25 Jan 2021
Pay structures and pay
progression
Outlines the purpose of pay structures and progression, including the common ways of
structuring pay and of determining, reviewing and controlling pay progression
Introduction
Pay structures offer a framework for wage progression and can help encourage
appropriate behaviours and performance. Pay progression describes how employees are
able to increase their pay either within or outside a pay structure.
This factsheet explores the purpose of pay structures and introduces the commonly used
types. It considers local pay structures, identifying the main approaches to regional pay
differentiation. It also examines the impact of pay structures on an employee’s ability to
progress, as well as the ways to determine pay progression.
What is a pay structure?
A pay structure is a collection of wage grades, levels or bands that link related jobs within
a hierarchy or series. It provides a framework to implement reward strategies and
policies.
They are usually designed to:
Align the reward strategy with the employer’s mission, vision, purpose and culture,
and business strategy by encouraging required behaviours and performance.
Bring order and clarity in managing pay rises and career development.
Help ensure fairness and lawfulness, for example by avoiding pay discrimination.
Sixty per cent of employers questioned for our 2019 Reward management survey use a
pay structure. They are most common in large and public sector employers.
The span of each grade is the percentage increase from the minimum to the maximum
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salary in the range. For example, if salaries range from £30,000 to £36,000, the grade span
is 20%. The wider the span, the greater the potential for progression.
‘Differentials’ refer to the percentage difference in pay between the mid-point of one
grade and the mid-point of the adjoining grade. The differential needs to be high enough
to reward taking more responsibility.
What is pay progression?
Pay progression is how an individual moves to higher pay levels within a grade. It’s often
regarded as the measure of ‘real’ wage growth. It’s distinct from salary rises linked to
inflation or wage increases associated with a formal promotion to a higher band.
Organisations use pay progression to:
Encourage and reward desired employee behaviours.
Maintain salary competitiveness while controlling payroll costs within set
parameters (including affordability).
Provide a fair and transparent process by which individual wage increases are
determined.
Progression is usually determined by the:
Width of each pay band – the degree of pay level variation within each band.
Number of pay grades within the overall pay structure.
There may need to be an overlap between the top levels of pay attached to one grade and
the lower levels of the next grade up. This recognises the greater value of the input from a
highly experienced/skilled individual at the top of their grade compared to a newlyappointed employee on a learning curve at the lower end of the grade above.
Types of pay structures
Pay structures have two key characteristics:
The number of grades within the structure
The span of each band.
There are short definitions of different pay structures below, although definitions vary
and approaches may overlap at times. In fact, a strict definition might exclude the first two
categories listed as they could be classified as unstructured pay arrangements.
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Individual pay rates, spot rates, spot salaries
There is a single hourly, weekly or annual pay rate for each job or person. Spot rates are
often found among lower-skilled occupations where there’s a need for a simple ‘rate for
the job’. They can also occur for more senior positions where the remuneration package
is designed to attract, retain and motivate a specific individual.
In this approach, there’s no formal structure for progression, but there may be scope for
moving to a higher spot rate, or for spot rates to be increased, to keep pace with inflation
and/or market rates.
Individual pay ranges, individual job ranges, individual salary ranges
These are more sophisticated versions of spot rates or salaries. Instead of a single rate
for the job, a pay range is attached to each job or employee. Individual salary ranges may
be preferred to individual pay rates as they allow some formal scope for pay progression.
Narrow-graded pay structures
These comprise a large number of grades, usually ten or more, with jobs of broadly
equivalent worth slotted into each grade. Progression usually comes in increments linked
to service length. Because grades are narrow, most employees reach the top of the range
fairly quickly, potentially leading to demands for upgrading and ‘grade drift’ (jobs being
ranked more highly than justified).
Pay spines
Similar to narrow grades, pay spines are based on a series of incremental points that
allow for pay progression linked to length of service.
Broadbanding
This uses a small number of pay bands, typically four or five, to allow for greater pay
flexibility than narrow-graded structures. A classic arrangement would have no pay
progression limits within each band, although some employers have re-introduced a
greater degree of structure, partly to counter equal pay concerns.
Broad-graded pay structures
Half-way between narrow and broadbands, these typically have between six and nine
grades. They can help counter grade drift as there’s greater scope for individual
employees to progress further along a pay grade, without the need for regrading.
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Job families
This groups jobs within similar occupations or functions together, usually with around six
to eight levels, similar to broad-graded structures. There are separate pay structures for
different families. This approach can help in facilitating higher rates for highly sought-after
workers such as specialist IT staff.
Career families, career-grade structures
These use a common pay structure across all job families, rather than operating separate
pay structures for each family. They show an emphasis on career paths and progression
rather than the greater pay focus of the job families approach.
Local pay structures
This is where pay varies according to the workplace location, even within individual
occupations. Two inter-related factors contribute to local pay variation:
Differences in the cost of living.
Relative tightness of local labour markets.
Research commissioned by the Office of Manpower Economics found a high level of
central control (rather than any significant local-level pay negotiations) and identified six
‘main approaches’ to local pay differentiation in the private sector:
National pay scales with London/South East additions: using some form of
premium for London and the surrounding area.
National pay scales with additions for London/South East and ‘hot spots’: giving
added flexibility by paying more in labour-market ‘hot spots’ outside traditional highcost areas.
Regional pay bands: using geographical boundaries.
Zonal pay: prevalent among retailers that have a store in most large towns, it
extends the concentric circles of London allowances to typically three to five zones
covering the whole of the UK.
Top-up location allowances: a fairly simple system of top-up allowances in
locations deemed to qualify.
Complex localism: more varied local approaches, though these are rare.
Types of pay progression
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Progression arrangements should fit and organisation’s strategy and ethos. It’s also
important that arrangements for pay advancement are fair and free from unlawful bias
due to an employee’s age, gender, ethnicity or other protected characteristics under UK
law – see more on pay fairness.
Types of progression mechanisms include:
Length of service
An individual progresses through a number of incremental pay points with each year of
service (usually up to a maximum point after a certain number of years). This rewards the
build-up of expertise in the job and helps employee retention. However, it may
discriminate indirectly against women as they are more likely to take time out to meet
family responsibilities.
Age-related increments
Seemingly outdated, there are some legal exceptions in place in respect of the UK’s
National Minimum Wage and Living Wage laws. Minimum rates are lower for young
workers to help them in their first steps on the employment ladder before progressing to
higher levels of pay. The rates usually change every April.
Individual performance-related pay
Pay rises are linked to an individual employee’s performance. The aim is to encourage
staff to perform to the highest level possible. Find out more about performance-related
pay.
Team performance pay
Pay rises are linked to team performance to encourage particular types of behaviour,
such as collaborative working.
Organisational performance
Pay rises are linked to organisational performance (for instance, by taking divisional sales
levels into account).
Competency pay
Pay rises are based on an assessment of employee competencies in various ways,
focusing on the worker’s input to the job, rather than achievement, for example customer
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service or communication skills. Find out more about competence and competency
frameworks.
Skills-based pay
Pay rises are based on acquiring additional skills or specific qualifications to encourage
employees to undertake appropriate study or training.
Market rates
Pay rises are pitched to keep pace with rates for similar jobs or regional pay levels in the
external labour market. See more on market pricing.
Inflation-linked pay rises
In simple pay structures, a cost-of-living increase may be applied each year. Such
arrangements don’t provide any scope for ‘real’ pay progression.
But as employers seek to link pay with performance, inflation-based rises are rarer and
largely confined to unionised environments and/or relatively low-skilled or homogeneous
occupational groups.
Where pay arrangements are more complex, the structure itself may be adjusted each
year. This is often an inflation-based increase to some pay levels or grade ranges
(sometimes excluding certain levels or minimum rates, for example to freeze pay for poor
performers), rather than giving everyone within that structure an identical pay rise. For
instance, the pay increase may be linked to performance and position in the salary range
with those below the median getting more than those above it.
Some employers award a cost-of-living increase and a separate award using one or more
of the methods above, or the two increases may be combined in determining a single pay
award (particularly popular at times of low inflation).
Design issues for pay structures
Key issues in introducing or replacing pay structures include:
Aligning pay structures with business and employee needs
It’s important to understand the basis for any grades or bands being incorporated into a
new or revised pay structure. This involves weighing up the pros and cons of differing
types of structure, including how closely they:
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Meet the business needs, including affordability.
Support the organisation’s mission, vision and values.
Meet the needs and aspirations of existing and potential employees, in a clear and
fair way.
An organisation should regularly review the way it structures pay and determines salary
progression as economic, political, regulatory and technological contexts change. If
existing arrangements can’t adapt to meet its or its employees’ requirements, alternative
approaches will be needed.
Internal versus external focus
Whether to emphasise an external or an internal focus is key when defining and placing
jobs within a band. For example, choosing a market pricing approach, where rates reflect
those in the external labour market, rather than an analytical job evaluation scheme that
focuses more on internal relationships between jobs within the organisation.
Avoiding unfair discrimination
Given the considerable evidence of gender segregation between and within pay
structures, many UK employers, particularly in the public sector, are attempting to
‘gender-proof’ pay structures as new arrangements are devised. Read more on pay
fairness.
Red-circling
Existing employees’ pay can be protected through ‘red-circling’ which maintains an
individual’s pay at its current level when the job is downgraded under a new structure.
However, under equal pay legislation, red-circling is problematic as it tends to perpetuate
existing pay inequalities. Limiting the red-circling period could help address this issue, but
employers should seek legal advice first.
Controlling pay progression
While modern pay structures aim to allow rewarding higher levels of performance or
contribution, employers still need to control payroll costs.
With service-related progression, control is built in as everyone can only achieve one
increment each year, up to a set level. But, because it effectively guarantees progression
to the pay scale maximum, employers could still face high wage bills, for example, when
employee turnover is low and staff become clustered at the top of each pay grade.
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Controlling pay progression is particularly important in flexible pay structures, such as
broadbanding. A variety of techniques may be used, including:
Target (or reference) points: Under individual performance pay arrangements, it’s
common for ‘satisfactory’ performers to progress to a target point in their pay
range. Once at that point, the rate of pay progression reduces.
Zones: Involves dividing each pay band into, say, three zones and specifying that
individuals can only progress to the next zone for some exceptional reason –
particularly useful for employers with a broadband system.
Cash bonuses: A reference point could be set in the pay range beyond which cash
bonuses might be paid rather than consolidated pay increases.
Further reading
Books and reports
ARMSTRONG, M. (2019) Armstrong’s handbook of reward management practice:
improving performance through reward. 6th ed. London: Kogan Page.
PERKINS, S.J. and WHITE, G. (2020) Reward management: alternatives, consequences and
contexts. 4th ed. London: Chartered Institute of Personnel and Development.
Visit the CIPD and Kogan Page Bookshop to see all our priced publications currently in
print.
Journal articles
HILL, B. (2019) The promised land: the optimal pay structure for 2020. Workspan.
November/December. pp34-39.
HOWLETT, E. (2019) Most employees have never had their pay explained to them. People
Management (online). 3 December.
JEFFREY, R. (2019) How much should you really pay your people?People Management
(online). 11 July.
CIPD members can use our online journals to find articles from over 300 journal titles
relevant to HR.
Members and People Management subscribers can see articles on the People
Management website.
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This factsheet was last updated by Charles Cotton.
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