Step Grids vs Salary Ranges: Choosing the Right Compensation Structure

Years ago when I first started my career in compensation, public sector organizations all seemed to operate on roughly the same pay structure.

Most municipalities used some version of a salary grid: job levels down the left-hand side and salary steps across the top. Each job was evaluated and assigned a level on the grid, and employees progressed through the steps over time — either through seniority, merit, or some combination of both.

At the time, it seemed like nearly everyone in the sector followed this model.

Over the past decade, however, new variations of compensation structures have started to appear in public sector organizations. Some municipalities have introduced broader salary ranges, others have experimented with performance-based progression, and many now operate hybrid systems that combine elements of multiple approaches.

This naturally raises the question for HR leaders and senior administrators:

What is the best compensation structure for a public sector organization?

If you’ve read my previous articles on internal equity or leadership values and culture, you’ll know that I often view HR practices through the lens of how they shape organizational culture and the experience of employees.

Compensation structures are no exception.

Underneath every compensation system sits a simple but powerful reality: a pay system communicates what the organization values and where employees should focus their time and effort.

Whether intentionally or not, compensation systems shape behaviour — and behaviour ultimately shapes culture.

The Traditional Step Grid: Stability and Predictability

The traditional public sector structure is the salary grid, often referred to as a step matrix.

In this model, jobs are evaluated and placed at a specific level on the grid. Employees then progress through the salary steps over time, typically on an annual basis.

This structure offers several advantages.

First, it provides stability and predictability. Employees know how their salary will progress over time, and organizations can forecast compensation costs with a high degree of confidence.

Second, it emphasizes experience and tenure within the role. The assumption is that employees become more effective as they gain experience and develop deeper knowledge of the organization.

Third, the structure reinforces transparency and consistency, which are particularly important in public sector environments where fairness and accountability are central values.

These characteristics align well with the broader goals of many public sector organizations.

However, step grids are also relatively rigid structures. Because progression is largely predetermined, they provide limited flexibility to differentiate pay based on performance or to recognize exceptional employees early in their careers.

Some organizations address this limitation through variations such as:

• Positioning the job rate in the middle of the grid rather than at the top
• Allowing two-step increases for exceptional performance
• Providing lump-sum performance awards once employees reach the top step

Even with these adjustments, however, step grids tend to emphasize consistency and tenure more than individual performance.

The Salary Range Model: Flexibility and Contribution

An alternative structure is the salary range model, where each job is assigned a range consisting of a minimum, midpoint (often called the job rate), and maximum.

As with step grids, internal equity is established through job evaluation. The difference lies in how employees progress within the range.

Rather than moving through predetermined steps, employees progress based on performance and their position relative to the midpoint. This progression is often guided by a performance increase matrix.

Employees whose salaries fall below the midpoint and who demonstrate strong performance may receive larger increases, allowing them to move more quickly toward the market rate for the role.

Employees whose salaries are already above the midpoint typically receive smaller increases because their pay already reflects the expected value of the role.

This structure provides greater flexibility and allows organizations to recognize high-performing employees earlier in their careers.

When a newly hired employee demonstrates strong capability and long-term potential, the organization can accelerate their movement through the range. In effect, the compensation system communicates that the organization values the employee’s contribution and wants to retain them.

From a cultural perspective, range structures tend to emphasize performance, contribution, and flexibility.

Where step grids communicate stability and predictability, salary ranges allow pay to reflect differences in employee contribution more directly.

Example Performance Increase Matrix

Below is a simplified example of how performance and position within the range might interact in a salary range system.

This model reflects several compensation principles:

• High performers progress more quickly early in their careers
• Salary growth slows as employees approach the maximum of the range
• Pay progression reflects both performance and market position

Union and Non-Union Compensation Systems

In many municipal environments, compensation design is also influenced by collective bargaining structures.

Unionized roles have historically favoured step grid structures because they emphasize transparency, consistency, and predictable salary progression based on tenure and experience. These characteristics reduce the risk of perceived favouritism and provide employees with clear expectations about how their salary will progress over time.

For leaders working in highly unionized environments, this predictability often becomes an important part of the employment relationship. Employees expect to understand how their compensation will progress, and unions often view step structures as an important mechanism for ensuring fairness and consistency across the workforce.

However, compensation structures rarely exist in isolation. They interact closely with another system that plays a significant role in shaping organizational culture: performance management.

Compensation Structures and Performance Management

Performance management systems vary widely across organizations, and the philosophy underlying those systems often aligns closely with the type of compensation structure an organization adopts.

Some organizations have moved toward continuous feedback performance management systems that do not rely on formal performance ratings. In these environments, the assumption is that most employees will perform well when they are properly supported, coached, and given clear expectations.

Rather than ranking or rating employees, managers focus on ongoing dialogue, coaching, and development conversations throughout the year.

This philosophy tends to align naturally with step grid compensation structures. If the organization assumes most employees will perform well when managed effectively, then a predictable compensation progression based on experience and tenure reinforces that belief. The system communicates that employees who continue to contribute and grow within the role will progress steadily over time.

Other organizations take a different view of performance management.

In these environments, leadership recognizes that employees differ in the time, effort, and attitude they bring to their work, and that these differences can have meaningful impacts on organizational performance.

These systems typically include formal performance ratings, allowing organizations to differentiate between levels of contribution and to reward employees who demonstrate exceptional commitment, initiative, and results.

This philosophy aligns more naturally with salary range compensation structures.

When performance ratings exist, range systems allow organizations to link pay progression more directly to performance outcomes. High-performing employees can progress more quickly through the range, while employees whose performance is more typical may progress at a slower pace.

The Culture Created by the Extremes

Like many HR systems, compensation and performance management structures exist along a spectrum.

At one end of the spectrum are organizations that combine continuous feedback performance management systems with step grid compensation structures.

These environments often emphasize teamwork, collaboration, and employee development. Managers focus on coaching employees to improve, and the compensation system reinforces stability and fairness across the workforce.

However, these systems can sometimes frustrate high-performing employees. When employees who consistently invest additional time, effort, and initiative see little difference in compensation outcomes compared to their peers, the system may unintentionally signal that exceptional effort is not meaningfully recognized.

At the other end of the spectrum are organizations that combine range-based compensation systems with performance ratings that strongly differentiate individual contributions.

These environments can create strong incentives for performance and may encourage employees to push harder to achieve results.

But these systems also carry risks. When compensation outcomes vary significantly between employees, organizations may experience increased competition between individuals, the development of silos between teams, and resentment among employees who feel others are receiving a larger share of opportunities or rewards.

Neither extreme is inherently right or wrong.

But each produces a different cultural environment.

Reinforcing Behaviour Through Compensation Tools

Beyond the base compensation structure, organizations often introduce additional compensation mechanisms to address labour market pressures or reinforce specific behaviours.

These tools may include:

• Recruitment bonuses
• Retention bonuses
• Market premiums
• Project incentives
• Temporary allowances for specialized roles

When used thoughtfully, these mechanisms can complement the organization’s underlying compensation and performance management systems.

In some cases, they are used to reinforce the behaviours already emphasized by the compensation structure. For example, organizations that operate with performance-based salary ranges may introduce additional incentives tied to organizational outcomes or project achievements, further reinforcing a culture that rewards results and individual contribution.

In other cases, these tools can be used to balance the signals sent by the underlying system. An organization that relies heavily on step grids and predictable progression, for example, may introduce retention bonuses or project incentives to recognize exceptional contributions that the base pay structure does not easily accommodate.

In this way, supplemental compensation mechanisms allow organizations to respond to labour market realities or recognize exceptional effort without fundamentally altering the core compensation structure.

Conclusion

Ultimately, compensation systems do far more than determine how employees are paid.

Step grids emphasize stability, predictability, and experience. Salary ranges emphasize flexibility, performance differentiation, and the ability to recognize and retain high-performing employees early in their careers.

Performance management systems further reinforce these signals, shaping how organizations recognize contribution and guide employee behaviour.

At one extreme, systems built around stability and development can create strong teamwork but risk under-recognizing exceptional performance. At the other extreme, systems built around performance differentiation can drive results but risk creating competition and division.

In the end, the compensation and performance systems an organization chooses should reflect the culture it is trying to create.

Because whether intentionally or not, every compensation structure sends a message to employees about what the organization values — and employees pay very close attention to those signals.