Chapt. 11 – Designing a
Base Pay Structure
Major Policy Decisions:
 Minimum
& maximum levels of pay
 Factors:
 Ability to pay
 Profitability
 Government regulations
 Union influences
 Market pressures
 General
relationships among pay
levels
Non-exempt vs. exempt
Senior management &
operating
mgmt.
Operatives & supervisors
Lead,
lag, or at-market
Results of each choice
Total
compensation dollar
Base pay
 Benefits
 Merit pay
 Other pay-for-performance

Openness/Secrecy of
Communication of
compensation information
Major Compensation
Decisions
1. Lowest rate of pay to entice quality
job incumbents?
2. Rate of pay to encourage employee
retention efforts?
3. Recognize seniority and merit
through base pay?
4. More than one rate of pay for
identical or similar jobs?
5. Differences in pay rates among jobs
requiring varying levels of KSAs?
6. Recognition of dangerous or
distressing working conditions?
7. Different job progression in jobs of
varying worth?
8. Opportunity for advancement? If so,
differences in pay related to promotion?
9. Can job holders go higher than max.
or lower than min. for jobs?
10.How will we handle across the board
cost-of-living adjustments?
Determining Pay Policy
Line
Step 1 – Establish the lowest and
highest rates of pay for company
Step 2 – Draw a line connecting the two
points
Another option – obtain lowest/highest
rates of pay from market survey to draw
the pay line
Scatter Plots
Plotted job data provide a convenient
way to see array of relationships and
identify natural groupings of jobs
X Axis – job points, assigned pay
grades, or job-worth identification
Y Axis – dollar value for the job
Do We Need More Than
One Pay Structure?
1. What does the company consider to
be the appropriate value of each job in
relation to other jobs?
2. What influences alter internal
relationships?
3. How will the company relate pay
policy to labor markets?
4. How do unions influence pay?
Determining Midpoint-toMidpoint Pay
Differences
This is the percentage change in the middle
value from one adjacent pay grade to the
next
Usually range from 3% to 25%
Lower differences normally found in lowerpaid, unskilled, semiskilled, and clerical
workers vs. executives/senior managers
Usually determined by going or market rate
Issues for Consideration
in Deciding Midpoints
The smaller the differences, the more
pay rates are available to assign to
specific jobs due to more grades
available in pay structure
More pay rates available, greater
opportunity for assigning different pay
rates for minor differences in jobs
Greater differences in pay rates, the
easier for job holders to perceive
differences in job worth
Smaller differences may force
companies to adopt more than one pay
structure
Developing Pay Grades
Pay grades are groupings of jobs that
have similar work difficulty and
complexity
Top of pay grade signifies this is most
important work produced in pay grade
Bottom of pay grade signifies this is the
least important work produced in pay
grade
Common Characteristics
of Pay Grades
Each grade provides a range of pay
Within a pay grade, there is a minimum,
midpoint, and maximum
Range from minimum to maximum is
usually from 30 – 50%
Most pay grades have from 6 – 7 ingrade steps
The relationship between rate of $$
increase per step and number of steps
in grade is usually equally distributed
Midpoint of pay grades normally overlap
Principal Considerations on Pay
Grades, Steps, & Progression
1. Identify the number of different jobs in
company receiving different pay rates
2. Determine number of pay structures used
in company --- if only one pay structure,
probably have more grades
3. Use steps within grades to recognize
seniority and longevity
4. Use steps to recognize merit increases
Spread of a Pay Grade
The height of a pay grade is its “spread”
What should be the spread?

Maximum dollar-minimum dollar x 100 = %
Minimum dollar
Pay Grade Width
Normally arbitrary --- many times total
points (if using a point-factor plan) are
just divided by a multiple and all grades
are same width

Example – 1000 points total in plan; 20
grades; pay grade width = 50
Within Grade Design
Organizations can choose to have as
many steps within each grade as
needed
Simple approach: use different steps for
employee’s advancement in
organization (or can tie to longevity or
years of service)
Example – page 343-344
Should Pay Grades Overlap?
Overlapping pay grades allow more
productive and senior employees in lower pay
grades to make more than new,
inexperienced employees in higher pay
grades
Drawback in large overlap is that promoted
employees moving from lower pay grade to
higher grade may not receive much pay
increase