Part 4
Compensation of
Human Resources
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
11
Chapter
Pay Structure
Decisions
Objectives
After reading this chapter, you should be able to:
1.
2.
3.
4.
List the major decision areas and
concepts in employee
compensation management.
Describe the major administrative
tools used to manage employee
compensation.
Explain the importance of
competitive labor-market and
product-market forces in
compensation decisions.
Discuss the significance of process
issues such as communication in
compensation management.
5.
6.
7.
8.
Describe new developments in the
design of pay structure.
Explain where the United States
stands from an international
perspective on pay issues.
Explain the reasons for the
controversy over executive pay.
Describe the regulatory
framework foe employee
compensation.
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
11-2
Pay Structure and Consequences
Administrative
Tool
Focus of
Comparison
Consequence
Irwin/McGraw-Hill
Pay Level
Job Structure
Market surveys
Job evaluation
External
Internal
- external moves:
attraction / retention
of employees
- labor costs
- employee attitudes
- internal moves:
promotion, transfer
- cooperation
among employees
- employee attitudes
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
Equity Theory
11-3
Pay, benefits,
opportunities, etc.
the same,
more or less
OUTCOME
INPUTS
<=>
?
OUTCOME
INPUTS
effort, ability,
experience etc.
A person evaluates fairness by comparing their ratio with others.
Irwin/McGraw-Hill
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
11-4
Three Employee Views of the
Pay Decision
Pay Level- Same job in Different organizations
Pay Structure - Different jobs in Same organization
Individual Pay Differences - Different people in Same
job
Irwin/McGraw-Hill
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
11-5
Market Pressures in Developing
Pay Levels
Deciding What to Pay ?
Product-market competition
upper bound on labor cost
staffing level
average cost per employee
Labor-market competition
lower bound on pay levels
Irwin/McGraw-Hill
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
Market Pay Surveys Benchmarking
11-6
Factors to consider
Identify key labor- and product-market
competition
Identify key jobs v. non-key jobs
Weight and combine pay rates appropriately
Track appropriate ratios over time
revenues per employee
revenues per labor cost
work force quality (e.g. education levels)
Irwin/McGraw-Hill
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
11-7
Example of a Three-Factor Job
Evaluation System
Compensable Factors
Total
Job Title
Experience
Education
Complexity
Points
Computer operator
40
30
40
110
Computer programmer
40
50
65
155
Systems analyst
65
60
85
210
Irwin/McGraw-Hill
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
11-8
Approaches to Developing a Pay
Structure
 Market

external comparisons
 Pay

policy line
combines internal & external
 Pay
Irwin/McGraw-Hill
survey data
grade
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
11-9
Developing a Pay Policy Line
8
7
monthly
salary
($000)
6
5
4
PAY
3
2
Line of Best Fit :
using Market-Survey data
in Table 14.4
1
40
80
120
160
200
240
280
320
Job Evaluation Points
Irwin/McGraw-Hill
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
11-10
Developing a Pay Policy Line
Predicted Salary = $7,128
8
7
6
monthly
salary 5
($000)
Predicted Salary = $6,486
4
PAY
3
2
1
Job Evaluation Points = 315
40
80
120
160
200
240
280
320
Job Evaluation Points
Irwin/McGraw-Hill
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
Pay Grade Structure
11-11
8
7
6
monthly
salary 5
($000)
4
PAY
3
2
1
100
150
200
250
300
350
Job Evaluation Points
Irwin/McGraw-Hill
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
Process Issues
11-12
 Participation

Use task forces for suggestions
 Communication
Employees need to understand system
 Need to keep managers aware of changes
 Managers need to explain system changes

Irwin/McGraw-Hill
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
Current Challenges
11-13
Problems with Job Based Pay Structure
too rigid, reduces flexibility
 reinforces top-down
 retards changes
 does not reward behavior change
 discourages lateral moves

Irwin/McGraw-Hill
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
New Approaches
11-14
Delayering and Banding
 Skill (knowledge) - based pay

increases flexibility
 firm needs to use available skills

Irwin/McGraw-Hill
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
Can the U.S. Labor Force
Compete?
11-15
 Labor
costs are unstable over time
 Quality & productivity of labor varies
 Non-labor cost factors also important
in locating facilities
market proximity
 response time

Irwin/McGraw-Hill
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
11-16
Comparative Productivity and Unit Labor
Costs: Unites States, Germany, and Japan
Productivity
(value added per labor hour)
100
100
$200
83
153
76
133
50
100
$100
Legend:
U.S.
Germany
Japan
Irwin/McGraw-Hill
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
Chief Executive Officer Pay in
Selected Countries
11-17
Multiple of CEO to
Manufacturing Employee
Total Remuneration
30
24
16
20
11
9
10
United
States
Irwin/McGraw-Hill
France
Germany
Japan
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.