally. Clear guidelines must be made available and must be followed both in the implementation phase and for the ongoing use of the structure.