A pay grade is a salary-system in an organization in which bands of salaries are made, and keeping into account the responsibility, seniority, position, experience etc, the salaries are given. Pay grades are often linked to the job profile, wherein higher the job profile more would be the pay grade.
For example an employee falling in a pay grade of 5 will not get paid as much as an employee in a pay grade of 7. The pay grades are calculated taking into account the amount of responsibility in their particular position and also length of service or the quality of the performance.
Some organizations believe in promoting employees based on age and tenure whereas other believe in performance, hence the pay grade criteria can differ based on the company philosophy. An employee can climb up the pay grades depending on his/her performance appraisals. Pay grades ensure internal alignment of compensation within the organization hence mitigating dissatisfaction.
In smaller organizations, it is often easy to assign pay rates to each job individually. But, in the context of larger organizations, this system would be difficult to administer as they may be different pay rates for hundreds or even thousands of jobs. Therefore, similar jobs are grouped together into grades for pay purposes.
Therefore, we can say that Pay Grade essentially comprises of jobs of similar or equal difficulty/importance. There are many methods to establish the grade. They are namely:
Ranking Method: Here, the grade consists of jobs falling within two or three ranks.
Point Method: In this case, the pay grade consists of jobs falling within a range of points.
Classification Method: This categorizes jobs into classes.
The Factor Comparison Job Evaluation Method is also used to obtain a grade that contains a specified range of pay rates. This is illustrated with the following example.