The Definitive Guide to Market-Based Salary Structures

You’ve built salary bands and documented pay ranges, and everyone has signed off on it. So why does every new-hire negotiation still feel like a judgment call? Why do managers keep asking for exceptions? And why does it seem like your best people are quietly shopping their resumes?

Compensation decisions have always been complex, but lately, figuring out a pay strategy involves running the gauntlet of wildly variable markets, torrents of new compliance rules, and a workforce that demands more transparency.

In this environment, a salary structure will fail if it’s not tied to real market data. Maybe you already do the occasional benchmarking, but it’s not always tied to your compensation planning cycle, or maybe analyzing external data is a “nice to have” that you’ll look into down the road. Either way, if you’re reading this guide, it’s time to bring benchmarking into your salary structuring process.

Salary benchmarking is your input—it’s the data you need to create a salary structure that’s built for today’s market and ready to adapt to future changes. Get the input right, and the output becomes something you can actually use.

This guide will walk you through both salary benchmarking and structuring—what they are, how they work together, and how to build and maintain a compensation framework that's compliant and competitive.

What is salary benchmarking?

Salary benchmarking is the process of comparing your internal compensation levels against external market data. Benchmarking typically looks at compensation data from organizations that share key traits with your company, such as similar size, industry, and region.

In simple terms, salary benchmarking answers the question, “How does what we pay compare to what others are paying for similar work?”

Salary benchmarking helps you:

• Set fair salary ranges on par with industry standards
• Compete with companies recruiting from the same talent pool
• Improve retention by offering above-market compensation packages

In this labor landscape, knowing how your pay rates compare with competitors is essential to preventing brain drain: 45% of employees say they’re underpaid, and 78% say they’d consider leaving their job for higher pay.

What is a salary structure?

A salary structure is the framework organizations use to define how much employees are paid across roles. It organizes jobs into pay ranges based on factors like responsibilities, skills, experience, and market value.

In a salary structure, each role (or group of similar roles) is assigned a pay range with three key components: a minimum, midpoint, and maximum value.

• Minimum salary: The lowest pay for a role, typically for less experienced employees
• Midpoint salary: The market-aligned rate for a fully proficient employee
• Maximum salary: The highest pay for the role, often reserved for top performers or highly experienced employees

Without structure, pay decisions can become reactive and disorganized, leading to pay compression, top-heavy org charts, and equity concerns. A clear salary range structure enables consistent and strategic compensation planning.

How a salary structure serves your business:

• Internal consistency: Employees in similar roles with similar responsibilities are paid within the same range. Consistency reduces inequity and enables more predictable financial planning for labor costs.
• Scalable pay decisions: Managers and HR can make pay decisions—for new hires, promotions, and merit increases—using the same framework each time. This saves resources and reduces complexity during recruitment and promotion cycles.
• Transparency: A consistent salary structure gives employees a clear picture of how pay decisions are made. Transparency around compensation builds trust and supports compliance with pay equity laws.

Types of salary structures

The right approach to salary structure depends on your organization’s size, industry, and compensation philosophy. Here’s a breakdown of some common salary structure styles.

Traditional (grade-based) structure

A traditional structure groups roles into pay grades. Each pay grade has a defined salary range and multiple roles may fall within the same band. Salary ranges tend to be narrow, and moving to a higher pay grade usually requires a promotion. For example, all the entry-level assistants across a company may fall into a Level 1 pay range of $40,000 to $55,000. For an assistant to make more than $55,000, they would need to be promoted to a different role.

Traditional salary structures are simple to build and easy to administer, but they can quickly fall out of step with market trends and limit career growth for employees.

Broadband structure

A broadband structure consolidates many pay grades into fewer, wider bands. For example, in this type of structure, all individual contributors within a department could fall into the same wide pay range of $60,000 to $120,000. Wider pay bands support more flexibility in compensation decisions and create opportunities to reward employee performance without excessive title changes.

A broadband salary structure requires close oversight to avoid inconsistency and inequity within your organization.

Market-based structure

A market-based salary structure is the most common approach, and for good reason. A market-based approach aligns pay ranges with external benchmarking data, ensuring that compensation stays competitive as market conditions evolve. For example, if you’re a nonprofit group and data suggests that other nonprofits in your region pay grant writers around $60,000 a year, you could then decide to be competitive by offering a little more than $60,000 for grant writing positions at your org.

Instead of relying solely on internal hierarchy to determine pay (which runs the risk of producing arbitrary or outdated pay decisions), a market-based structure takes into account the labor market value of an employee’s skills and experience—in other words, paying employees what they’re actually worth.

How benchmarking shapes your salary structure

Benchmarking data is the foundation of a market-based salary structure. You start by determining how much your competitors are paying for the roles you’re also hiring for. That external market data informs where your internal pay ranges should sit, and in turn, those pay ranges become the structure you use to make compensation decisions.

If you use outdated or incomplete external market data or compare roles improperly, the subsequent pay ranges and structure you create won’t have the intended impact. To build a salary structure that works, you need to focus on the data first.

Titles are notoriously inconsistent across organizations. A "Senior Manager" at one company might be equivalent to a "Director" at another. If you're benchmarking based on titles alone, you're likely to end up with mismatched data.

Step-by-step: How to benchmark salaries

Step 1: Define roles and responsibilities

Before you can compare your roles to the market, you need to be clear about what those roles actually entail. This means having up-to-date job descriptions that capture the scope of work, responsibilities, required skills, and leadership authority for each position.

This step is more important than it sounds. Titles are notoriously inconsistent across organizations. A "Senior Manager" at one company might be equivalent to a "Director" at another. If you're benchmarking based on titles alone, you're likely to end up with mismatched data.

Step 2: Identify your market

You can’t compare yourself to peer organizations if you don’t know where to find your peers. Your specific market will lie at the intersection of a few different factors.

• Region: Where is your company headquartered? Where do your employees live? Remote hiring often requires benchmarking against a national or global market.
• Industry: Salary trends vary greatly depending on industry. Nonprofits, for instance, will likely have lower average salaries than the tech or financial industries.
• Size: Pay tends to scale with company size. A small startup and a Fortune 500 enterprise could offer very different salaries for similar roles.

Step 3: Gather data from reputable sources

Once you know your market, it’s time to go hunting for the salary data. This is the step where many organizations either try to cut corners or get overwhelmed. But accessing benchmarking data doesn’t have to be intimidating, as there are plenty of reliable resources out there.

Some examples include:

• Mercer^® Compensation Data
• Bureau of Labor Statistics (for US wage data)
• Aon Radford
• Willis Towers Watson

Note that many of the most reliable compensation surveys require you to submit your own data in exchange for access. This is usually worth doing since the data you get back from a private survey is typically more detailed and more accurate than what's available publicly.

Step 4: Match salary data to roles

Match your internal salaries to external salary data based on job descriptions, looking at experience requirements, skills, and scope of responsibilities. Most compensation surveys will categorize salaries by job levels, so you can identify comparable roles within benchmarking data.

Before digging into the survey data, review how the survey provider defines different levels and sort your internal roles accordingly. Be sure to document your reasoning for choosing each role’s job level—transparency is essential for creating a fair and consistent salary structure.

Step 5: Analyze and adjust

Once you've gathered the data and matched roles, you'll typically have a set of salaries for each position, ordered from least to greatest. The 50th percentile (median) salary represents the midpoint of what the market pays for that role. From here, you'll want to:

• Identify where your current pay falls relative to the market
• Flag roles where you're significantly above or below market
• Note any roles where data is sparse or inconsistent

This analysis will become the raw material for building your pay ranges.

How to turn salary benchmarking into pay ranges

Setting a midpoint salary

The first value to choose for a role’s pay band is the midpoint. This is the halfway point within a role’s salary range, so it should be the amount you’d want to pay someone who has the target skills and experience for their role.

If your midpoint is too high, the entire range will skew high, which could cause your labor costs to become unmanageable and prematurely cap an employee’s growth potential. But if a midpoint is too low, pulling the salary range down, you’ll struggle to compete for talent and will end up underpaying your employees.

Strategy tip: 75th percentile rule
A common best practice is to set your midpoint at the 75th percentile of benchmark salary data for the role. In other words, you want to offer a salary that’s higher than what 75% of your competitors would offer.

This usually keeps your pay ranges competitive without putting unnecessary pressure on your labor budget. That said, how your company chooses salary midpoints will depend on your unique circumstances, so your best strategy might differ from the 75th percentile rule.

Choosing your market position

One of the most important strategic decisions in compensation planning is where you want to position your pay relative to the market. Your three basic options are to either lead, match, or lag the market.

• Lead the market: Ideally, you can create a competitive edge by offering compensation above the market median, such as setting pay rates at the 75th percentile. Leading the market puts you in a better position to hire top talent, but it requires a larger labor budget.
• Match the market: Matching the market (offering pay at or near the 50th percentile) keeps your compensation strategy on par with most of your competitors. You may lose talent to companies offering above-market rates, but you’ll still be offering pay rates that qualified candidates are willing to consider.
• Lag the market: If the budget is tight, you may need to consider paying below median market rates. This is a tricky position to be in, but you can try to offset the low pay with a compelling benefits offering, creative perks, and a strong workplace culture.

Keep in mind, your positioning doesn't have to be uniform across your organization. Some companies lead the market for revenue-generating or hard-to-fill roles while matching or lagging for others.

Determining pay range width

After choosing a midpoint salary for a role, you can complete the pay range by setting minimum and maximum salaries. A common approach is to set the range spread—the distance between minimum and maximum—based on the complexity and career progression potential of the role.

Narrower ranges (a 20–30% spread) work well for roles with limited variation in scope. These are roles where if someone’s experience or skill advances, they’ll likely be promoted to a different role.

Wider ranges (a 40–80% spread) are more appropriate for senior or highly variable roles where skills can develop and responsibilities can meaningfully grow without necessitating a title change.

Strategy tip: Calculating pay ranges

The midpoint sits in the middle of your range spread. For example, if the market midpoint for a role is $80,000 and you're applying a 40% spread, your salary range would be +/-20% of $80,000. Calculating that range would require the following equations.

• Minimum Salary = 80,000 - (0.2 x 80,000)
• Maximum Salary = 80,000 + (0.2 x 80,000)

The range for a role with an $80,000 midpoint salary and 40% spread would be:

• Minimum: $64,000
• Midpoint: $80,000
• Maximum: $96,000

Handling outliers for existing employees

When you roll out new pay ranges, you'll almost certainly find employees whose current pay falls outside the new structure.

For employees below the minimum, the general best practice is to bring them into range as quickly as budget allows, prioritizing the largest gaps first. Leaving people below the minimum of their range is an equity and retention risk.

For employees above the maximum, the situation is more nuanced. Closely examine the employee’s experience level and scope of responsibilities. If their pay exceeds their role’s range, it’s possible that they’re overdue for a title promotion that would more accurately reflect their current responsibilities and salary.

On the other hand, if the employee isn’t ready for a promotion, you may need to consider a temporary freeze on merit increases until they are eligible to be promoted into a higher pay band.

Be transparent about the situation and emphasize that this isn’t a performance issue, just an equity gap that needs to be addressed. Use this time to give extra attention to the affected employee’s career development, so they can move up into the appropriate pay band as soon as possible.

What if market salaries exceed your budget?

While offering below-market rates is less than ideal, there are plenty of companies in this situation who still find a way forward. If market rates exceed your budget, you have a few options.

Adjust market positioning

Identify roles where lagging the market has the lowest impact. Consider lagging the market for entry level roles where candidates may be willing to take lower pay in exchange for access and experience, as well as any easy-to-fill roles that don’t require specialized skills. Prioritize matching or leading the market for highly skilled, revenue-generating positions.

Phase changes

Create a plan to incrementally increase salaries over multiple budget cycles. This may be a slow process, but it’s better than leaving the problem unaddressed. Start with increasing the pay for roles where you’re most likely to lose people or struggle to hire. With each budget cycle, continue to close the gaps in your salary structure until every role is matching the market rate.

Leverage total rewards

Find other areas of your compensation package where you can either add more value or better communicate existing value. Examples of value areas to highlight include potential earnings from equity, the flexibility of a hybrid or remote job, a generous PTO offering, or career development opportunities.

Common salary benchmarking mistakes (and how to fix them)

Using outdated or incomplete data

Compensation markets move fast, and data that's two or three years old can be significantly off. Likewise, incomplete data can cause you to miss out on important pieces of the labor market story. Prevent benchmarking off of faulty data by using multiple sources, checking publication dates and sample sizes, and refreshing your data at least annually.

Poor role matching

Benchmarking your roles by title instead of responsibilities leads to skewed data. If your benchmarking results show many of your salary offerings as significantly above or below market rates, take a moment to review how you’ve labeled the roles you’re benchmarking against—you may need to recalibrate how you’re defining job levels and titles within your analysis.

Ignoring internal equity

External benchmarking tells you what the market pays. Internal equity analysis tells you whether people inside your organization are paid consistent amounts for doing similar work. Pay inequity hurts retention, erodes morale, and, if proved discriminatory, exposes you to liability. When you’re doing external benchmarking, set aside some time to compare roles internally as well. If there are any salary gaps between comparable roles, this is your chance to address it.

Making too many exceptions

There will always be a reason why a pay band doesn’t quite make sense for a particular employee. But if you treat everyone on a case-by-case basis, your salary structure will fall apart and inequity problems will rise. Try to create more consistency by setting narrow guidelines for when exceptions are allowed. And if exceptions are becoming frequent, that's a signal that your ranges may need to be revisited.

How pay transparency is changing compensation strategy

As a decision maker for your org, if someone presented you a proposed department budget that included no line items and no data-backed reasoning, you would find that unacceptable. An employee feels the same way when they’re offered a compensation package with no context or explanations.

Pay transparency is quickly becoming the legal standard. For example, most US states now have some type of pay transparency law, and the EU Pay Transparency Directive goes into effect in 2026. An organized and data-backed salary structure gives you key documentation for demonstrating to regulatory bodies that you’re in compliance with pay equity and transparency laws.

Aside from changes to the law, cultural norms around discussing pay have also shifted. Not only is it more socially acceptable to openly talk about pay—nearly half (49%) of employees have shared their salaries with a coworker—but employees find it suspicious if companies don’t share information about salary ranges and pay equity.

The desire for transparency is high, but expectations are low: 32% of employees don’t trust their organization to accurately benchmark salaries. If you’re able to present pay ranges that are grounded in rigorous market data analysis, you’ll likely be defying assumptions and earning meaningful employee trust.

How often should you update your salary structure?

At minimum, benchmark your salary structure annually. You can time benchmarking to align with compensation planning or a performance review cycle so that any adjustment can be incorporated into merit raises.

High-growth companies or those in highly competitive talent markets may need to benchmark more frequently, in some cases semi-annually or possibly on a rolling basis for the most critical roles.

Beyond an annual or semi-annual benchmarking cycle, certain triggers should prompt an immediate review of your salary structure:

• You're creating new roles that don't fit the existing structure (e.g., emerging technology roles).
• You're expanding into new regions.
• You're experiencing significant market shifts (e.g., economic downturns, rapid inflation, or industry disruption).
• Employees are raising pay concerns or you're seeing turnover tied to compensation.
• You're consistently struggling to fill open positions or losing candidates at the offer stage.

How to keep your salary structure aligned over time

Maintaining a salary structure is an ongoing responsibility for HR and finance teams. Here are a few tips to remember as you keep your salary structure on track.

• Stay consistent with your market positioning. If you've decided to match the market, don't quietly drift into lagging because it's easier on the budget. Be intentional.
• Standardize your data sources. Using the same surveys year over year makes it easier to track trends and explain changes.
• Monitor key compensation metrics. Offer acceptance rates, time-to-fill for open roles, and turnover tied to compensation are all signals that your structure may need attention.

Manual vs. automated benchmarking

Needless to say, salary benchmarking is a lot of work. Vetting and gathering data, analyzing the data, building salary structures—it all takes time and expertise.

For smaller organizations, manual benchmarking is usually doable. You have a smaller headcount so you can give proper attention to each role as you collect and compare salary data and build your pay structure.

But the bigger your company gets, the more complex benchmarking and salary structuring becomes. This is where specialized tools and services come into play.

If salary benchmarking and structuring has become too overwhelming, it may be time to invest in a platform that can make it a lighter lift. Ideally, the right platform will allow you to manage your internal people data, external benchmarking data, and salary structure all in one ecosystem.

By having access to benchmarking data and automating the analysis, you can focus your energies on the big-picture compensation strategy.

Build a salary structure that works

Compensation is one of the most consequential pieces of your business strategy. It affects your culture, compliance posture, and ability to compete. A salary structure built on real market data enables your organization to pay for the true value of your workforce’s contributions and make consistent, transparent decisions.

And when you treat salary benchmarking and structure as one connected, ongoing system rather than as siloed, one-time projects, you can create a compensation plan that actually works for both your people and your business.