fundamentals ofHuman Resource Management

Unit 07

Establishing a Pay Structure

What Do I Need to Know?

1. Identify the kinds of decisions involved inestablishing a pay structure.

2. Summarize legal requirements for paypolicies.

2. Summarize legal requirements for paypolicies.

3. Discuss how economic forces influencedecisions about pay.

4. Describe how employees evaluate thefairness of a pay structure.

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What Do I Need to Know? (continued)

5. Explain how organizations design paystructures related to jobs.

6. Describe alternatives to job‐based pay.

7. Summarize how to ensure that pay is actuallyin line with the job structure.

7. Summarize how to ensure that pay is actuallyin line with the job structure.

8. Discuss issues related to paying employeesserving in the military and paying executives.

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Your Opinion

1‐Strongly Disagree, 3‐Neutral, 5‐ Strongly Agree

1.Pay decisions should be based onperformance, not seniority.

2.I would like to know what my coworkers getpaid.2.I would like to know what my coworkers getpaid.

3.I would not mind if others knew my salary.

4.Pay secrecy helps a company stay competitive.

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Introduction

• Pay is a powerful tool for meeting theorganization’s goals.• Pay has a large impact on employee attitudesand behaviors.• Pay influences the kinds of people who are

• Pay has a large impact on employee attitudesand behaviors.• Pay influences the kinds of people who are

attracted to (or remain with) the organization.• Employees attach great importance to paydecisions when they evaluate theirrelationship with their employer.

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Decisions About Pay

Job Structure

• The relativepay fordifferentjobs withinthe

Pay Level

• The averageamount theorganizationpays for aparticularjob

Pay Structure

• The paypolicyresultingfrom jobstructureand pay‐level

• The relativepay fordifferentjobs withintheorganization

• The averageamount theorganizationpays for aparticularjob

• The paypolicyresultingfrom jobstructureand pay‐leveldecisions.

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Figure 11.1:Issues in Developing a Pay Structure

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Legal Requirements for Pay

Equal employment opportunity

Minimum wages

Equal employment opportunity

Minimum wages

Pay for overtime

Prevailing wages for federal contractors

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Legal Requirements for Pay:Equal Employment Opportunity

• Employers must not base differences in pay onan employee’s age, sex, race, or otherprotected status.

• Any differences in pay must be tied to suchbusiness‐related considerations as jobresponsibilities or performance.

• Any differences in pay must be tied to suchbusiness‐related considerations as jobresponsibilities or performance.

• The goal is for employers to provide equal payfor equal work.

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Legal Requirements for Pay:Minimum Wage

• Minimum wage - thelowest amount thatemployers may payunder federal or statelaw, stated as an

• Fair Labor StandardsAct (FLSA) - federal lawthat establishes aminimum wage andrequirements for

employers may payunder federal or statelaw, stated as anamount of pay per hour.

that establishes aminimum wage andrequirements forovertime pay and childlabor.

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Exercise

• A firm has an employee’s base pay which is:

$10/hr + $30/wk (bonus).

• If an employee works for 50 hours this week (40regulars and 10 overtime), estimate thisemployee’s total pay.

• Follow the Art of overtime pay of Labor Law ofVietnam.

• A firm has an employee’s base pay which is:

$10/hr + $30/wk (bonus).

• If an employee works for 50 hours this week (40regulars and 10 overtime), estimate thisemployee’s total pay.

• Follow the Art of overtime pay of Labor Law ofVietnam.

Economic Influences on Pay

Product Markets• The organization’s product

market includesorganizations that offercompeting goods andservices

Labor Markets• Organizations must

compete to obtain humanresources in labor markets.

• Competing for labororganizations that offercompeting goods andservices

• Organizations compete onquality, service, and price.

• The cost of labor is asignificant part of anorganization’s costs

• Competing for laborestablishes the minimum anorganization must pay tohire an employee for aparticular job.

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Pay Level: Deciding What to Pay

Pay at the rate set by the market

Pay at a rate above the market

Pay at a rate below the market

Pay at the rate set by the market

Pay at a rate above the market

Pay at a rate below the market

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Gathering Information About Market Pay

• Benchmarking - aprocedure in which anorganization comparesits own practicesagainst those ofsuccessful competitors

• Bureau of LaborStatistics (BLS)

• Society for HumanResource Management(SHRM)

against those ofsuccessful competitors

• Pay surveys• Trade and industry

groups• Professional groups

(SHRM)• American Management

Association

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Figure 11.3: Opinions About Fairness -Pay Equity

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Test Your Knowledge

• Mariah found out that a friend of hers with asimilar job in the same town makes significantlymore money than she does. Which of thefollowing is probably not the cause of this?a) Different cost‐of‐living

similar job in the same town makes significantlymore money than she does. Which of thefollowing is probably not the cause of this?a) Different cost‐of‐livingb) The companies are in different product markets

with different pay strategies

c) Mariah is a poor performerd) Mariah’s job is non‐exempt

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Job Structure: Relative Value of Jobs

Job Evaluation

• An administrativeprocedure formeasuring the relativeinternal worth of theorganization’s jobs.

Compensable Factors• The characteristics of a

job that theorganization values andchooses to pay for.

measuring the relativeinternal worth of theorganization’s jobs.

organization values andchooses to pay for.- Experience- Education- Complexity- Working conditions- Responsibility

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Table 11.1: Job Evaluation of Three Jobswith Three Compensable Factors

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Figure 11.5:Sample PayGrade Structure

Pay grades - setsof jobs havingsimilar worth orcontent, groupedtogether to

Pay grades - setsof jobs havingsimilar worth orcontent, groupedtogether toestablish rates ofpay.

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Pay Ranges

• Pay ranges - a set ofpossible pay ratesdefined by a minimum,maximum, andmidpoint of pay foremployees holding aparticular job or a jobwithin a particular paygrade.

• Red‐circle rate - pay ata rate that falls abovethe pay range for thejob.

• Green‐circle rate - payat a rate that falls below

midpoint of pay foremployees holding aparticular job or a jobwithin a particular paygrade.

• Green‐circle rate - payat a rate that falls belowthe pay range for thejob.

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Alternatives to Job‐Based Pay

Delayering• Reducing the number of

levels in the organization’sjob structure.

• More assignments are

Skill‐Based Pay Systems• Pay structures that set pay

according to the employees’levels of skill or knowledgeand what they are capableof doing.

• More assignments arecombined into a single layer.

• These broader groupingsare called broad bands.

• More emphasis onacquiring experience, ratherthan promotions.

according to the employees’levels of skill or knowledgeand what they are capableof doing.

• This is appropriate inorganizations wherechanging technologyrequires employees tocontinually widen anddeepen their knowledge.

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Exercise – Finding a Compa‐Ratio

• Compa‐Ratio (CR) - the ratio of average pay to the

midpoint of the pay range.

• If the average equals the midpoint, CR is 1.

• If CR is greater than 1, the average pay is above the

midpoint.

• If CR is less than 1, the average pay is below the

midpoint.

• Compa‐Ratio (CR) - the ratio of average pay to the

midpoint of the pay range.

• If the average equals the midpoint, CR is 1.

• If CR is greater than 1, the average pay is above the

midpoint.

• If CR is less than 1, the average pay is below the

midpoint.

Exercise

• Salaries of employees in a Pay Grade are:

• Mid point of the Pay Range is $2,175/month.

1. Determine the Compa-Ratio.

2. Determine the Average Salary of Employees.

EMPLOYEES SALARY ($)EMPLOYEE 1 2,306

EMPLOYEE 2 2,066

EMPLOYEE 3 2,523

• Salaries of employees in a Pay Grade are:

• Mid point of the Pay Range is $2,175/month.

1. Determine the Compa-Ratio.

2. Determine the Average Salary of Employees.

EMPLOYEE 3 2,523

EMPLOYEE 4 2,414

Summary

• Organizations make decisions to define a jobstructure, or relative pay for different jobs within theorganization. Organizations also must establish paylevels, or the average paid for the different jobs.

• These decisions are based on the organization’sgoals, market data, legal requirements, andprinciples of fairness.

• These decisions are based on the organization’sgoals, market data, legal requirements, andprinciples of fairness.• Together, job structure and pay level establish a paystructure policy.

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Summary (continued)

• To remain competitive, employers must meet thedemands of the product and labor markets.

• Limit their costs as much as possible.• Pay at least the going rate in their labor markets.

• According to equity theory, employees think of theirpay relative to their inputs - training, experience,and effort.

• According to equity theory, employees think of theirpay relative to their inputs - training, experience,and effort.• To decide whether their pay is equitable, they

compare their outcome (pay)/input ratio with otherpeople s outcome/input ratios

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Summary (continued)

• The traditional approach to building a pay structureis to use a job‐based approach.• Alternatives to the traditional approach includebroad banding and skill‐based pay.

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