Introduction to grade and pay structures and their purposes

Covering Assessment Criterion 2.1 of 5HR03 Reward for Performance and Contribution, this video opens the topic of grade and pay structures by establishing why organisations need them before any particular type is introduced. It addresses four core purposes that any pay structure must fulfil: internal equity, external competitiveness, progression, and governance and control. The discussion of internal equity centres on how structures create a systematic basis for valuing roles relative to one another, while the treatment of external competitiveness connects pay structures to labour market benchmarking and the tension between attraction, retention, and cost management.

The video also addresses the absence of a universal solution, making clear that the suitability of any structure depends on factors such as organisational size, culture, sector, workforce composition, and strategic objectives. A public sector body and a technology start-up are used as contrasting illustrations of why the same approach cannot be applied universally. This contextual framing is positioned as foundational for HR professionals who will later need to choose between structure types rather than simply describe them.

The final section of the video draws a preliminary distinction between formal and informal structures, which forms the conceptual boundary that AC 2.1 requires learners to explain. Formal structures are characterised by defined grades or bands, specified pay ranges, and documented policy, whereas informal structures accommodate individual negotiation and case-by-case decision-making. The video signals that specific formal structure types — including multi-graded, broad-graded, broad-banded, and job family structures — alongside informal arrangements such as spot rates and individual job grades, will be examined in the subsequent video in this series.