If you’ve heard of a pay grade, you might have your own opinions on whether this system is a positive or negative. But if you've recently come across this compensation system and have never heard of it before, you may have lots of questions.
Either way, before deciding whether to accept or decline a job offer, its useful to fully understand what a pay grade is, how it works, and if it's beneficial to you. In this article, we explain everything you need to know about pay grades and how the system can affect your salary. Spoiler alert: It's definitely less complicated than it seems at first glance.
What is a pay grade?
A pay grade is a compensation system that determines the amount an employee earns based on their level of responsibility, authority, and length of experience. In this system, compensation is predefined and laid out in a structure that tells employees exactly how much they'll receive as their career progresses. For this reason, pay grades generally exclude salary negotiations.
“Pay grades typically have set minimum and maximum salary limits,” says Max Williams, founder and HR Outsourcing (HRO) specialist at Herobot. “Key factors that influence pay grades include market salary benchmarks, job complexity, and company size.”
Pay grades are mostly used in the public sector, unionized industries, and large corporations, but aren't limited to it. “They’re gaining popularity in other sectors, like tech and corporate environments where consistency in compensation is important,” Williams says.
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How pay grades work
A pay grade works by applying pre-determined factors to determine the monetary compensation an employee will receive in each stage of employment. These factors are often called steps or levels (for clarity we’ll call them steps in this article). This structure is often organized in charts or sheets that display each step an employee can take in the organization and the compensation available for each phase.
In simple terms, this means that, as an employee, you must meet certain criteria to move up the career ladder in a company and increase your pay accordingly. The criteria for each step within a pay grade vary between companies but, generally, key factors are job title, years of experience, and level of responsibility. In some industries, length of service and education are taken into consideration.
For a more comprehensive visualization, companies often separate pay grades by job family—which is a group of similar jobs within the workplace. For example, a common company structure is C-level employees (CRO, CFO, CMO), V-level (vice presidents), D-level (department directors), B-level (department managers), and staff (workforce). Each job family has its own steps within a pay grade structure.
Pay grades: Example
The federal government uses pay grades—officially called the General Schedule (GS) Payscale—to determine the salary of its employees. The grades range from 1 to 15 and each has 10 steps. In this structure, an employee can increase their pay vertically, by climbing each step within their grade, or horizontally, by jumping grades.
In grade 1 are entry-level positions with the starter salary of $21,986 a year and the maximum salary of $27,502 a year, corresponding to step 1 and 10 respectively. On the opposite end of the scale is grade 15, which is reserved for senior management roles, high-level technical specialists, and professionals with advanced degrees. In grade 15, the starting salary is $123,041 and the maximum salary is $159,950, corresponding to step 1 and 10 respectively.
Pay grade example: 2024 Official General Schedule Base Rates of the Federal Government
Pros and cons of pay grades
As with any compensation system, pay grades have pros and cons for employees. “The biggest advantage of pay grades is that they create consistency and transparency in compensation, helping to avoid pay discrepancies and potential biases,” Williams says. “On the downside, they can be rigid, limiting salary flexibility, and may not always account for exceptional performance or niche skills.”
Pros
- Consistency and transparency: You know exactly how compensation is determined and what amount you can expect at different levels of your career, as well as the maximum amount you'd be able to receive in that company and position.
- Fewer wage gaps: Pay grades can be an effective tool to eliminate wage gaps by providing the same compensation for all employees in the same position and level, since the criteria for promotion is the same for all, and potential biases (e.g. gender, race, age) are less likely to affect wages.
- Career progression: Pay grades also “provide a clear framework for career progression,” Williams says, and can be a stimulus for learning and development, since education and level of responsibility are often key factors for salary progression.
Cons
- No salary negotiation: Pay grades don't give room for salary negotiation, as individual negotiating defeats the purpose of the system. You could argue that, based on your qualifications and experience, you belong in a different grade or step, but that's about it.
- Mismatch between compensation and effort: The lack of flexibility of this system can lead to a mismatch between an employee's effort and their compensation. For instance, you can close a major deal, showing professional maturity and negotiation skills, but it’s possible that you’d stay in the same grade if you don't meet the education or length of service criteria of the next grade.
Pay grade vs salary bands
Salary bands (also known as pay bands) are another type of compensation method that categorize salaries, similar to pay grades. However, while a pay grade specifies preset criteria for each particular position and its level, salary bands offer a broader categorization of job groups with similar complexity and value for the organization.
“Salary bands offer more flexibility within each band, allowing for variations based on performance or experience,” Williams says. “Bands allow for more nuanced compensation practices compared to pay grades.”
Neither is inherently bad or good—but one may be best for you based on your career ambitions and your work style. If you'd like a consistent compensation system with detailed criteria for promotion, pay grades might be best for you. But if you're a top performer looking for a quicker career progression, salary bands may be the better system.
“Salary bands offer more flexibility—employees have greater room for salary growth within their roles, allowing them to advance financially without having to wait for a promotion or a move to a different pay grade,” Williams says.
How to move up in pay grades
With pay grades, there is no ambiguity: To move up you must meet the expectations of your current role while also increasing responsibilities, knowledge, and/or education level. “Pursue additional training or certifications, and communicate your career goals clearly with your manager,” Williams says.
The idea is to show that you're exceeding what's expected from you and you are deserving of a salary increase at the next level of your position. Your manager can help you create a career development plan, gradually giving you tasks that exceed your current responsibilities so that you gain more experience and develop new skills.
Another way to do this is by networking with your peers and higher-level employees to gain a deeper understanding of the company's expectations. “Networking within your organization and aligning your performance with the company’s key objectives can also demonstrate that you're ready for more responsibility and higher pay,” Williams adds.
Finally, remember to document your actions and key accomplishments that clearly demonstrate increase in responsibility, experience, use of new skills, and professional growth. Companies that use pay grades often need to see measurable evidence of your performance and proof that you check all the boxes necessary to justify a promotion.
Need help planning the next steps in your career? Here's a guide on how to set long-term career goals (plus, a worksheet!)