Types of Pay Structure: Which Is Best?

Pay structures are often seen as a fixed formula, but in my experience, they’re anything but. Over the years, working with HR and reward leaders across the UK, I’ve found that designing a pay structure is as much about judgement and flexibility as it is about data. 
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With pay transparency climbing the agenda — and 71% of companies we surveyed at HR Datahub already publishing or planning to publish their pay data by 2026 — now’s the time for organisations to make sure their structures are both robust and fair. 
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In this article, I’ll explore the main types of pay structure, what to consider when choosing one, and how to build a framework that stands up to scrutiny.

Quick Facts

• 71% of companies we surveyed already publish or plan to publish their pay data by 2026, signalling a clear shift toward transparency.
• 67% of employers use a pay structure, most commonly in large organisations and the public sector (CIPD).
• EU Pay Transparency Directive obligations start 7 June 2026 for EU member states; UK-only companies aren’t directly bound, but multinationals and UK firms seeking higher transparency should align processes now. Northern Ireland may adopt aligned measures, so keep an eye on local guidance.

What is a Pay Structure?

A pay structure (or salary structure) is an organised framework of grades or bands that groups related jobs and sets clear minimum-to-maximum pay ranges and progression rules. It aligns employee pay with job value and market rates, supports internal equity and compliance, and guides consistent, defensible pay decisions.

Why Pay Structures Matter

In my experience, a well-designed pay structure does far more than organise salaries. It underpins how people feel about fairness, recognition and opportunity at work. When built thoughtfully, a pay structure becomes one of the most effective tools for improving engagement, retention and trust across an organisation.
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• Equity & Fairness: A clear pay framework helps ensure people are paid fairly for their role and contribution, reducing the risk of bias or inequity. This is especially important for organisations committed to DE&I, as transparency around pay decisions builds credibility.
  
  
• Retention & Motivation: Employees stay longer when they understand how their pay is determined and how they can progress. Clear pay ranges and progression rules often correlate with stronger morale and lower turnover.
  
  
• Market Competitiveness: Regularly benchmarking pay structures against the external market ensures salaries remain competitive — critical in sectors where skills are in short supply. Without this, pay drift and talent loss can quickly follow.
  
  
• Defensibility & Compliance: With pay transparency on the rise, organisations must be able to justify how they set and manage pay. A structured approach backed by reliable salary data protects against legal and reputational risk.
  
  
• Strategic Decision-Making: Pay structures give leaders the insight they need to plan budgets, forecast costs, and make data-driven reward decisions aligned with business goals.

Types of Pay Structures

When it comes to pay structures, there’s no one-size-fits-all solution. The right approach depends on your organisation’s size, maturity and talent strategy, and even the most sophisticated models need to evolve as the business changes. 
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Below are some of the most common types of pay structures,  including their strengths, drawbacks, and practical insights from my experience working with HR and reward leaders across the UK.

Traditional Pay Structure (Graded Pay)

A traditional pay structure (sometimes called a graded pay system) divides jobs into clear grades or levels, each with defined salary ranges based on job value and market benchmarks.
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Benefits:

• Provides transparency and fairness through consistent job evaluation and levelling.
  
  
• Easy to communicate internally, helping employees understand progression.
  
  
• Supports compliance with equal pay and DE&I objectives.

Drawbacks:

• It can become rigid over time, especially if grades aren’t regularly reviewed.
  
  
• Employees may reach the top of their range quickly, leading to “grade drift” or frustration.

Use cases:
Ideal for medium to large organisations with well-defined hierarchies, particularly in the public sector and industries where roles are stable and responsibilities are clear.
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Practical considerations:
Keep evaluation systems current and review grade differentials regularly to ensure they reflect changing market rates and role expectations.
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Traditional graded structures are still the most common starting point in the UK. They’re explainable, easy to manage, and familiar to employees, but they work best when you build in flexibility to adjust as the business evolves.

Broadband Pay Structure

A broadband pay structure combines multiple grades into a few wide pay bands, allowing for more flexibility in managing pay.
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Benefits:

• Encourages flexibility and career development across functions.
  
  
• Reduces administrative complexity by merging grades.
  
  
• Offers greater room for progression within a band.
  

Drawbacks:

• Can make pay less transparent and harder to justify without robust governance.
  
  
• Risk of pay inequity if managers use discretion inconsistently.
  

Use cases:
Well-suited for organisations undergoing transformation or those prioritising internal mobility and skill growth over rigid hierarchies.
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Practical considerations:
Introduce clear rules for pay progression within each band and regularly benchmark roles to avoid internal inequities.
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Broadband structures give HR teams breathing room to adapt, but you need strong governance and benchmarking data to stop flexibility turning into pay chaos.
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I touch upon why salary surveys aren’t always enough to provide robust market insight here.

Skill-Based Pay Structure

A skill-based pay structure links pay to the range or depth of skills an employee develops, rather than job title or tenure.
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Benefits:

• Promotes upskilling and cross-functional learning.
  
  
• Enhances agility by rewarding capability growth rather than static roles.
  
  
• Motivates employees to broaden their skillsets in fast-changing industries.
  

Drawbacks:

• Requires accurate and regular skills assessment.
  
  
• It can become costly if too many employees reach advanced pay levels without a proportional business impact.
  

Use cases:
Popular in manufacturing, technology, and engineering sectors, where technical capability directly drives value.
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Practical considerations:
Define skill criteria transparently, ensure consistent evaluation, and align pay adjustments with measurable business outcomes.

Performance-Based Pay Structure

A performance-based pay structure ties pay progression to measurable outcomes such as individual, team, or business performance.
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Benefits:

• Encourages productivity and goal alignment.
  
  
• Enables differentiation between high and low performers.
  
  
• Supports a meritocratic culture when applied fairly.
  

Drawbacks:

• It can create unhealthy competition or short-term focus if not balanced with development goals.
  
  
• Requires strong performance management systems and consistent calibration.
  

Use cases:
Effective in sales, consulting and high-growth industries where output is quantifiable.
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Practical considerations:
Balance base salary with incentives or bonuses to avoid over-reliance on variable pay, and ensure line managers are trained to evaluate performance objectively.

Job Families & Market-Based Pay Structure

A market-based pay structure groups roles into job families (such as HR, Finance, or IT) and benchmarks pay ranges against external market data for each.
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Benefits:

• Keeps pay competitive and responsive to market fluctuations.
  
  
• Enables precise salary benchmarking by job family.
  
  
• Supports fairness and transparency within specialist functions.
  

Drawbacks:

• Requires access to accurate, up-to-date market data.
  
  
• It can be complex to manage across large organisations.
  

Use cases:
Ideal for diverse organisations with multiple specialisms or where market conditions vary significantly across roles.
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Practical considerations:
Use reliable benchmarking tools like HR Datahub to ensure decisions are grounded in real-time market information.
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This is one of the most powerful structures when it’s done well. It lets you balance internal fairness with external competitiveness, but you can’t do it properly without live and trusted market data.

Fixed Pay Structure (Flat Pay)

A fixed or flat pay structure pays all employees in the same role the same salary, regardless of tenure or performance.
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Benefits:

• Simple, transparent, and easy to administer.
  
  
• Eliminates ambiguity around pay fairness.
  

Drawbacks:

• It can demotivate high performers.
  
  
• Offers limited flexibility for reward differentiation.
  

Use cases:
Common in smaller organisations, start-ups, or environments where teamwork and equality are prioritised over individual competition.
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Practical considerations:
If you adopt flat pay, consider complementing it with non-financial rewards or benefits to maintain engagement and retention.

Hybrid Pay Structure

A hybrid pay structure combines elements of different systems — for example, a graded base pay with performance-related bonuses or market-based adjustments.
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Benefits:

• Provides the flexibility to tailor pay strategies across departments.
  
  
• Balances structure with adaptability, making it resilient to change.
  

Drawbacks:

• It can become complicated to manage if not clearly documented.
  
  
• May lead to perceived inconsistencies if communication is unclear.
  

Use cases:
Well-suited for organisations in transition or with both stable and fast-moving functions (for example, tech firms with operational and R&D teams).
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Practical considerations:
Keep governance consistent and use clear documentation to explain how each element fits into the overall pay philosophy.

Equity-Based Pay Structure

An equity-based pay structure offers part of an employee’s reward through shares, options or ownership stakes, tying individual success to company performance.
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Benefits:

• Aligns employee interests with long-term organisational goals.
  
  
• Helps attract and retain talent in start-ups and high-growth firms.
  

Drawbacks:

• It can be complex to administer and communicate.
  
  
• May carry financial risk if share value fluctuates.
  

Use cases:
Common in start-ups, scale-ups, and venture-backed companies where cash flow is limited but growth potential is high.
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Practical considerations:
Ensure employees understand vesting terms and potential tax implications, and balance equity with competitive base pay to maintain stability.

Geographic Pay Structure (Regional Pay Differences)

A geographic pay structure adjusts salaries based on an employee’s work location, typically reflecting the cost of living and local market rates.
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Benefits:

• Keeps pay aligned with regional labour markets.
  
  
• Supports fair treatment across different cost-of-living zones.
  

Drawbacks:

• It can be divisive if remote workers in lower-cost regions are paid less for the same job.
  
  
• Requires frequent review to stay aligned with evolving hybrid work models.
  

Use cases:
Common in national and global organisations where employees are spread across regions or countries.
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Practical considerations:
Anchor benchmarking to where the role is based or where the employee primarily works. As I often advise HR leaders, use clear communication to explain how geographic pay is determined, particularly in hybrid or remote-first environments.
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The key is consistency. Whether you benchmark to a single national rate or adjust regionally, document the logic clearly so employees understand how it’s applied.

How to Choose the Right Salary Structure

Choosing the right pay structure is as much about understanding your organisation as it is about understanding the market. The most effective structures are the ones that fit the company’s goals, workforce, and stage of growth — not the most complex or expensive ones. 
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Here’s how I recommend HR and reward leaders approach the decision step by step:

1. Identify Organisational Needs

Start by looking at what your organisation actually needs from its pay structure. A start-up might prioritise flexibility and quick decision-making, while a large corporation may require standardisation and governance. Be honest about your goals: whether that’s improving retention, ensuring fairness, or preparing for transparency legislation, and let those priorities drive your design choices.

2. Analyse Workforce Composition

Understand the shape of your workforce: how many levels exist, where roles cluster, and which functions are hardest to recruit for. Job levelling is essential here — map out every role to the right grade or family before deciding how many pay bands you need. Remember, you can’t build a fair pay structure without first knowing what jobs you actually have.

3. Consider Market Competitiveness 

Benchmark against current market data to keep ranges competitive and auditable. Set the minimum–midpoint–maximum for comparable roles and locations, and review hot roles more frequently to prevent pay drift.
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Without accurate market data, pay structures become guesswork. You need to know what ‘good’ looks like externally before deciding what’s fair internally.

4. Factor in Geographic Pay Differences

If your workforce is hybrid or remote, decide how location influences pay. Will you benchmark to a single national rate, or adjust for regional differences? In my view, consistency is more important than perfection. As long as your policy is clear, employees will understand how pay decisions are made. For UK-based organisations, a UK-wide rate excluding London can often strike the right balance.

5. Assess Budget & Growth Potential

Pay structures must align with financial realities. Set clear parameters for total payroll costs and future growth, especially if you plan to expand or introduce new roles. Remember that implementing a structure can surface hidden inequities, which may require investment to correct. It’s better to plan for these adjustments early than to be caught off guard later.

6. Balance Flexibility vs. Structure

The biggest misconception about pay structures is that they’re rigid. In practice, the best systems combine order with adaptability. Use structure to drive fairness and clarity, but leave room for exceptions when business needs demand it. As I often say, reward is as much an art as a science — and flexibility is what keeps it human.

7. Review Legal & Compliance Factors

Finally, make sure your pay framework can stand up to scrutiny. For companies operating in the EU, the EU Pay Transparency Directive comes into force in June 2026, requiring clear documentation of pay methodology. Even for UK-only organisations, growing expectations around pay equity and transparency make evidence-based pay essential. Ensure every range, grade, and progression rule can be explained and justified if questioned.

How to Implement a Pay Structure

Once you’ve decided on the right type of pay structure, the next step is putting it into practice. This stage often determines whether the project succeeds or fails — not because of the technical details, but because of how it’s communicated and maintained. 

1. Job Mapping & Benchmarking

Start by mapping every role across the organisation. Begin with points-based levelling to assess scope and complexity, group roles into job families, and only then design your pay bands. With the architecture in place, benchmark each role against reliable market data to set fair minimum–midpoint–maximum ranges.
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You don’t need a six-figure consultancy project to start: begin with levelling, job families, and market ranges for critical roles.

2. Define Pay Bands, Progression & Compliance Factors

Once roles are benchmarked, create clear pay bands or ranges for each level. Define how employees progress within those bands, whether through performance, skill acquisition or tenure.
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Incorporate compliance considerations early, especially around equal pay and transparency. Make sure your methodology can be easily explained to leadership and staff alike. 

3. Secure Leadership Buy-In and Communicate Transparently

A pay structure only works if leaders believe in it. Engage them early in the process. Explain the rationale, share the data and outline how it supports business strategy.
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When it’s time to roll out, communication is everything. Employees will naturally wonder, “Will my pay change?” or “What does this mean for me?” Be upfront, honest, and consistent in your messaging. Avoid vague statements and take the time to explain why changes are happening, how people are protected, and how future reviews will work.
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When companies don’t communicate clearly, pay projects can cause anxiety or mistrust. The best implementations are the ones where people feel involved, not blindsided.

4. Conduct Regular Salary Reviews & Adjustments

Implementing a pay structure isn’t a one-off exercise; it’s an ongoing process. Schedule annual or biannual pay reviews to adjust ranges based on market trends, inflation, and internal equity. This keeps your pay framework responsive to change and ensures employees continue to feel valued.
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Small, regular salary adjustments are always easier and cheaper than large corrections later on.
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AI is changing role content quickly. Expect micro-updates to job families and bands rather than infrequent, wholesale rebuilds.

Common Pay Structure Challenges & How to Overcome Them

Even the most well-designed pay structures can run into problems once they’re put into practice. These challenges usually stem from how pay is managed over time rather than how it’s designed at the start. 

Here are some of the most common pitfalls, and how to stay ahead of them:

Pay Compression Issues

The challenge: When new hires are brought in at higher salaries than existing employees in similar roles, it creates internal inequity and tension.

How to overcome it: Review market benchmarks regularly and adjust salaries for existing employees where necessary to keep internal equity aligned with hiring rates.

Employee Resistance to Fixed Pay Structures

The challenge: In flat or tightly graded structures, high performers can feel undervalued when there’s little room for financial progression.

How to overcome it: Balance fixed pay systems with performance-related bonuses, recognition schemes, or clear skill-based progression pathways. Clarity about how employees can grow is as motivating as the pay rise itself.

Managing Geographic Pay Differences

The challenge: Hybrid and remote work have made it harder to define what “location-based pay” really means, particularly for employees who live outside major cities but work with London teams.

How to overcome it: Set clear, documented rules on how location affects pay and apply them consistently. If you choose a UK-wide benchmark, communicate it transparently and revisit it annually as hybrid work patterns evolve.

Ensuring Pay Equity 

The challenge: As pay transparency expectations rise, organisations need to prove their pay decisions are fair and consistent.

How to overcome it: Set an annual or biannual cadence for pay reviews and automate alerts for drift so you can correct issues early. Document the logic behind ranges so decisions remain explainable.

Common FAQs

What is a spot salary? 

A spot salary is a single fixed rate for a role with no pay range or progression. It’s simple and transparent but offers little flexibility for experience or performance differences.

What is the most common salary structure?

In UK medium to large organisations, traditional graded pay structures are most common, often paired with job families and market benchmarking.

What are the benefits of a pay structure? 

Fairness, market competitiveness, clarity on progression and explainable decisions that support retention.

Is Your Pay Structure Competitive? Find Out with HR Datahub

If your bands haven’t been refreshed against the market in the last 12 months, you’re likely seeing pay drift, hiring delays, or uneven progression. HR Datahub lets you spot-check critical roles, validate minimum–midpoint–maximum and set a reliable review cadence.
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HR Datahub gives you the market insight to do this quickly across functions, regions and seniority in a way that stands up to scrutiny. If you want to check whether your current bands still stack up, I’d suggest starting with your hard-to-hire roles and the teams with the highest turnover.
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If you’d like to see how your ranges compare to live market data, book a short demo, and we’ll walk you through how it works.
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You may also be interested in our free Pay Planning and Reward Toolkit, which helps you design fair, competitive and data-driven pay structures.