Compensation Definitions: Basic Must Knows for the Entrepreneur or Employee

Have you ever been in a staff meeting or other location and had a visit from a Human Resource Professional to discuss Compensation? Or maybe you’ve inquired about salaries or hourly rates – and have you been bombarded with terminology. Here are some basic compensation terms with definitions that will help you sail through those meetings looking like the entrepreneur that you are.

Compensation Program: Refers to the kind of pay that the organization uses. It can refer to hourly vs. salary, can include compensation philosophies (discussed below) and usually includes listings and/or values for compensation items such as health insurance, vacation, holidays and tuition reimbursement.

Pay Structure: Is the grouping of pay grades or pay bands. There can be more than one pay structure in a Compensation Program. For instance, there may be one pay structure for service and maintenance positions, one for professional and one for managerial. Or, the organization may have just one structure for all positions.

Salary vs. Hourly Compensation: Salary compensation is a base rate based on annual compensation for an employee who does not receive over time pay. A salaried employee will receive the same compensation regardless of the number of hours worked. Hourly compensation refers to pay based on hours worked. An hourly employee will receive a set hourly fee for each hour worked and should receive time and one half for any hours worked above 40 in one week.

Pay Grade: is the name for a pay range used to determine pay for grouping of jobs within a pay structure. All jobs in one pay grade will be paid similarly. It is made up of a minimum and maximum. The organization may assign a name to the pay grade which would indicate where it falls in comparison to other pay grades. For instance, pay grade 27 would have a lower minimum than a pay grade 29. All individuals working in jobs that fall under one pay grade should be paid somewhere within the minimum and maximum of the range.

Pay Band or Broad Band: Some organizations now use Pay Bands. These are similar to pay grades but are usually much wider and encompass more jobs. The philosophy behind utilizing a pay band vs. a pay grade pay structure usually is one that provides managers with more flexibility for rewarding employees for taking on additional tasks or for working at a higher level. Some organizations will also adopt this kind of structure to help emphasize a policy of promotion within.

Pay Grade Minimum: is the lowest pay that anyone should receive for a job that falls within the grade. Generally, the minimum of the range should be a new hire rate for someone who just meets the minimum requirements of the job.

Pay Grade Median: is the middle of the pay grade. Organizations generally target the median of the pay range to the average rate paid for similar jobs in other organizations. In most compensation programs, the goal is to pay fully functioning (knows all aspects of the job – may takes several years) employees the median of the pay grade – or close to it.

Pay Grade Maximum: The top of the pay grade. This is the most that an employee can make while staying in the same job. Depending on the compensation philosophy of the organization, it can take years to reach the maximum of the range in organizations. Or, if the compensation plan is based on performance, only a handful will ever reach it.


Kirsten E. Ross brings a unique blend of energy and insight to her work with clients. Her clients efficiently gain self-awareness and create positive change that empowers leaders and improves communication and relationships. Her work creates productive, profitable workplaces. She is a Leadership & HR Coach with a Masters degree in Human Resource Management and a Senior Human Resource Certification. In addition, she brings more than 19 years of hands-on experience, has authored a varie...

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