How to Design and Calculate a Step Rate Pay Program

A step rate pay program is a pay structure that provides automatic increases to pay based on predetermined events, such as years of service, hours worked, completion of skill development, or performance.  

A step rate pay program is commonly used in the public sector, government, higher education, and unionized organizations.  A step rate pay program can also be used to pay hourly employees in manufacturing, retail, and consumer goods.  Although market pricing continues to be used by the majority of organizations, it should be noted that step rate pay programs are used by fewer than 10% of organizations and typically within specific industries.   

Here are the typical components of a step rate pay program: 

• Pay grades 

• Market-competitive pay ranges (typically 20-40% range spread) 

• Steps within each pay range (5-10 or more from entry to top step) 

• Step increments 

• Progression criteria

Advantages 

These are some of the benefits of a step rate pay program: 

• Pay equity 

• Pay transparency 

• Employee retention 

• Administrative simplicity 

• Fair and equitable 

• Ease of budgeting 

Disadvantages 

These are some of the downsides of a step rate pay program: 

• Program inflexibility 

• May reduce employee motivation 

• Labor cost management over time 

• Program implementation complexity 

• Possibility of age discrimination claims by younger workforce due to seniority pay recognition 

These are four examples of a step rate pay program: 

• Automatic Step Rate (Seniority) 

• Variable Step Rate (Performance 

• Variable Step Rate (Skill Acquisition) 

• Higher Education Step Rate Program 

How to Calculate a Step Rate System –  Examples 

In the examples below, market pricing was utilized to develop the pay structure using grades and ranges.  Here is the pay range in this example: 

Grade 3 Hourly – $15.40 Minimum – $18.00 Midpoint – $21.05 Maximum 

The salary range progression between midpoints under a step program is typically 5-10%. For example, the Grade 3 midpoint is $18.00 per hour, where the Grade 4 midpoint is $19.44 per hour using an 8% progression between midpoints.  

The width of the example pay range is 37% ($21.05/$15.40) -1 = 37% range spread. Most organizations will use a 20-40% consistent range spread when designing a step rate pay program.  

Automatic Step Rate (Seniority) 

5-10 Steps 

2-5% Difference between Each Step 

Defined Time Schedule 

This time–based step rate pay system example includes nine steps for all jobs within the Grade 3 hourly structure with similar market value. You will notice that the market value (midpoint) is placed at the middle step, and each step value above and below the market value represents a 4% rounded increase or decrease from the previous step value. 

An automatic step rate program will typically include 5-10 steps with a 2-5% difference between each time-based step. This approach allows a company to recognize retention and seniority.  It does not recognize performance or skill acquisition. 

Variable Step Rate (Performance) 

5-10 Steps 

2-5% Difference between Each Step 

Defined Time Schedule with Performance Recognition 

Performance Achievement 

Exceeds Standards: 2 Steps 

Meets Standards: 1 Step 

Sometimes Meets Standards: 0-1 Step with Delay 

Does Not Meet Standards: 0 Step 

The variable step rate program is similar to an automatic step rate program but it also includes a performance modifier. Typically, there are 5-10 steps under a variable step-rate program, with a 2-5% difference between each step, and a time schedule for the review. 

This program works well for repetitive jobs when a step program is common in the marketplace and when a company wants to recognize and differentiate based on performance. 

Variable Step Rate (Skill Acquisition) 

5-10 Steps 

2-5% Difference between Each Step 

Defined Time Schedule with Skill Acquisition 

Skill Acquisition Achievement: 

2+ Skills: 2 Steps 

1 Skill: 1 Step 

0 Skills: 0 Step 

Using a step rate program based on skill acquisition allows the organization to recognize key skill development. This can be valuable in a manufacturing environment. Skills acquisition should be well defined, regularly used, challenging, but attainable over the course of the performance period.  Steps need to be taken to avoid significant cost increases due to skill acquisition.  Recognizing the review of skill acquisition every 6-12 months may support cost management of the overall increases in the program. 

Higher Education Step Rate Program 

Higher education has relatively sophisticated step rate programs. They are typically transparent, and many are available online. Consider this example of the University of California at Irvine Salary Scales and Step Rate Programs.   

Summary 

A step rate program can be an effective methodology to deliver employee pay. It is commonly used in the public sector, government, higher education, and unionized organizations. It can also be a viable pay delivery method within manufacturing, retail, and consumer goods. 

Every pay delivery program, whether it is based on merit, cost of living, or step rates, should always accomplish the following for an organization: