What is Grade Pay?
‘Grade Pay’ is defined as the compensation level that a specific employee is at in an organization. In other words, it can be defined as a unit in the monetary compensation system. Pay grade is used by almost all sectors such as the public service, the military as well as the private sector.
It’s a crucial aspect of any salary structure as it provides a framework for pay and ranges of the salary for a specific designation. This helps both the employee and employer decide the salary of a designation instead of having a free negotiation structure.
Grade Pay Classification
Having grade pay means having different salary structures as well as different salary ranges for this designation. Hence, it is usually classified as follows:
Vertical Grade Pay
A ‘Vertical Grade Pay’ refers to different requirements and responsibilities associated with a specific designation.
Horizontal Grade Pay
A ‘Horizontal Grade Pay’ is the collective term for the monetary incentives, commissions, etc. which vary as per the performance of the employee in the designation.
Difference between ‘Basic Pay’, ‘Pay Grade’ and ‘Pay Scale’
When it comes to pay structure, there is some confusion between the following terms: Basic Pay, Pay Grade or Pay Scale.
‘Basic Pay’ refers to a fixed minimum salary paid to an employee before any kind of bonuses are added or any deductions are performed. It excludes all kinds of bonuses including overtime, dearness allowance, etc. Once these extra parameters are added to the basic pay, this is then transformed to ‘Gross Salary’.
We have already observed the definition of ‘Pay Grade’ above. ‘Pay Scale’ is a system that decides how much an employee is to be paid, based on various parameters of their job.
In India, grade pay also has another meaning: it refers to the compensation for positions of authority or added responsibility. It is usually used in public sector and by the government, which uses grade pays to classify the employees based on their pay scale.
Relevance of Grade Pay
The organization providing the salaries needs to ensure that adequate criteria are met before appointing employees in responsible positions. The organization could be conducting their business in the public sector or private sector. However, it is crucial their pay grade is on par with the industry standards.
Pay grades are also easier to administer than individual salary ranges. It also allows for taking easier decisions about internal alignment as well as allowing the company to create slots for designations that don’t have any specified pay scale.
Factors affecting grade pay
Some of the factors that play a crucial role in deciding this amount of salary:
- Education Level
- Experience Level
- Service Period