Human Resource Management:

Gaining a Competitive Advantage

Chapter 11
Pay Structure Decisions

McGraw-Hill/Irwin Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.
 Learning Objectives
 List major decision areas and concepts in
employee compensation management.
 Describe major administrative tools used to
manage employee compensation.
 Explain the importance of competitive
labor-market and product-market forces in
compensation decisions.
 Discuss the significance of process issues such
as communication in compensation management.

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 Learning Objectives
 Describe new developments in pay structure
designs.
 Explain where U. S. stands on pay issues from an
international perspective.
 Explain reasons for executive pay controversy.
 Describe the regulatory framework for employee
compensation.

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 Introduction
Employer’s View: Employee’s View:
• Pay is critical in • Policies having to do with
attaining strategic wages, salaries, and
goals. other earnings affect their
• Pay impacts employee overall income and thus
attitudes and behaviors. their standard of living.
• Employee • Both level of pay and
compensation is fairness compared with
significant others’ pay are important.
organizational cost.

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 Developing Pay Levels
 Pay structure - relative pay of different jobs
(job structure) and how much they are paid (pay level).
 Pay level - average pay, including wages, salaries
and bonuses.
 Job structure - relative pay of jobs (the range of pay
often expressed by salary grades).
 Pay policiesare attached to jobs, not individuals.

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 Equity Theory and Fairness
Pay Structure Concepts and Consequences

Pay Structure Administrative Focus of Consequences of

Decision Area Tool Employee Pay Equity Perceptions
Comparisons
Pay Level Market pay surveys External equity External employee
movement, labor
costs, employee
attitudes
Job Structure Job evaluation Internal equity Internal employee
movement, cooperation,
employee attitudes

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 Developing Pay Levels –
Market Pressures
2 Competitive Market Challenges in Pay Decisions:

– Product-market competition –challenge to sell

goods and services at a quantity and price
thatwill bring a return on investment.

– Labor-market competition –amount an

organization must pay to compete against other
organizations that hire similar employees.

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 Employees as a Resource
 A philosophy that considers employees to be an
investment that will yield valuable returns.

 Controlling costs through noncompetitive pay

can result in low employee productivity and
quality.

 Pay policies and programs are one of the most

important HR tools for encouraging desired
employee behaviors and discouraging undesired
behaviors.

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 Deciding What to Pay

 Deciding pay levels is discretionary and is based on

a broad range.

 The organization has to decide whether to pay at,

below, or above the market average.

 Efficiency wage theory- wages influence worker

productivity.

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 Market Pay Surveys
 Benchmarking is a procedure by which an
organization compares its own practices against
the competition.

 3 issues to determine before using pay surveys :

1. Which employers should be included in the survey?

2. Which jobs are included in the survey?

3. If multiple surveys are used, how are all the rates of

pay weighted and combined?

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 Product MarketV. Labor Market
Comparisons

Product-market Labor-market
comparisons will comparisons will
be more important be more important
when:
• Labor costs when:
represent a large • Attracting and
share of total costs. retaining employees
• Product demand is is difficult.
elastic.
• The supply of labor • The costs of
is inelastic. recruiting are high.
• Employee skills are
specific to the
product market.

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Rate Ranges, Key and Non-key Jobs
 Rate ranges- different employees in the same
job that may have different pay rates.

 Key jobs are benchmark jobs that have relatively

stable content and are common to many
organizations so that market-pay survey data can
be obtained.

 Non-key jobs are unique to organizations and

cannot be directly valued or compared through
the use of market surveys.

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 Developing a Job Structure

 Job structure- relative worth of various jobs in the

organization, based on internal comparisons.

 Job evaluation is an administrative procedure used

to measure internal job worth.
 The evaluation process is composed of
compensable factors, which are the characteristics
of jobs that an organization values and chooses to
pay for.
 Job evaluators often apply a weighting scheme to
account for the differing importance of compensable
factors to the organization.

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 Developing a Pay Structure
 3 Pay-setting Approaches:
– Market Survey Approach - The greatest emphasis
is on external comparisons. It bases pay on market
surveys that cover as many key jobs as possible.

2. Pay Policy Line - A mathematical expression that

describes the relationship between a job’s pay and
its job evaluation points.

3. Pay Grades- Grouping jobs of similar worth or

content together for pay administration purposes.
 Range spread is the distance between minimum and
maximum amounts in a pay grade.

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 Conflicts –
Market Pay Surveys & Job Evaluation
 Internal data would drive up labor costs and create
product-market problems.

 If external market data are emphasized and a job

is paid lower internally, comparisons that employees
make internally would result in dissatisfaction.

 An organization should consider its strategy, what

jobs and/or functions will be critical for success and
market-competitive pressures.

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 Monitoring Compensation Costs

One way to examine the difference between policy

and practice is to compute a compa-ratio,
which is an index of the correspondence between
actual and intended pay.

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 Globalization, Geographic Region
and Pay Structure
 Pay structuresdiffer across
countries
in level and relative worth of jobs.

 Although expatriate pay and

benefits
have been linked more closely to the
home country, this link now appears
to depend more on the assignment’s
nature and length.

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 The Importance of Process:
Participation and Communication

Participation Communication
 Participation should  The effect of
involve those who will communication is likely to
manage and be affected impact employees'
by the process. perceptions of equity.
 Participation includes  Managers must be
recommending, prepared to explain why
designing and the pay structure is
communicating a pay designed the way it is
program. and to judge whether
 Typically, pay-level changes should be made
decisions are only made to the structure.
by top management.

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 Current Challenges
 Job-based pay structures can create problems:
 reinforces top-down decision making as well as
status differentials.
 bureaucracy, time and cost required to generate
and update job descriptions can become a
barrier to change.
 job-based structure may not reward desired
behaviors, where the knowledge, skills, and
abilities needed yesterday may not be helpful
today and tomorrow.
 system encourages promotion-seeking behavior,
but discourages lateral movement.

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 Current Challenges
 3 Responses to Problems with Job-based Pay
Structures:
– delayer – reducing number of job levels within an
organization to provide more flexibility in job
assignments and in assigning merit increases.
– moving away from linking pay to jobs toward
building structures on skill, knowledge and
competency.
– Skill-based pay - paying individuals for skills they are
capable of using rather than for the job they are
performing.

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 Can the U.S. Labor Force Compete?
 U. S. labor cost are high compared to newly
industrialized and developing countries.

 4 Factors Shifting Production to Other Countries:

Stability

Skill levels
Non-labor quality &
considerations Productivity productivity
Unit Labor Costs
&G.D.P.

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 Executive Pay
 Executive pay has been given widespread
attention in the press.
 Executive pay accounts for a small proportion
of labor costs.
 Executives have a disproportionate ability to
influence organizational performance.
 Executives help set culture, so if their pay
seems unrelated to organizational
performance, employees may not understand
why their pay should be at risk depending on
the organization's performance.

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CEO Remuneration in U.S. Dollars

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Reasons for Executive Pay Criticisms
 Some executives are very highly paid.

 U.S. executives - best paid in the world.

 Ratio of executive pay to average

worker pay creates a "trust gap" -
workers do not trust executives'
intentions and resent their pay.

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 Equal Employment Opportunity
 (EEO) regulations prohibitssex and race-based
differences in employment outcomes such as pay,
unless justified by business necessity.
 Organizations must also deal with changing labor
market and demographic realities.

 2 Trends Related to EEO:

– increasing participation of women and
nonwhites in the labor force.
– proportion of wages in 2006 that women earn
compared to men was 81 % and black to
white earnings was 80 %.

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 Comparable Worth
 Comparable worth (or pay equity) is a public policy
that advocates remedies for any undervaluation of
women's jobs.

 Based on the idea that individuals should obtain

equal pay, not just for jobs of equal content, but
for jobs of equal value or worth.

 Courts have consistently ruled that using the going

market rates of pay is acceptable defense in
comparable worth litigation suits.

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 Wage Laws
 The Fair Labor Standards Act (FLSA) of 1938
established a minimum wageand overtime pay rate.
 Minimum wage is $7.25 an hour. It is the lowest
amount that employers are legally allowed to pay.
 Executive, professional, administrative and outside
sales are exempt from FLSA coverage.
 Exempt – those employees not covered by the
FLSAand not eligible for overtime pay.
 Davis-Bacon Act and Walsh-Healy Public
Contracts Act require federal contractors to pay
employees no less than area’s prevailing wages.

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 Summary
 Equity theory suggests that social comparisons are an important
influence on how employees evaluate their pay.

 Employees make external comparisons between their pay and

the pay they believe is received by employees in other
organizations which may have consequences for employee
attitudes and retention.

 Employees make internal comparisons between what they

receive and what they perceive others within the organization
are paid. These comparisons may have consequences for
internal movement, cooperation, and attitudes (like organization
commitment).

 Such comparisons play an important role in the controversy

over executive pay.

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 Summary, continued
 Pay benchmarking surveys and job evaluation are tools used in
managing pay level and job structure components of the pay
structure.

 Pay surveys permit organizations to benchmark their labor

costs.

 Globalization is increasing the need to be competitive in labor

costs and productivity.

 Pay structures is moving to fewer pay levels to reduce labor

costs and bureaucracy and shifting from paying employees for
narrow jobs to giving broader responsibilities and paying them
to learn necessary skills.

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