8 Types of Pay Structures To Consider for Your Workforce

If your pay decisions rely mostly on judgment calls, you’re not alone. Many organizations start out negotiating raises as they go, trusting managers to adjust compensation based on performance or tenure. While that may work for a small team, it quickly becomes unsustainable at scale.

Without structure, pay decisions become inconsistent. Employees doing similar work may receive wildly different salaries. Raises become harder to justify, and budgeting turns into guesswork. Over time, this can even lead to compliance risks — especially in industries like construction or the nonprofit sector, where funding, wage laws, and union rules leave little room for error.

That’s why pay structures are essential for growth.

A pay structure is a system for organizing how employees are compensated. It sets clear pay levels based on various criteria for hourly, salaried, or contract employees.

Most companies use salary ranges or pay grades to maintain consistency across similar roles. However, there are other types of compensation structures that are important to know about to choose which is best for your company.

In this guide, we’ll explore eight types of pay structures and how to align compensation with the needs of your workforce so you can scale with confidence.

What Is a Pay Structure?

A pay structure is a formal system that organizes employee compensation into clearly defined levels (often called pay grades or bands) based on job type, skills, or contract status. They give leadership more control over labor costs while setting clear expectations for employees. Each level will typically include a salary range with:

• A minimum (the starting pay)
• A midpoint (typically aligned with market averages)
• A maximum (the highest pay for that level)

These ranges are usually determined through job evaluations and comparisons with market data to ensure fairness and competitiveness.

Most pay structure models include percentage-based spreads between pay levels and may even use certain control points or reference rates (like quartiles) to guide promotions and raises.

Why Pay Structures Matter

A clear compensation structure can improve both financial planning and employee trust.

• Keep payroll predictable - Structured pay ranges help finance and HR teams manage labor costs more effectively.
• Clarify expectations - Employees know how their pay is set up and how they can advance.
• Support equity - Roles with similar responsibilities earn similar pay. This helps promote transparency and reduce bias.
• Stay competitive - Anchoring pay to internal rules or external benchmarks helps organizations avoid overpaying or falling behind market rates.

Done right, a pay structure improves retention by supporting fairness and aligning compensation with your broader business goals.

Types of Pay Structures

Most organizations use a mix of pay structures, typically based on role, region, and business need. Here is a quick look at eight common models:

‍

Now, let’s look at these eight key pay structure models in depth.

1. Traditional (Graded) Pay Structure

A traditional pay structure organizes compensation into a series of narrow pay grades. Each grade matches a specific job level and includes a defined salary range. Employees advance either by moving within their grade or by earning a promotion to a higher grade.

This system creates predictability and works well for organizations with established hierarchies and formal career paths (like government agencies, school systems, or large nonprofits). The structure also supports compliance and budgeting by standardizing pay across similar roles.

Here is an example of a traditional pay structure where each grade reflects increasing responsibility and expertise. Employees can progress within a grade based on performance and tenure, and move to higher grades as they take on more complex roles.

Benefits

• Clarity and consistency - Employees understand how their pay is determined and what they need to do to advance.
• Promotes equity - Jobs with similar responsibilities earn similar compensation, reducing pay gaps.
• Eases financial planning - Defined ranges make it easier to predict raises and manage budgets.

Challenges

• Limited flexibility - It can be difficult to reward top performers or adapt quickly to labor market shifts.
• Can become rigid - Too many grades may slow down promotions and create unnecessary red tape.
• Risk of stagnation - Employees may reach the top of their grade and feel there’s nowhere left to grow.

Best Fit

Traditional pay structures are best used with formal job hierarchies and clear career frameworks. Government bodies, educational institutions, and large nonprofits often rely on this model to encourage fairness and transparency — especially when reporting to unions or donors.

2. Variable Pay Structure

A variable pay structure links compensation to performance. Instead of relying solely on fixed salaries, employees can earn additional income based on individual, team, or company results. Bonuses, commissions, differential pay, profit-sharing, and stock options are all common examples.

These incentives are typically tied to clear metrics, such as meeting sales targets, completing projects early, or reaching fundraising goals. For employers, this model offers flexibility: you can reward results without committing to permanent increases in base pay.

For example, imagine an independent sales agent at a furniture company who earns money solely from commissions (no base salary). In this structure, the agent may receive 10 percent of every sale they close. If the agent sells $25,000 in furniture, they earn $2,500 for that month. With variable pay, compensation rises and falls with performance.

However, even with commission-based employees, minimum wage, overtime, and other labor laws still apply (albeit with a few key exemptions).

Benefits

Variable pay structures offer a way to motivate performance while staying financially agile.

• Performance-based rewards - Compensation is directly tied to results, encouraging employees to hit their goals.
• Cost-effective - Incentive payouts occur only when targets are met (as long as minimum wage and overtime rules are met) keeping labor costs mostly tied to profitable outcomes.
• Attracts top talent - High performers are often drawn to roles that reward success.

Challenges

While it can be an effective pay structure, variable pay requires thoughtful planning.

• Complex administration - Managing fair, compliant incentive programs takes clear rules with strong oversight, and the right compensation management tools.
• Risk of misalignment - If poorly structured, incentives can lead to unhealthy competition or off-target behavior.

Best Fit

Variable pay works best in environments where success is measurable. Sales teams and other client-focused roles often benefit from this structure. For example, in construction, project managers might receive bonuses for completing work on time with no safety violations.

3. Broadband Pay Structure

A broadband pay structure consolidates several job levels into a few wide salary bands. Each band covers a broad pay range, which gives organizations more flexibility to reward performance, adjust to market changes, or recognize skill growth. This method doesn’t require a formal promotion or title change.

This approach is especially useful in fast-paced industries or flatter organizations where rigid hierarchies may slow down growth and innovation. It supports development across roles, not just up the ladder.

For example, imagine a technology company wants to simplify its compensation system. Instead of having separate pay grades for Junior Developer, Mid-Level Developer, and Senior Developer, the company creates a single broad pay band for all software developers. Likewise, they also develop a band for project managers of all levels, customer support, and so on. This pay structure may look something like:

• Software Development Band – Salary Range: $60,000 to $120,000 per year
• Project Management Band – Salary Range: $70,000 to $130,000 per year
• Customer Support Band – Salary Range: $45,000 to $85,000 per year

In this structure, all software developers (and positions within other departments) fall within the same broad pay band. Their exact salary within this range depends on factors like experience, skills, and project contributions.

Benefits

• Flexible compensation - Managers can adjust pay within a band to reflect market demand, performance, or specialized expertise.
• Encourages skill growth - Employees can increase their compensation by expanding their capabilities, even without changing roles. This encourages high specialization.
• Reduces red tape - Fewer salary bands mean fewer approval steps and less administrative overhead.

Challenges

• Inconsistent application - Without clear guardrails, pay decisions may vary widely across departments or teams.
• Manager-dependent - Leaders need strong training and oversight to prevent bias or inequity.
• Unclear advancement - With fewer levels in the career framework, employees may feel unsure about their long-term growth path. This may also limit internal mobility, which often has a direct impact on retention.

Best Fit

Broadbanding is a good fit for organizations that want to reduce layers and support flexible career development. Tech, finance, and professional services firms often use this model to reward experience without overcomplicating titles. In project-based industries, executive and director roles often vary in scope by project or region, making them well-suited for broad pay bands that reflect their dynamic responsibilities.

4. Market-Based Pay Structure

A market-based pay structure sets salary ranges using external data instead of internal titles or traditional hierarchies. Employers rely on industry surveys and benchmarks (like compa-ratio) along with regional wage data to align pay with current labor market trends.

This structure helps organizations stay competitive, especially when wages and talent availability vary by region or industry.

While market-based structures may still include defined pay grades, the key difference is how those ranges are determined. Instead of basing pay on internal rankings, salaries are aligned to what similar roles earn in the market.

For example, a mid-sized healthcare organization might use a market-based pay structure for its nursing staff. First, they would need to conduct a comprehensive job analysis for each role (RN, LPN, Medical Assistant, etc.) factoring in job responsibilities and required qualifications. Then, they would collect current market compensation data to establish competitive salary ranges for each position, typically defining minimum, midpoint, and maximum pay levels. From there, specific pay grades would be assigned by role and experience.

Benefits

• Attracts talent - Market-aligned pay ranges make it easier to compete for candidates with high-demand skills.
• Supports retention - Keeping compensation in step with external rates can reduce turnover.
• Data-driven decisions - Market benchmarks improve transparency and give leaders confidence in salary planning.

Challenges

• May create pay gaps - If some roles are in higher demand than others, pay rates can become imbalanced, and internal equity may suffer.
• Requires frequent updates - Compensation data changes quickly, and outdated ranges can lead to missed opportunities or underpayment.
• Risk of compression - When new hires earn close to or more than tenured employees, it can cause morale issues.

Best Fit

Market-based pay works well for companies that compete for specialized talent or operate across different regions. Industries like tech, engineering, and construction often use this model for roles such as estimators or engineers. In these roles, local demand strongly influences compensation.

{{inline-cta-products-payroll="/style-guide"}}

‍

5. Step Pay Structure (Incremental Pay Scales)

A step pay structure provides fixed pay increases at scheduled intervals, often tied to tenure, certifications, or milestone achievements. Employees progress through a set of “steps” within a pay grade, typically on an annual or biannual schedule, until they reach the top of that range.

This approach is common in unionized, government, and public-sector settings where predictability and transparency are critical. It’s designed to reward loyalty and ensure fairness across similar roles.

Here is an example of a step-pay structure based on tenure, in which the employee will get a raise each year (assuming satisfactory performance):

‍

Benefits

• Clear progression - Employees know exactly how and when their pay will increase.
• Reduces bias - Raises are based on consistent criteria, not subjective evaluations.
• Boosts retention - A structured path can help increase retention by rewarding long-term commitment.

Challenges

• Not performance-based - Top performers earn the same as others unless additional bonuses are layered in.
• Inflexible to the market - Pay increases happen on schedule, even if market rates remain flat.
• Limited manager discretion - Leaders have little control over timing or raise amounts.

Best Fit

Step pay works best in structured environments with union or compliance requirements. Construction companies often use it to manage tradespeople (apprentices, journeymen, etc.), where pay increases are tied to experience and certifications.

6. Skill-Based Pay Structure

A skill-based pay structure rewards employees for the capabilities they build — not just the title they hold. As team members gain certifications, expand their technical knowledge, or learn new tools, their compensation grows to reflect those contributions.

This approach highlights the value of learning and adaptability. It works especially well in environments where cross-training, versatility, and technical growth are business priorities (all very common with hourly employees).

Here is an example of how you might structure a skill-based pay structure for machine operators:

‍

Benefits

• Encourages development - Employees are motivated to grow their skill sets over time in order to increase their own pay.
• Increases flexibility - A more skilled, versatile workforce can cover multiple roles, reducing delays or staffing gaps and making agile work more feasible.
• Rewards contribution - Pay is tied to the value employees bring to the team, not just how long they’ve been there.

Challenges

• Requires strong systems - Tracking skills and managing pay adjustments requires the right tools and oversight.
• Not a good fit for every role - Some jobs don’t lend themselves to measurable or stackable skills, making skill-based pay irrelevant or hard to implement.

Best Fit

Skill-based pay is ideal for industries where technical growth adds clear value — like construction, IT, and manufacturing. In construction, for example, workers certified in welding, rigging, or equipment operation often earn more than peers with fewer qualifications.

7. Hybrid Pay Structure

A hybrid pay structure combines elements from multiple compensation models to support different roles within the organization. Typically, this means pairing a base salary (set using a traditional or market-based approach) with performance-based incentives like bonuses, commissions, or profit-sharing.

Most companies already use some form of hybrid model, even if informally. It provides the stability of fixed pay while offering flexibility to reward results.

For example, imagine a home appliance manufacturer wants to motivate their sales team to increase profits and reward them for their performance. They may use a hybrid pay structure in which each salesperson earns a fixed base salary of $2,500 per month. On top of that, each salesperson can earn commissions based on the total value of products they sell each month. That structure may look like this:

• For sales up to $10,000: 5% commission
• For sales between $10,001 and $20,000: 7% commission
• For sales over $20,000: 10% commission

So, if a salesperson sells $18,000 worth of appliances in a month, their first $10,000 earns them a 5% commission at $500. The remaining $8,000 earns them a 7% commission at $560. Added to their base salary of $2,500, that employee earns $3,560 for the month.

Benefits

• Supports diverse roles - Combines steady income for operational roles with performance incentives for revenue-generating teams.
• Drives performance - Bonuses and commissions can motivate employees to exceed goals.
• Adapts to complexity - Easily accommodates organizations with a mix of hourly, salaried, and contract roles.

Challenges

• Can feel inconsistent - If not communicated clearly, different pay models across roles may raise equity concerns.
• Requires clear administration - Managing multiple components takes strong systems and ongoing oversight.
• Risk of overemphasis - Incentives that are too aggressive may shift focus away from teamwork or long-term strategy.

Best Fit

Hybrid pay structures work well for sales teams in virtually any industry and in companies with a mix of roles (especially those that directly impact revenue). For example, a project-based organization might offer base salaries plus completion bonuses for project managers.

{{inline-cta-wp-hcm-strategies="/style-guide"}}

‍

8. Individual (Spot Rate) Pay Structure

An individual or spot rate pay structure assigns compensation one job at a time, without using formal salary grades or bands. Each employee or role is given a specific rate based on market value, internal needs, or negotiation.

This approach offers maximum flexibility and is often used by small organizations or for highly specialized positions. But as companies grow, the lack of structure can lead to inconsistencies and administrative challenges.

For example, if you run a content creation agency, you may decide to pay your lead graphic designer a salary of $72,000 and your office manager $50,000. This can be based on ROI, market rates for certain positions, or other factors.

Benefits

• Tailored compensation - Pay is set based on the specific value of the role, without being limited by a preset range. This makes it ideal for niche roles that are hard to benchmark against the market.
• Fast and simple - In small teams or early-stage startups, this can be a practical way to hire for positions quickly.

Challenges

• Limited consistency - Without clear structures, similar roles may be paid very differently (since salaries are decided as needed).
• Harder to scale - Managing individual rates on a case-by-case basis becomes time-consuming as headcount grows.
• Risk of inequity - Employees may feel compensation decisions are arbitrary or unfair.

Best Fit

Spot rate pay structures are typically used by small businesses, startups, or teams with highly unique roles. A nonprofit, for example, might offer a spot rate to a short-term grant compliance expert hired outside their regular structure.

However, as organizations grow, most shift toward structured models (such as broadband or market-based pay) to improve consistency and compliance.

–

How To Choose and Implement the Right Pay Structure

There’s no one-size-fits-all approach to compensation. Most organizations use a mix of pay structures for specific departments or workforce segments. Here are some tips to help you choose the pay structures that best align with your business goals.

Consider Your Business Size & Stage

Smaller organizations often start with simple systems (like spot rates or basic graded structures) because they’re fast and easy to manage. As these businesses scale, they typically move toward more formal pay models like broadband or hybrid structures.

For fast-growing startups, this shift may also include transitioning from equity-heavy compensation to structured salary bands that support long-term growth and retention.

It’s also a good idea to audit your current pay. Review salaries across roles, departments, and locations, then identify inconsistencies or pay gaps that may need attention.

Align With Workforce Composition

The types of roles you employ should also guide your compensation approach. You’ll want to map specific roles to your pay structure. Assign each position to the appropriate grade or band based on skill, responsibility, experience, or whatever criteria makes sense.

• Hourly roles: Traditional or step pay structures promote fairness and predictability.
• Highly skilled talent: Market-based or skill-based structures help attract and retain top performers.
• Mixed teams: A hybrid model can support flexibility — using structured pay for hourly roles and variable or broadband structures for salaried or contract positions.

Use Industry Norms as a Guide

Your industry can shape which pay structures will work best.

• Construction often requires multiple models. Field-based workers may be on step or fixed-rate structures, while salaried staff like project managers benefit from market-based or broadband pay. In a tight labor market, structure helps balance competitive pay with cost control.
• Nonprofits typically use graded or step structures to ensure fairness and justify pay to boards and donors. Program staff often follow traditional steps, while leadership roles may use broadband structures for flexibility within tight budgets.
• Government & education organizations may rely on step-based systems for consistency and pay equity, which make formal structures essential.
• Tech & engineering companies may favor market-based or broadband models to stay competitive. Early-stage startups may begin with spot rates to hire on a role-by-role basis.

Regardless of your structure, industry wage benchmarks and internal job analysis can help build fair, competitive ranges that align with your goals.

Keep Budget and Equity in Mind

Structured models like step pay or traditional grades make it easier to control costs and promote pay equity. On the other hand, more flexible options (like broadband or spot rate structures) offer agility but require strong oversight to prevent overspending or pay disparities.

Account for Legal Requirements

Every pay structure must comply with federal and state labor laws:

• Equal Pay Act & Title VII: Require fair and non-discriminatory pay practices.
• FLSA: Governs minimum wage, overtime pay, recordkeeping, and child labor standards.
• ADA & ADEA: Protect against compensation discrimination based on disability or age.
• State-specific laws: Some states enforce stricter standards around overtime and wage thresholds.

Document Your Structure and Communicate Rollout

As of 2024, several U.S. states (including California, Colorado, and New York) require salary range disclosures in job postings. In addition, employers with 100 or more employees must submit Component 2 EEO-1 reports to the EEOC, breaking down pay data by gender, race, and ethnicity. A clear, well-documented pay structure helps ensure consistency and simplifies compliance with these reporting standards.

Once you’ve made a plan, communicate the rollout to each affected team. A well-executed rollout builds trust and sets the tone for long-term success. Explain how the new structure works, how raises are determined, and what career growth looks like under the model.

Use High-Quality Payroll Software

How well you manage your chosen pay structure depends heavily on the tools you use in that workflow. Criterion HCM makes it easy to manage a wide range of compensation models — whether you're automating step-based pay increases, calculating performance bonuses, or transitioning from spot rates to structured pay. Our platform offers built-in tools for tracking position history, time tracking, payroll automation, and custom report creation. That way, you can reward results, boost retention, and stay compliant without adding complexity.

Be Ready To Change It All Again

Your pay structure should be built on solid data — but also able to adapt. As your organization grows or regulations shift, your compensation strategy may need to evolve. Regular reviews can help ensure your structure stays fair, competitive, and compliant.

For this, you’ll want to generate reports about workforce performance, labor costs, engagement, ROI, and more key HR metrics before and after the rollout. This will help you assess the impacts of your new pay structures and make adjustments as necessary.

In some cases, you may even use a particularly well-suited department as a control group before rolling out the changes to the rest of the company.

Improve Your Pay Structure Strategy with Criterion

Choosing the right pay structure isn’t just about budgeting for payroll — it’s a strategic decision that shapes your workforce and supports your culture. The right decision can improve morale, reduce turnover, and help you stay competitive in your market for years to come.

But a structure that works for one company may not have the same effect on yours. The eight pay structures we’ve covered can be tailored or combined to fit your organization’s goals and industry-specific needs. The key is to align your compensation strategy with your business objectives, budget, compliance obligations, and workforce expectations.

Ready to implement a new pay structure (or improve the one you already have)? Criterion HCM unifies HR and payroll to support unique pay structures and automate your most complex configurations. Request a demo to see how you can HR and finance teams manage compensation with confidence and clarity.