What Is Pay Grade? Definition, Structures And Examples

Updated 30 October 2023

Pay grades are a type of preset salary system organisations may use to compensate their team members. If you work in operations or human resources, learning more about pay grades can help you discuss salary ranges with prospective employees. Also, if you are applying for a new role in a company that uses a pay grade, learning more about this concept could help you better understand your personal compensation plan.

In this article, we define what a pay grade is, explain what grading structures your company may use, show how these structures work, list the factors that may affect a pay grade system and provide examples to help you understand this concept.

Read more: What Is Compensation? A Complete Guide

What Is Pay Grade?

A pay grade is a method of compensating employees for their work based on their qualifications, years of experience and other predetermined factors. This type of payment system is preset with a specific structure. Within the system, there are multiple steps and levels, each of which has transparent requirements. For example, a new employee may begin on level one, step one. For each year they work at the company, they may gain one step, with a higher salary.

Information about these predetermined salaries, levels and steps are available to all employees and are often accessible to the public as well. Many public sector organisations, such as government roles, use this type of pay structure. Some private sector companies may also use pay grades to make the salary process more transparent for all employees. With a pay grade, team members know exactly what they can do to earn a higher salary. Typically, employers predetermine this pay, which means there are no salary negotiations, although some private companies may offer ranges and flexibility in their pay grade systems.

Related: Salary Negotiation Tips and Examples

What Are The Pay Grade Structures?

Organisations may use a pay grade structure to order their different steps and levels. Here are the two most common design structures for pay grade systems:

Vertical pay grade

Vertical pay grade is a compensation structure in which salary and step increases relate to a person's job title, years of experience and responsibilities. This pay grade model sometimes reflects the requirements a person needs for their position, such as degrees or certifications. For example, employees with a secondary school education may begin at level one, while those with advanced degrees may begin at level two. For each year of work, they may move one step.

Alternatively, each step might relate to additional responsibilities and a new job title within the same job family. For example, a training level role for accountants might be level one, while a senior management position is level four. Within these levels, there are smaller steps based on the employee's years of service or other factors.

Horizontal pay grade

Horizontal pay grade also bases salary on experience and length of service. Increases in step or level may also relate to degrees or certifications a person earns. A distinguishing feature of horizontal pay grade is the potential for pay increases relating to the quality of someone's work. When this is the case, the increase in salary that a person earns is also preset and follows the outlined path or guide. For example, a company may offer a range and for high-quality work, the individual may earn a higher salary within the set range.

How Do Pay Grades Work?

Pay grades work by using preset factors to determine the amount of money someone earns at their job. These factors inform the structure of steps and levels within company compensation charts. The charts show job titles and the exact salary or salary range for each position. If the charts reflect a range, then the exact compensation a person earns within that range typically follows a specific point system.

Typically, there are levels, which refer to either job titles or a certain qualification, such as a degree. Within these levels, there are smaller steps. Typically, a person can move to the next step based on the time they spend in the company. To move to the next level, they may need additional education or to qualify for a new role with additional duties. A pay chart describes these requirements and details how a person can earn a higher salary.

Related: Gross Salary and Net Salary: Definitions and Examples

What Factors Affect Salary On A Pay Grade?

Individual organisations can determine which factors influence the step or level systems within a pay grade. The step guide or pay grade chart can reflect all salary increases that relate to those factors. Here are factors that may affect a person's step or salary:

Education

Education is often an important part of a pay grade. A pay grade chart may describe certain degrees and how that affects salary. The chart may also include information about specific certifications or training. Holding a certain degree or certification may increase a person's step or level on the chart, causing them to earn a higher salary.

For example, a new sales representative might earn a salary of ₹110 per hour. Another person in the same role and step with an advanced degree may begin at a higher level, earning ₹150 per hour. Both candidates may move forward one step each year they work at the organisation.

Experience

Experience is the number of years a person has worked in a similar job before coming to the organisation. For example, a candidate applying for a marketing role might be new to the organisation but have six years of previous marketing experience.

Some companies or industries start all employees on the first step of the salary guide for their role. Others use the candidate's prior experience to determine their level or step. For example, if a new teacher starts their first job at a school, their pay grade would correspond to the salary for step one on the guide. A teacher with five years of previous teaching experience may begin on step five if the school uses prior experience as a deciding factor for compensation.

Performance

Performance relates to what the professional achieves in the role. This may affect pay grades in a private company. Government or public agencies that use pay grades often use years of service and education as the deciding factors, without considering performance. When a company uses performance as a factor, they may consider specific accomplishments the employee achieved. For example, a team member who regularly produces high-quality work may move up a step or level.

Years of service

Years of service is how long a person works for an organisation, and some companies offer a set salary increase depending on the individual's years of service. For example, some companies may say employees move one step forward for each year they work at the organisation. Others may use a range. For them, step one may consist of years one to three, and step two is years four to six. Typically, an employer lists this information clearly on the pay grade chart.

Example Pay Grade Structures

Pay grades can vary depending on the organisation and the factors they consider when determining salary levels. Below are three examples showing different pay grade structures.

Example one

This vertical structure example shows the different levels based on the employee's job title, relevant experience and time at the company:

Administrator pay

Level one (Intern)

Step one: ₹1,000,000
Step two: ₹1,100,000
Step three: ₹1,200,000

Level two (Assistant)

Step one: ₹1,500,000
Step two: ₹1,600,000
Step three: ₹1,700,000

Level three (Administrator I)

Step one: ₹2,000,000
Step two: ₹2,100,000
Step three: ₹2,200,000

Level four (Manager)

Step one: ₹2,500,000
Step two: ₹2,600,000
Step three: ₹2,700,000

Employees move one step for each year of service.

Example two

Some pay grades have overlap between the titles, meaning someone at level two may earn as much as someone at level three if they have been at the company longer. Here is a vertical structure example with some overlap that focuses on one job title and includes salary based on education levels and years of experience:

Research associate pay

Level one

Step one (1-5 years): ₹800,000
Step two (5-10 years): ₹900,000
Step three (10-15 years): ₹1,000,000
Step four (15+ years): ₹1,100,000

Level two (Bachelor's degree)

Step one (1-5 years): ₹1,200,000
Step two (5-10 years): ₹1,300,000
Step three (10-15 years): ₹1,400,000
Step four (15+ years): ₹1,500,000

Level three (Master's degree)

Step one (1-5 years): ₹1,400,000
Step two (5-10 years): ₹1,500,000
Step three (10-15 years): ₹1,600,000
Step four (15+ years): ₹1,800,000

Level four (PhD)

Step one (1-5 years): ₹1,800,000
Step two: (5-10 years): ₹2,000,000
Step three (10-15 years): ₹2,200,000
Step four (15+ years): ₹2,400,000

Example three

This example shows a horizontal structure where performance can affect total pay:

Software developer pay

Level one (Intern or training role)

Step one (1-2 years): ₹1,000,000-₹1,100,000
Step two (2+ years): ₹1,100,000-₹1,200,000

Level two (Junior developer)

Step one (1-3 years): ₹1,400,000-₹1,500,000
Step two (3-6 years): ₹1,500,000-₹1,600,000
Step three (6-9 years): ₹1,600,000-₹1,700,000
Step four (9+): ₹1,700,000-₹1,800,000

Level three (Developer)

Step one (1-3 years): ₹1,600,000-₹1,800,000
Step two (3-6 years): ₹1,700,000-₹1,900,000
Step three (6-9 years): ₹1,800,000-₹2,000,000
Step four (9+): ₹1,900,000-₹2,100,000

Level four (Senior or manager role)

Step one (1-3 years): ₹1,800,000-₹2,000,000
Step two (3-6 years): ₹1,900,000-₹2,100,000
Step three (6-9 years): ₹2,000,000-₹2,200,000
Step four (9+): ₹2,100,000-₹2,300,000

Salary determined by performance review. Each point on the review rubric may increase in an additional ₹10,000 annually.

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