A pay grade is a step within a compensation system that defines the amount of pay an employee will receive. The pay grade is generally defined by the level of the responsibilities performed within the job description of the position, the authority exercised by the position, and the length of time the employee has performed the job.
Responsibilities, and hence a higher pay grade, are extended to employees who manage the work of other employees. Growing levels of management responsibility experience increasing levels of pay within the pay grade.
Occasionally, the horizontal axis is related to the performance of the employee as well as the length of the employee's service. The vertical steps in a pay grade chart refer to the level of the responsibilities defined by the job's requirements.
Pay grades provide a framework for compensation by defining the amount of pay available at each step in the employment process. Pay grades take the place of salary negotiation, particularly in public sector employment where fairness trumps contribution. Pay grades are also typical of union-represented positions.
Pay Grades in the Public Sector and Unionized Workplace
Particularly in the public sector or in a unionized workplace, the existing pay grades also affect how much money an employee can expect to make when starting a new job. The employee's initial ranking within the pay grade is affected by his or her job experience, education, and other factors. In the Federal Government General Schedule, for example, individuals with senior management roles will receive a GS 14 or 15 pay grade.
On the same schedule in a particular pay grade range, an employee who is new to a job that they are starting right out of college will start at pay step one of the pay grades. If he or she continues to work in the same role, the pay grade will allow for the upward movement in salary, usually one pay step per year of service within the pay grade assigned to that job.
Compensation systems that involve pay grades are often used for public sector jobs such as in the Federal government, the military, and universities.
Pay steps within each pay grade differ between organizations and may involve as many as 10 to 15 or more pay steps before an employee reaches the top rate of pay for their pay grade. A pay raise, once an employee reaches the top of their pay grade is dependent on the cost of living allowances or increases.
More Steps in the Pay Grade Encourage Employee Motivation and Feelings of Mobility
The number of pay steps encourages employees to feel as if their career success and compensation are increasing during the time they perform the job—even if they are performing the same job. This is important as it is not always possible for every employee to obtain a promotion, a lateral move, or a move to a different internal job with more responsibilities to start moving up the pay steps of the next pay grade level.
If very few increases exist via pay steps, employees feel stuck and unappreciated. This can affect employee morale and employee motivation adversely. Since the public sector and unionized employees are less likely to adventurously seek out new external activities, often preferring the assuredness and security of a regular paycheck, this can create a workplace that is rife with stagnation, unhappiness, and defeat.
Overlapping Salaries Are Common in Pay Grades
Overlaps in the amount of salary available at each pay step of the pay grade are common to pay grades. For example, a beginning worker's job at pay grade 1 might involve 10 to 15 pay steps from $24,000 to $36,000. Pay grade 2 assigns rates from $28,000 to $40,000 and so forth.
Pay grades are also useful in private sector employment. As a company grows larger, you want to ensure fairness and similar pay structures across different positions within a variety of work units and job functions.
Similar pay for similar job requirements and responsibilities ensures that each work unit can attract and retain excellent employees. Pay grades in the private sector can involve salary negotiation and the application of more managerial discretion than in its public sector counterparts. This is because pay grades in the private sector seek to reward and recognize superior performance as well as factors such as longevity and commitment.