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What Is a Compensation Structure?

By Kesha Ward
Updated Feb 09, 2024
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Every company, business, or organization that pays workers has some form of compensation structure. These documents, usually produced and maintained by human resource (HR) departments, establish salary ranges for each paid position. The configuration and scale of pay are dependent on the specific duties to be performed as part of each position. The pay scale for workers at every level includes minimum and maximum amounts that are outlined in the structure, and pay variations on the scale often take skill level and experience into account.

A company’s compensation structure reveals its pay philosophy. The two most common types of compensation structures are the internal equity structure and pay hierarchy. The internal equity method of determining compensation uses a grid to ensure that each position is compensated according to the pay of positions positioned above and below it on the grid. With a hierarchical compensation structure, the prevailing market rate of pay is taken into consideration with each position and pay on the structure increases with the level of experience and responsibility.

A compensation structure is influenced by a company’s industry as well as the salaries paid to employees in competing industries. In most cases, positions within a company with similar responsibilities and functions will offer competitive pay. It is possible for a position with the same title and function to have a different compensation structure in different industries. For example, an account specialist working in a large technology company may make significantly more than an account specialist with a small start-up company or mom and pop business.

In most cases, a compensation structure is comparable within similar industries. It is important for pay to be competitive in order to attract and retain the best employees for positions. Workers will seek out employment with companies that pay more unless other attractive benefits or perks are offered.

The compensation structure may include an employee’s base pay as well as any incentive and merit pay programs. Base pay can be derived from a set salary or hourly amount. Incentive and merit based pay are included in these structures, and can vary based on employee effectiveness. In a performance driven environment, employees can significantly increase their earnings by reaching and exceeding performance goals set by the company.

Incentive compensation is often used to motivate employees to perform better at work. This type of compensation is common in sales environments. Employees who successfully sell more make more.

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