Chapter 11

Pay Structure Decisions

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Learning Objectives

1. List major decision areas & concepts in employee compensation management.

2. Describe major administrative tools used to manage employee compensation.

3. Explain importance of competitive labor-market and product-market forces in compensation decisions.

4. Discuss the significance of process issues such as communication in compensation management.

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Learning Objectives

5. Describe new developments in pay structure designs.

6. Explain where U.S. stands on pay issues from an international perspective.

7. Explain reasons for executive pay controversy.

8. Describe regulatory framework for employee compensation.

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Introduction

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Developing Pay Levels

Pay structure - relative pay of different jobs (job structure) & how much they are paid (pay level).

Pay level - average pay, including wages, salaries & bonuses.

Job structure - relative pay of jobs (range of pay often expressed by salary grades).

Pay policies are attached to jobs, not individuals.

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Equity Theory and Fairness Pay Structure Concepts & Consequences

Pay StructureDecision Area

AdministrativeTool

Focus of Employee PayComparisons

Consequences ofEquity

Perceptions

Pay Level Market pay surveys

External equity External employeemovement, laborcosts, employee attitudes

Job Structure Job evaluation Internal equity Internal employeemovement, cooperation,employee attitudes

Developing Pay Levels-Market Pressures

2 Competitive Market Challenges in Pay Decisions:1. Product-market competition - sell goods and services at

a quantity and price that will bring a return on investment.

2. Labor-market competition - amount an organization must pay to compete against other organizations that hire similar employees.

Unless higher labor costs are offset by higher worker productivity or desirable product features that allow a higher product price, it will be difficult to sustain relatively high costs in a competitive product market.

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2 Components of Labor Costs

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 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 - procedure by which an organization compares its own practices against the competition.

3 issues to consider 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 rates of pay

weighted and combined?

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Product Market VS. Labor Market Comparisons

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Rate Ranges, Key & Non-key Jobs

Rate ranges - different employees in same job that may have different pay rates.

Key jobs - 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 based on internal comparisons.

Job evaluation - administrative procedure used to measure internal job worth. The evaluation process is composed of

compensable factors, which are characteristics of jobs that an organization values and chooses to pay.

Job evaluators often apply a weighting scheme to account for differing importance of compensable factors to the organization.

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Developing a Pay Structure3 Pay-setting Approaches:

1. Market Survey Approach – emphasizes external comparisons. It bases pay on market surveys that cover as many key jobs as possible.

2. Pay Policy Line – 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 - distance between minimum &

maximum amounts in a pay grade.

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Conflicts – Market Pay Surveys & Job Evaluation

Internal data drives 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

Examine the difference between policy and practice,

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 structures differ across countries in level & relative worth of jobs.

Expatriate pay and benefits depend on assignment’s nature and length.

Most companies have a policy that provides for pay differentials based on geographic location to prevent inequitable treatment of employees who work in more expensive parts of the country.

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Process: Participation & Communication

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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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Responses To Problems WithJob-Based Pay Structures

Can the U.S. Labor Force Compete?4 Factors In Deciding Where to Locate Production

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Executive Pay

Executive pay accounts for a small proportion of labor costs. Executives have a disproportionate ability to

influence organizational performance. Issues include not only how much executives

are paid but how they are paid.

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Reasons for Executive Pay Criticisms

Some executives are very highly paid.

U.S. executives – highest 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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EEO- Trends Female-to-male median earnings was 0.81, ratio of

Black-to-White earnings was .78 and Hispanic–Latino-to-White earnings was .72.

Women increased to 47% of all employees in 2013.

Asian Americans earn 16% more than Whites.

Between 1960 and 2013, whites decreased from 90% to 81% of all employees.

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

Fair Labor Standards Act (FLSA) of 1938 established a minimum wage and overtime pay rate. Minimum wage is $7.25 an hour. It is the lowest amount

that employers are legally allowed to pay. Exempt – those employees (executive, professional,

administrative and outside sales) not covered by the FLSA and 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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FLSA: OvertimeThe FLSA requires that employees be paid at a rate of one and a half times their hourly rate for each hour of overtime worked beyond 40 hours in a week. The hourly rate includes base wage plus other components such as bonuses and piece-rate payments.

Overtime pay is required for any hours beyond 40 in a week that an employer “suffers or permits” the employee to perform, regardless of whether the work is done at the workplace or whether the employer explicitly asked or expected the employee to do it.

Summary Equity theory - social comparisons influence how employees

evaluate their pay.

Employees make external comparisons between their pay and 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) and 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 structure is moving to fewer pay levels to reduce labor costs and bureaucracy and shifting from paying employees for narrow jobs to giving broader

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