How to Create Pay Grades

While there are no regulations or set standards regarding the establishment of pay grades, there are some basic, customary steps involved in doing so. Key components in establishing and maintaining pay grades include:

  • Get a commitment and participation from management and/or the executive team in establishing company minimum and maximum pay for the organization.
  • Use the company’s compensation philosophy to create pay grades that support that philosophy (will you lead the market, lag the market, or pay at market?)
  • Select the number of grades to be used based on the size of the company, job diversity, job evaluation results, etc.
  • After consulting valid salary surveys, set a minimum, midpoint, and maximum for each grade. The maximum of one grade may overlap the minimum of another and vice versa. A common spread between minimum and maximum in each pay grade is 30 percent to 50 percent, but it can be set at whatever the employer feels is acceptable.
  • Establish a communication plan to inform and educate employees and managers.

Finally, develop written policies to assist in the administration of the new pay structure, and be sure to manage the organization’s compensation program consistent with the structure and policies created. MSEC has the expertise to assist with all of these steps. Contact your representative to learn more.