A pay grade is a level of compensation within a organization. In this type of system, all employees are assigned a pay grade according to their position and experience and are paid a certain amount based upon this grade. This system is common in government and military compensation.
Pay grades are used to regulate salaries for employees. This works to ensure that all employees doing the same or similar jobs receive the same compensation. While the amount of pay may vary some within a grade, the system discourages negotiations over salaries.
Generally, the lowest pay grades in a system are reserved for unskilled labor, paying the lowest salary. Workers will be moved up to higher grades based on whether they meet the requirements of positions within the pay grade, including years of experience, complexity of the job, and level of education. Jobs that require extensive education, such as a master's or a doctorate, typically begin at a higher pay grade than those that don't require a degree.
Pay grades generally lump together people of similar stature within an organization. Most managers will belong to one grade, directors to another, and executives to another. Promotions within this type of organization typically mean moving up a pay grade, thereby guaranteeing a certain rise in salary.
In some organizations, employees can move to higher pay grades simply through longevity. For instance, a manager who has worked in a position for seven years may automatically be in a higher grade than one who has worked in a similar position for three years. Some pay grade systems do allow for some salary variation. The variation is built in to allow exceptional work to be rewarded within the pay grade.
Some pay grades also allow for variations within a large organization. Employees of a large national or multinational company may have their salary adjusted based on the costs of living expenses at their particular location. Often, employees of a large or capital city are allocated more money within a grade to pay for the higher expenses of living in that city. Pay grades are generally adjusted yearly for inflation.
One element of the pay grade system, in both pubic and private organizations, is that salary data is public knowledge. All employees can see the salaries associated with each grade, thereby removing an element of distrust concerning salaries that can exist in a corporation. It also allows employees to know their likely salary at future stages of their career, if they remain within the system. This can be useful in planning finances or helpful in negotiating salaries with a company that does not use a pay grade system.