Moving From Discretionary Pay to Structured Compensation

Discretionary Pay Relies Too Heavily on Individual Judgement

A discretionary pay system is one in which salaries are determined largely through negotiation, manager judgement, historical pay, recruitment pressure or one-off exceptions. Some discretion is unavoidable in compensation, but problems arise when the organisation cannot explain why similar roles receive different salaries or why one worker progresses faster than another. Over time, locally reasonable decisions can accumulate into a pattern that is difficult to audit. Managers may use different standards, hiring teams may negotiate differently with candidates, and legacy salaries may remain untouched for years. The result is not necessarily unlawful pay, but it creates a weak evidence base because differences are harder to trace to consistent, job-related criteria.

Start by Building a Clear Job Architecture

Structured compensation begins with understanding the jobs themselves. Employers should identify job families, levels, responsibilities and the factors that distinguish one level from another. Job evaluation or classification should focus on the value of the work rather than the current salary of the employee occupying the role. Article 4 of Directive (EU) 2023/970 requires pay structures that support equal pay for equal work or work of equal value and refers to objective, gender-neutral criteria including skills, effort, responsibility and working conditions, with other relevant factors used where appropriate. A job architecture built on those principles gives the compensation structure a defensible foundation rather than simply formalising historical pay differences.

Connect Each Level to a Defined Pay Opportunity

Once jobs are organised, the employer can connect each job or level to a pay grade, salary band or another defined pay opportunity. The exact model is an organisational choice. Some employers use narrow grades, others use broad bands, and some combine market ranges with job levels. The important point is that employees and decision-makers should be able to identify which pay opportunity applies to a role and why. Minimums, midpoints and maximums should be set through a documented methodology, and any geographic or market adjustments should follow identifiable rules. The structure should reduce the possibility that two managers create entirely different salary opportunities for equivalent work simply because they use different negotiation practices.

Replace Open-Ended Negotiation With Placement Criteria

A salary range does not remove discretion unless the employer also defines how a person is placed within it. Starting pay can be influenced by relevant experience, skills, qualifications, internal equity, market conditions or other job-related factors, but those factors should be described before decisions are made. Employers should identify which factors are allowed, what evidence supports them and who approves unusual placements. This is especially important for new hires because negotiation can otherwise reproduce historical differences between candidates who have different bargaining behaviour or previous salaries. Structured placement rules do not require identical starting salaries. They create a consistent decision path that allows differences to be explained through objective factors rather than through negotiation alone.

Make Pay Progression Rules Understandable and Accessible

Structured compensation also needs rules for movement after hire. Article 6 requires employers to make easily accessible to workers the criteria used to determine pay, pay levels and pay progression, and those criteria must be objective and gender neutral. Recital 35 notes that progression criteria can include factors such as individual performance, skills development and seniority. Employers should therefore define what progression means in their own structure, how often it is reviewed, which factors can increase pay and what evidence is required. Vague standards such as management confidence or being highly valued are difficult to apply consistently. Clear progression rules make it easier for workers to understand how pay can change and easier for employers to test whether those rules are producing consistent outcomes.

Treat Promotions and Performance Pay as Governed Decisions

Promotions, merit increases and performance-related pay are common points where discretion re-enters a structured system. Employers should define the difference between progression within a salary range and movement to a higher-level job. Promotion criteria should be connected to job scope and responsibility rather than title changes alone, while performance-related increases should rely on criteria that are measurable enough to be calibrated across managers. Records should show the decision, the evidence, the resulting salary and any exception from normal guidelines. This allows compensation teams to review whether some groups receive larger increases, faster progression or more frequent promotions without objective explanation.

Govern Exceptions Instead of Pretending They Will Never Occur

A mature compensation structure does not need to prohibit every exception. Market shortages, retention risks, acquisitions, unusual expertise or transitional arrangements can create legitimate reasons for a decision outside normal guidelines. The stronger approach is to govern those exceptions. Employers should record the reason, supporting evidence, approver and effect on comparable workers. Repeated exceptions should trigger a structural review because they may show that a range is outdated or that the job architecture no longer matches the work. Exception data should also be reviewed for patterns by sex and worker category. Structured compensation fails if the formal rules are clear but most important decisions are routinely made outside them.

Move in Stages Rather Than Rebuilding Every Salary at Once

Employers with highly discretionary legacy systems may not be able to redesign every job and salary immediately. A staged transition can begin with job architecture and high-risk areas, followed by salary ranges, placement rules, progression criteria and exception governance. Existing salaries can then be mapped into the new structure and reviewed for outliers, compression, unexplained differences and employees outside range boundaries. The organisation should document transitional decisions rather than forcing artificial adjustments solely to make every salary fit neatly on day one. The objective is to create a repeatable system that improves future decisions while identifying legacy issues that require separate remediation or legal review.

A Structured System Should Make Pay Decisions Reconstructable

The practical test of a compensation structure is whether the employer can reconstruct a decision months or years later. It should be possible to identify the worker's job and level, the applicable salary range, the criteria used for initial placement, the progression or promotion rules that applied, any performance factors and any approved exception. That record does not automatically prove compliance, but it gives the organisation a stronger basis for internal review, worker communication and equal-pay analysis. Structured compensation is therefore less about eliminating judgement than about making judgement disciplined, visible and reviewable within an objective framework.

Frequently Asked Questions

Related Guides

• building transparent pay structures and salary bands
• how to create salary ranges
• how to document criteria for pay progression
• how promotions should affect salary bands

Official Sources

• Directive (EU) 2023/970 - Article 4
• Directive (EU) 2023/970 - Article 6