The salary structure refers to the framework by which a business builds its compensation system. Most companies operate within a specific salary structure as a way to organize employee compensation and make it easier for teams responsible for hiring new employees and promoting existing ones. The salary structure helps employees understand the minimum amount they can expect to earn and the maximum earning potential for their role.
In this article, we'll explore what a salary structure is, common types of salary structures to get acquainted with, and how to create a salary structure.
Learn about the Salary Structure
1. What is the salary structure?
A salary structure is how a company or its leadership determines the level of compensation an employee will receive. It is based on factors such as the length of time an employee has worked at the organization, their rank within the company, their accomplishments, and the type and difficulty of the work they perform.
Many employers use a salary structure that includes salary tiers, helping employees know the salary range they can expect for their role, with minimum, maximum, and average levels. The bottom salary is the minimum salary someone in that role can earn, while the top salary is the maximum amount an employee can expect to earn in that role. The middle ground is the salary range between these two points. New hires or existing employees receiving raises can negotiate the salary range they fall into.
New employees joining an organization may start at the lowest end of the salary scale because they lack seniority and may be assigned to non-managerial roles. Other new employees, while still new to the organization, may have more experience and work in leadership positions, in which case they may begin to be paid more according to the salary structure.
A salary structure that includes salary grades is common.
2. Types of salary structures
When deciding which type of compensation structure to use, consider what others in your industry are using, the size of your business, where your company is headquartered, and whether employees have exemptions or non-exemptions. Here are some salary structures:
→ Market-based salary structure
A market-based salary structure is the most common type and involves paying your employees based on what other companies in the same industry pay their employees. This type of salary structure requires some research so you can find the average salary for a position and build your own salary scale from there.
A market-based salary structure might look like this:
- Level 1: 5.000.000 to 7.000.000 VND
- Level 2: 8.000.000 to 10.000.000 VND
- Level 3: 11.000.000 to 13.000.000 VND
The main benefit of using a market-based salary structure is that employees will feel their compensation is fair compared to the industry average for their role. This can help employers retain top talent and recruit new employees with industry knowledge and experience to help the business succeed.
Traditional salary structure
Traditional salary structures involve using multiple salary tiers so that employees can reach their maximum salary over time, rather than achieving it too quickly, which can lead them to seek opportunities elsewhere or become less productive. Businesses using traditional salary structures also tend to offer smaller salary increases.
If you're considering a traditional salary structure, determine what you'll call each salary level, how much it will cost, and what the salary range will be for each level, including minimum and maximum amounts. Then, you'll establish what an employee must do to increase their salary, whether that includes staying with the organization for a certain period or demonstrating outstanding performance.
Using a traditional salary structure, a job at the organization could have a salary ranging from 8.000.000 VND to 20.000.000 VND, with the following salary ranges:
- Level 1: 8.000.000 to 10.000.000 VND
- Level 2: 11.000.000 to 12.000.000 VND
- Level 3: 13.000.000 to 14.000.000 VND
- Level 4: 15.000.000 to 16.000.000 VND
- Level 5: 17.000.000 to 18.000.000 VND
- Level 6: 19.000.000 to 20.000.000 VND
Companies using traditional salary structures may appreciate that it gives employees the opportunity to be promoted from one salary level to the next. When employees see that they are moving up within their salary range, even if they remain in the same position, it can be a great motivator for them to continue producing their best work. Traditional salary structures also allow a company to maintain more control over compensation.
→ "Wide Gap" salary structure
The "Wide Gap" salary structure is the least common, but some companies still choose this path because of its usefulness.
This salary structure is similar to the traditional salary structure in that there are salary levels that employees must advance to in order to receive higher pay. However, what makes the "Wide Gap" salary structure different is that it consolidates many salary levels into a few broader levels, meaning there are fewer salary levels and each level has a wider salary range.
Using a “Wide Gap” salary structure, a role at the company could have a salary ranging from VND 8.000.000 to VND 20.000.000, with the following salary ranges:
- Level 1: 8.000.000 to 10.000.000 VND
- Level 2: 11.000.000 to 14.000.000 VND
- Level 3: 12.000.000 to 20.000.000 VND
The advantage of broadband is that this structure focuses more on long-term career development than on promotion.
A company that chooses to use a “wide gap” may not have many opportunities for advancement. Instead, it provides a way for employees to develop their skills and take on more responsibilities so they can grow in their roles while receiving regular salary increases, even without promotions. A “wide gap” is particularly useful for smaller organizations with flatter hierarchical structures.
How to build a salary structure for a business.
1. Look at the salary structure in other companies.
Even if you're not using a market-based salary structure, you should still check how other companies are paying their employees in similar positions to yours. It's important to consider companies in the same industry to get the most accurate results. For example, if you run a software company, consider comparing the performance of other software companies to that of a healthcare company.
By conducting some research, you can gain a better understanding of how competitive salaries are and whether you need to make any adjustments based on your findings. You can also develop your formal stance on how competitive you want or can be compared to other companies. You might consider paying more than the market average if you want to attract high-quality candidates and keep your current employees happy. However, you may need to pay less than the market average if you are a startup with many benefits but limited resources to pay high salaries to new hires.
2. Decide how you will handle the salary increase.
Once you understand your competitive landscape, you can decide how you'll handle future salary increases for things like promotions and annual raises. Choose what you want based on these increases, whether it's employee performance or how long they've been with the company. You can also decide how often you'll offer increases. Most organizations conduct annual reviews where managers decide how much of a raise each employee should receive.
With market knowledge, you can also decide whether the increase you offer is above average. For example, a company might choose to pay a higher-than-average starting salary to its employees, but offer smaller annual increases than the market average. Another company might have a lower-than-average salary for a position, but offer generous annual raises to compensate.
It's up to each company to decide on the right balance between offering competitive starting salaries and retaining quality employees through impressive salary increases.
3. Evaluate your current salary structure.
When developing your compensation structure, assess your current salary levels to identify any employees or departments earning more or less than they should be based on your company's competitive landscape. You might find that you're inadvertently paying employees in one department more than the market rate for the same job, while every other employee in the organization is around the average for their position. This inconsistency can frustrate employees, who may then choose to apply elsewhere for higher pay.
4. Start building your salary structure.
After you've reviewed market rates and gained a better understanding of how you currently structure your compensation, you can write a salary range for each position, including minimum and maximum amounts. Choose how many salary increments you want to offer for each position.
5. Look at the salaries of your current employees.
There are written salary ranges for each position that will give you an opportunity to assess which range current employees fall into. You can review each person to see who is underpaid and who is overpaid in their role. Employees should be within the minimum and maximum salary range for their position; anything beyond that and you may want to explore ways to address this so you comply with the new salary structure.
If you're paying an employee less than their minimum wage, consider raising their salary to a reasonable level immediately. If this isn't a viable solution for your business, you could consider raising their salary over a short period. If you're paying an employee more than their maximum wage, you may need to postpone their annual salary increase until you adjust your compensation structure based on market rates. In this case, and to keep employees engaged and happy at work, explore alternative ways to compensate them. For example, you could establish a bonus program.
The benefits of having a salary structure.
Some organizations choose not to create a salary structure because developing one requires a team of employees who can dedicate the necessary time to fine-tune a system of this nature. These individuals would need to assign current positions and employees to salary levels and continuously monitor market rates for any necessary updates to the salary structure. However, companies that incorporate a salary structure may realize the following benefits:
1. Financial planning becomes easier.
Leadership teams, especially when budgeting for the new fiscal year or deciding whether to approve a new position within the company, can plan more easily if they know the minimum and maximum salaries for each position.
2. Employees perceive consistency.
New employees joining the organization with ranks that are fairly assigned to them based on the parameters you've set can lead to greater employee satisfaction. Existing employees can also feel confident that their compensation is fair.
3. The salary structure is a driving force behind employee and business performance.
When employees have a clear path to earning more money, they may feel motivated to work toward that goal. A well-structured compensation system can pave the way for an organizational hierarchy that employees can view and value as a career path.