Human Resource Management:
Gaining a Competitive Advantage
Chapter 11
Pay Structure Decisions
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objectives
 List major decision areas & concepts in employee
compensation management.
 Describe major administrative tools used to manage
employee compensation.
 Explain 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 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) in an organization.
 Pay policies are attached to jobs, not individuals.
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Equity Theory and Fairness
 Equity theory suggests that people evaluate the
fairness of their situations by comparing them with
those of other people
Where O = Outcomes: pay, benefits, and working conditions,
And I = Inputs: effort, ability, and experience
If P’s ratio (OP/IP) is smaller than the other’s ratio
(OO/IO), then P feels under rewarded compared to
O, and vice versa
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Equity Theory and Fairness
Perceived inequity may cause changes in P’s
attitudes or behavior – P may seek to restore
equity by:
1. Reducing inputs (not working as hard),
2. Increasing one’s outcomes (theft, etc.), or
3. Leaving the situation that generated the
inequity (leaving the organization, refusing to
work, refusing to cooperate with others)
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Equity Theory & Fairness
Pay Structure Concepts & Consequences
External equity – compensation comparisons with
those in other organizations
Internal equity – compensation comparisons with
those working other jobs in the same organization
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Developing Pay Levels-Market Pressures
2 Competitive Market Challenges in Pay Decisions:
1. Product-market competition-challenge to sell
goods and services at a quantity and price that
will bring a return on investment.
• 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
2. Labor-market competition-amount an
organization must pay to compete against other
organizations that hire similar employees..
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2 Components of Labor Costs
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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 important HR
tools for encouraging desired employee
behaviors and discouraging undesired
behaviors.
11-11
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
the organization 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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Sample Compensable Factors
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Developing a Pay Structure
 3 Pay-setting Approaches:
1. Market Survey Approach - greatest emphasis is
on 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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Sample Pay Survey Data
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Pay Survey Used to Develop Pay Levels
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Sample Pay Grade Structure
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Sample Pay Grade Structure
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Conflicts – Market Pay Surveys & Job Evaluation
 Internal data drives up labor costs and create productmarket 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 marketcompetitive pressures.
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Monitoring Compensation Costs
To examine the difference between policy and
practice, compute a compa-ratio, which is an index
of the correspondence between actual and intended
pay (Actual average pay for grade/Pay midpoint for
grade).
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25
Globalization, Geographic Region & Pay Structure
 Pay structures differ across countries in level &
relative worth of jobs.
 Expatriate pay and benefits depend on
assignment’s nature and length.
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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 Job-Based Pay Structures
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Delayering
 Delayering involves reducing the complexity of a
job-based pay structure
 Combines job descriptions
 Reduces the number of pay grades
 Gives managers more discretion in pay decisions
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31
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:
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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
11-34
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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EEO- Employment Compensation
 among executives women appear to
have lower pay than men
 women comprised 47% of all
employees in 2011
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Equal Employment Opportunity
 (EEO) regulations prohibits sex & race-based
differences in employment outcomes such as pay,
unless justified by business necessity.
 2 Trends Related to EEO:
1. increasing participation of women and
2.



nonwhites in the labor force.
proportion of wages in 2010:
women compared to men was 81%.
black to white was 80%.
Hispanic-Latino to white earning was 70%.
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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 wage and overtime pay rate.
 Minimum wage is $7.25 an hour. It is the lowest
amount that employers are legally allowed to pay.
 States can have their own minimum wage, as long as
it is above the federal level.
 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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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
responsibilities and paying them to learn necessary
skills.
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