Salary structure reflects how a company values its people. The way pay is broken down not only shapes employee satisfaction but also defines how competitive a business is in the job market. In this article, terra will explain what a salary structure is and how businesses can design one that is clear, fair, and practical.
What is the salary structure?
Every company, no matter its size, needs a salary structure. It is the organized way of deciding how much employees are paid and how different parts of their pay are calculated.
Salary structure definition
A salary structure is the framework that explains how compensation is built and distributed to employees. It ensures pay is fair, consistent, and transparent across the organization. By having a defined structure, businesses can set salaries that match with job roles, industry standards, and internal budgets.
Components of a salary structure
A salary structure is made up of different parts that together form an employee’s total pay:
- Basic salary: The fixed core of an employee’s pay. It usually makes up the largest share and is used as the base for calculating other parts like allowances and contributions.
- Allowances: Extra payments to support daily living or work needs. Common ones include housing, transport, and meal allowances.
- Mandatory contributions (insurance, taxes): Deductions required by law, such as social insurance, health insurance, unemployment insurance, and income tax. These lower take-home pay but provide long-term benefits.
- Gross salary vs. Net salary: Gross salary is the total before deductions. Net salary (take-home pay) is what employees actually receive after taxes and contributions are taken out.
- Cost to Company (CTC): The total cost a company spends on an employee, including salary, allowances, bonuses, and employer contributions. CTC shows company expenses, not the employee’s net pay.
See more: Everything you need to know about salary slip
The fundamentals of designing a competitive salary structure
A good salary structure helps build trust and keeps employees motivated. To achieve that, businesses need to consider several key principles.
Transparency and fairness
Employees value clarity in how their pay is decided. When salary policies are open and applied fairly, it reduces doubts and builds trust. Clear rules on what drives pay, such as skills, performance, or seniority, also make it easier to explain salary decisions.
Internal equity vs. External competitiveness
A strong salary structure balances two aspects. Internal equity means employees in similar roles within the company are paid fairly compared to one another. External competitiveness keeps salaries aligned with market standards, helping the company attract new talent and retain existing employees.
Payroll considerations and compliance
Salary design must follow labor laws, tax rules, and social insurance requirements. Mistakes in compliance can lead to legal issues and harm employee confidence. At the same time, businesses should focus on payroll efficiency by making sure calculations and payments are accurate and on time.
Aligning salary structure with business strategy
Pay is not only about numbers, it also reflects company priorities. A salary structure should support the organization’s strategy, whether that means rewarding strong performance, attracting specialized skills, or keeping costs under control. When pay is aligned with long-term goals, it creates a clear link between business growth and employee rewards.
Why is salary structure important?
Salary structure affects how a company manages costs and motivates people. Both employers and employees benefit when pay is organized and transparent.
For employers
A clear salary structure helps companies plan labor costs, keep pay consistent across roles, and avoid conflicts about salary. It also supports fair promotion decisions and makes it easier to compare with market levels, which helps attract and retain talent.
For employees
For employees, salary structure makes things easy to understand. It shows how pay is calculated, what is taken out, and what benefits are included. This openness builds confidence and helps employees see the link between their performance, career growth, and the rewards they receive.
Types of salary structures
Over time, several salary models have been developed to fit different needs: some prioritize stability, others emphasize career progression, while newer ones focus on performance or market competitiveness. Below are the most common salary structures used today, with examples of how companies apply them in practice.
Basic salary structure
This is the oldest and most straightforward model, where employees receive a fixed monthly or yearly salary regardless of output. It creates stability, but it does not leave much room for motivation. Basic salary structures are still very common in government jobs, traditional industries, or roles where performance is difficult to measure.
For example, a receptionist in a small company might receive $700 per month, every month, without changes tied to performance. This helps the employer manage predictable payroll costs and gives the employee a sense of security. However, as job markets evolve, this model can make it harder for businesses to compete for ambitious or high-performing talent.
Pay grade / Pay scale structure
Pay grade and pay scale are systems used by companies to classify employee salaries based on role, responsibility, skills, and experience. This structure helps organizations manage payroll fairly while supporting career progression and development.
For example, a company might establish a pay grade system ranging from Grade A to Grade E:
| Pay Grade | Job Title | Minimum Salary | Maximum Salary | Notes |
| A | Entry-level / Junior | $1,000 | $1,500 | Typically for new employees |
| B | Associate / Staff | $1,500 | $2,500 | Employees with 1–3 years of experience |
| C | Senior / Specialist | $2,500 | $3,500 | Experienced employees or high skill level |
| D | Team Lead | $3,500 | $5,000 | Responsible for managing a small team |
| E | Manager | $5,000 | $7,000 | Middle management with strategic decision responsibilities |
How it works:
- A new employee starts at the minimum of the assigned pay grade (e.g., Grade A).
- With experience, skills, or performance achievements, the employee can move up within the pay grade or get promoted to the next grade.
3P salary structure (Position, Person, Performance)
This is one of the most modern approaches, designed to balance fairness, competitiveness, and motivation. The 3P model looks at:
- Position: the value of the role in the organization.
- Person: the individual’s skills, qualifications, and experience.
- Performance: measurable results and contributions.
A marketing manager has a base salary of $2,000. On top of that, $400 is added for advanced certifications they hold. Their total compensation also includes an annual bonus, which is linked to the performance of marketing campaigns.
This creates a dynamic salary system that not only reflects job responsibilities but also rewards individual strengths and achievements. The model is complex to design, but when executed properly, it becomes a strong talent magnet and retention tool.
See more: What is 3P salary? The most accurate guide to 3P salary calculation
Broadband salary structure
Instead of having dozens of small pay grades, broadbanding reduces them into fewer, wider bands. This model gives managers flexibility to adjust salaries within a range without constantly promoting employees. It is especially useful in industries where job roles evolve quickly, like technology or creative sectors.
Take a software company as an example. Instead of separating developers into 10 narrow grades, the company might have 3 bands: Junior ($1,000–$2,000), Mid-level ($2,000–$4,000), and Senior ($4,000–$7,000).
Within each band, managers can reward employees based on market demand, skills, or contributions, without overcomplicating the hierarchy. The trade-off is that employees might not always understand why one person in the same band earns more than another, so communication is key.
Commission-based salary structure
Here, employee pay is directly tied to performance, often through sales or revenue. In most cases, it combines a small base salary with a variable component that depends on results. This structure is highly motivational but also risky if targets are unrealistic.
For example, a real estate agent might receive a base pay of $500 plus 2% commission on every property sold. In high-performing months, they can earn several times their base salary, but during slow periods, income can shrink dramatically.
For employers, this model keeps fixed payroll costs low and aligns rewards with revenue. For employees, it creates both opportunity and pressure, so it works best in sales-driven industries where individuals are comfortable with income fluctuations.
See more: How does commission work? Commission pay meaning, formulas and examples
How to build a salary structure for businesses
Many business leaders and HR professionals are unsure where to start when building a salary structure. In the following section, we will walk you through a step-by-step approach to design a clear, fair, and competitive pay framework.
Start with market benchmarking
Before setting salaries, you need to know what the market is paying. Use reliable sources such as Glassdoor, LinkedIn Salary, or industry-specific reports to collect data for each role in your company. Note the low, median, and high salaries for each position, and consider your company size, budget, and strategy.
Create a simple spreadsheet with columns for Role, Market Low, Market Median, Market High, Target Salary Range. This becomes your reference for deciding competitive pay while staying within budget. For more accuracy, you can also check government labor websites or local HR associations for official salary guidelines.
Define how salary growth will work
Decide how pay will increase over time. Raises can be based on tenure, performance, or a combination. For example, you might implement:
- A 5% annual raise for meeting expectations.
- A performance bonus for exceeding targets or completing critical projects.
Document this clearly in writing so employees understand how their salary can grow. You can even create a simple visual chart: “Years of Experience / Role Level / Expected Salary Range / Raise Mechanism.” This helps employees plan their career path and motivates them to perform.
Review your existing salary framework
Analyze your current salaries to identify gaps or inequities. Compare existing pay against the market ranges and check for compliance with local labor laws, including minimum wage, mandatory insurance contributions, and personal income tax.
Use Excel or Google Sheets to calculate averages, spot anomalies, and simulate adjustments.
Build a clear salary framework
Create a structured pay framework that includes base salary, allowances, benefits, and bonus mechanisms. Present it in a table or spreadsheet with columns like: Base Salary – Allowances – Bonus – Total Cost to Company (CTC).
Define ranges for each role and include guidance on moving within those ranges. For example, a “Marketing Specialist” might have a base of $1,500–$2,000, allowances totaling $200, and potential performance bonuses of $300.
The framework should be simple to use. HR and managers can apply it to all roles without frequent clarification. It should also remain flexible so that high performers can be rewarded and adjustments can be made as market conditions change.
Align with current employee salaries
Finally, compare the new structure with current salaries. Identify employees who fall below the new minimum and plan gradual adjustments. For employees who earn above the new maximum, freeze increases or adjust only on promotion to avoid internal inequity.
Communicate clearly with your team: explain why the new structure exists, how it benefits employees, and how the transition will be handled. Transparency at this stage builds trust and reduces resistance.
Common mistakes to avoid in salary structure design
Designing a salary structure may seem straightforward, but many companies make avoidable mistakes that can create frustration for employees and headaches for HR. Understanding the common pitfalls can help you build a structure that works smoothly for both the company and its people.
Ignoring market benchmarks
One of the biggest mistakes is setting salaries without looking at what other companies pay for similar roles. Without market data, your pay may be too low to attract talent or unnecessarily high, straining the budget. Always research industry reports then decide on pay bands that are competitive yet sustainable.
Overcomplicating the structure
Adding too many grades, allowances, or complex bonus formulas can make the system difficult to apply. HR and managers may struggle to calculate salaries consistently, and employees may find it confusing. Keep the structure simple but comprehensive: base pay, key allowances, and performance-related incentives should be easy to track and update.
Not updating with market and regulation changes
A static salary structure can quickly become outdated. Changes in market rates, inflation, or labor laws can make salaries uncompetitive or non-compliant. Regularly review the framework at least once a year, adjust pay ranges according to market trends, and make sure all mandatory contributions and taxes are current.
Frequently asked questions (FAQs) about salary structure
Employees often have many questions about salary structures. This FAQ section answers the most common questions, helping both HR and employees understand how salary frameworks work in practice and why they are designed the way they are.
Can companies change salary structures anytime?
Companies can update their salary structures, but changes should be carefully planned and communicated. Sudden or frequent changes without explanation can frustrate employees and affect trust. Ideally, updates happen during annual reviews or when market conditions or regulations change.
How can we align salary structure with performance reviews?
Linking pay to performance motivates employees to meet goals. A clear framework should show how raises, bonuses, or promotions are tied to measurable results, such as KPIs or project outcomes. This creates transparency and rewards high performers fairly.
What are the common compliance risks when structuring salaries?
Common risks include paying below minimum wage, miscalculating taxes or mandatory contributions, and not following labor law rules on overtime or benefits. Using payroll outsourcing services can help reduce errors.
Can salary structure be different across departments or job levels?
Yes. Different roles and departments often require different pay ranges due to skills, responsibilities, or market rates. However, internal equity should still be maintained so employees feel the system is fair.
Can my employer change my salary structure without my consent?
Employers generally cannot reduce pay or change key salary components without informing employees, especially if it violates labor laws or employment contracts. Any changes should be communicated and documented in writing.
What is the most common salary structure in modern companies?
Many companies now use a 3P structure, which combines the value of the role, individual skills, and measurable performance to determine pay. Pay-grade systems and broadband structures are also common, depending on company size and industry.
How does salary structure affect promotions and raises?
Salary structures define the range for each role and level, so promotions or raises are guided by these ranges. Employees moving to higher responsibility roles receive pay in the new range, while exceptional performance within the same role can lead to increases within the existing range.
Why do two people in the same role sometimes have different salary structures?
Differences can arise from experience, skills, qualifications, or performance. While the base framework may be the same, factors like specialized expertise, certifications, or contribution to key projects can create variation, as long as it remains fair and transparent.
terra Payroll – Payroll service in Vietnam
Managing payroll for foreign-invested (FDI) companies can be complex, with local labor laws, tax regulations, and compliance requirements to navigate. terra Payroll offers comprehensive outsourced payroll services that handle everything from employee salary calculations and statutory contributions to tax filings and social insurance.
By partnering with terra Payroll, companies can benefit from:
- Accurate payroll processing: All salaries, allowances, bonuses, and deductions are calculated correctly, reducing errors that could affect employees or compliance.
- Simplified compliance management: Local labor laws, tax rules, and social insurance contributions are fully handled, freeing HR teams from routine administrative work.
- Flexible payroll solutions: Whether for small teams or large organizations, terra adapts to company size, new hires, and departmental changes.
- Time and cost savings Routine payroll tasks are taken over, allowing HR to focus on strategic priorities like employee performance and engagement.
With more than 250 clients and over 21 years of experience, terra helps companies manage payroll efficiently. We deliver reliable, scalable, and accurate payroll services, making salary calculations straightforward and fully compliant.
Contact terra today for a full consultation!
Conclusion
A well-designed salary structure gives employees a clear understanding of how their pay is determined and what opportunities exist for growth. It helps managers make consistent decisions and keeps the company competitive in the job market. By combining clear frameworks businesses can maintain equity across all roles.
