Pay Structures
Balancing Internal and External Pressures: Adjusting
the Pay Structure
External Pressures
Internal Pressures
Job Structure
Pay Structure
(Milkovich & Newman, 2008)
Combine Internal Structure and
External Market Rates

Two parts of the total pay model have merged
– Internally aligned structure - Horizontal axis
– External competitive data - Vertical axis

Two aspects of pay structure
– Pay-policy line
– Pay ranges
(Milkovich & Newman, 2008)
Construct a Market Pay Line

A MARKET LINE links a company's benchmark jobs on
the horizontal axis with market rates paid by competitors
on the vertical axis. It summarizes the distribution of going
rates paid by competitors in the market

Approaches to constructing a market pay line
– Free hand approach
– Regression Analysis
Scatterplot
7
6
PAY
5
(Survey
monthly
Salary in
$000)
4
3
2
1
80
120
Adapted from Irwin/McGraw-Hill
160
200
240
280
Our Job Evaluation Points
320
© The McGraw-Hill Companies, Inc., 1999
360
Exhibit 8.16: Understanding Regression
(Milkovich, Newman, & Gerhart, 2011, p. 263)
Pay Grades & Pay Ranges


A PAY GRADE is a
horizontal grouping of
different jobs that are
considered substantially
equal for pay purposes.
Grades enhance
organization’s ability to
move people among
jobs within a grade with
no change in pay.
Adapted from Irwin/McGraw-Hill
•
•
A PAY RANGE is a
vertical dimension of the
pay structure.
Each pay grade will have
associated with it a pay
range consisting of a
midpoint and a specified
minimum and maximum.
© The McGraw-Hill Companies, Inc., 1999
Exhibit
8.17:
Develop
Pay Grades
(Milkovich, Newman, & Gerhart, 2011, p. 265)
Exhibit 8.18: Range Midpoint, Minimum, and Maximum
(Milkovich, Newman, & Gerhart, 2011, p. 268)
Exhibit 8.19: Range Overlap
(Milkovich, Newman, & Gerhart, 2011, p. 269)
Grades and Ranges: Why Bother?

Offer flexibility to deal with pressures from external
markets and differences among firms
– Differences in quality among individuals applying for
work
– Differences in the productivity or value of these quality
variations
– Differences in the mix of pay forms competitors use
(Milkovich & Newman, 2008)
Grades and Ranges (cont.)
 Typical
range spread
– Top-level management positions – 30 to 60% above and
below midpoint
– Midlevel professional and managerial positions – 15 to
30% above and below midpoint
– Office and production positions – 5 to 15% above and
below midpoint
(Milkovich & Newman, 2008)
Broad Banding

Purposes
– Provide flexibility to define job responsibilities more
broadly
– Foster cross-functional growth and development
– Ease mergers and acquisitions
(Milkovich & Newman, 2008)
Exhibit 8.20: From Grades to Bands
(Milkovich, Newman, & Gerhart, 2011, p. 270)
Pay Compression

Results when wages for those jobs filled from outside the
organization are increasing faster than the wages for jobs
filled from within the organization

As pay differentials among jobs become very small, the
traditional pay structure becomes compressed

Compression is an issue in professional work when new
graduates command salaries almost equal to those of
professionals with 3 - 5 years experience
Adapted from Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999