What Is a Salary Grade?

Salary grades are a common method for documenting and communicating pay structure by organizations that prefer not to divulge actual employee salary information. A salary grade schedule typically is broken into three components: high, middle and low-end grades based on the candidates' experience and qualifications. Organizations use salary grades to promote equity and fair pay standards.

Pay Structure

Use of a salary grade schedule is common in companies that strive to structure employee compensation as equitably as possible based on a person's position and years of experience. The other popular method for pay is what is called marketing pricing. This approach is customized by individual hire and is based on fair market value for the employee. While flexible, market pricing sometimes opens a company up to discrimination lawsuits.

Salary Grade Purpose

In the article "The Basics of Salary Grades," David Creelman, CEO of Creelman Research, notes that salary grade pay schedules evolved to meet requirements of affirmative action for organizations that had to prove equitable hiring practices that promote diversity. The general premise is to sort jobs by department and position and offer a basic breakdown of salary or wages for each position. Companies, especially small businesses with few employees, substitute a salary grade or structure pay schedule as a way to document pay policies to avoid the awkwardness of reporting specific employee salaries.

Salary Grade Schedule

Although a salary grade can feature a more detailed pay breakdown, the salary-grade system generally has three pay points -- minimum, middle and maximum. The minimum salary grade for a position indicates the lowest pay a new hire with limited experience could get. The midpoint serves as a pay standard for someone with average experience. The maximum is the most a person in a given position can make. Each stated salary grade amount dictates the lowest pay for an employee in that range. However, employees can make a salary between two grade points. Creelman notes that, in general, each salary grade is 20 to 30 percent higher than the previous one; however, this varies by industry and job.

Management and Adjustment

Some managers prefer the freedom to determine salary based on qualifications, but others appreciate the less vulnerable ability to apply a salary based on prescribed salary grade guidelines. Managers use salary grades for salary offers to new hires and to determine incremental pay increases for existing employees. Some organizations make annual or periodic adjustments to salary grade pay scales to account for increases to cost of living and other factors affecting the need to adjust overall pay for a position. If demand for a certain job is high and supply of workers is low, a company may have to increase pay for each salary grade to get quality employees.