Designing a pay plan or pay schedule for a large organization with hundreds of thousands of employees with varying fields and levels of expertise isn't easy. There is no single best solution, but there are three options that provide general guidelines. The challenge with these three types of pay scales is that they can appear similar upon first glance, but there are differences between salary ranges, pay grades and pay bands.
The most basic pay structure used to determine pay within an organization is the pay scale or salary range. This range isn't typically used as a formal pay structure in most organizations. Instead, it is a general range of salaries that those working in a particular field can expect to make. For example, the Bureau of Labor Statistics provides a pay scale for most professions with salary information ranging from the 10th to the 90th percentile in a given profession. This scale represents what 80 percent of those working in their respective fields made in a given year. The median salary is the midpoint of that pay scale. Employers can use these numbers to get an idea of how much they should pay employees.
Pay grades are often used by government agencies to establish how much they will pay workers in a given profession. These pay grades are often based on experience and education. Pay grades are usually expressed in terms of a range of salaries, starting with the lowest level of pay and progressing to the highest level of pay, which is made by those with the highest credentials and experience levels in their field. Companies and government agencies typically use a formal process to determine where jobs fit into each grade of the pay scale. This process is sometimes based on a point system that is used to establish an objective way to evaluate jobs.
Pay bands are similar to pay grades, but they represent a broader way to determine pay grades. Although a pay grade may be narrowly defined by a point system, a pay band may encompass many or a few different pay grades. In other words, a pay band may include grades one, two and three of a pay grade, while the second pay band may include grades four, five and six.
Things to Consider
Determining which type of pay system to use isn't simple because each has problems. Pay grades may result in disputes among employees or potential hires regarding which pay grade they should be included in. Because pay grades are more narrowly defined, one worker may find himself excluded from the next pay grade up, even those he has similar qualifications to someone else making more pay.
Similarly, a pay band may be too broadly defined to get an accurate separation in salaries among those working together. Those with "senior" titles and positions may find themselves earning the same as those with significantly less experience and responsibility. The salary range or pay scale only indicates what workers in a given field earn. This could result in an market-driven pay structure in which employees demand more money as the market warrants.