1. CHAPTER 11 Establishing a Pay Structure
fundamentals of Human Resource Management 4th edition by R.A. Noe, J.R. Hollenbeck, B. Gerhart, and P.M. Wright
CHAPTER 11
Establishing a Pay Structure
This chapter describes how managers weigh the importance and costs of pay to arrive at a structure for compensation and the levels of pay for different jobs.

2. What Do I Need to Know?
Identify the kinds of decisions involved in establishing a pay structure.
Summarize legal requirements for pay policies.
Discuss how economic forces influence decisions about pay.
Describe how employees evaluate the fairness of a pay structure.
After reading and discussing this chapter, you should be able to:

3. What Do I Need to Know? (continued)
Explain how organizations design pay structures related to jobs.
Describe alternatives to job-based pay.
Summarize how to ensure that pay is actually in line with the pay structure.
Discuss issues related to paying employees serving in the military and paying executives.
After reading and discussing this chapter, you should be able to:

4. Your Opinion 1-Strongly Disagree, 3-Neutral, 5- Strongly Agree
Pay decisions should be based on performance, not seniority.
I would like to know what my coworkers get paid.
I would not mind if others knew my salary.
Pay secrecy helps a company stay competitive.
Use these questions to begin a discussion of issues surrounding pay philosophies and perceptions of fairness.
1-Strongly Disagree, 3-Neutral, 5- Strongly Agree
Pay decisions should be based on performance, not seniority.
I would like to know what my coworkers get paid.
I would not mind if others knew my salary.
Pay secrecy helps a company stay competitive.
From the employer’s point of view, pay is a powerful tool for meeting the organization’s goals.
Pay has a large impact on the organization such as:
Affects employee attitudes and behaviors
Influences which kinds of employees are attracted to and retained by the organization
Can align employees’ interests with organizational goals
Viewed as a sign of status and success
Pay structure consists of the relative pay for different jobs within the organization.
Pay level is the average amount, including wages, salaries, and bonuses, the organization pays for a particular job.
Pay structure and pay levels help the organization achieve goals related to employee motivation, cost control, and the ability to attract and retain talented human resources.

5. Introduction
Pay is a powerful tool for meeting the organization’s goals.
Pay has a large impact on employee attitudes and behaviors.
It influences the kinds of people who are attracted to (or remain with) the organization.
Employees attach great importance to pay decisions when they evaluate their relationship with their employer.
This chapter describes how managers weigh the importance and costs of pay to arrive at a structure for compensation and the levels of pay for different jobs.

6. Decisions About Pay
Job Structure
The relative pay for different jobs within the organization.
Pay Level
The average amount the organization pays for a particular job.
Pay Structure
The pay policy resulting from job structure and pay-level decisions.
Because pay is important both in its effect on employees and on account of its cost, organizations need to plan what they will pay employees in each job.

7. Figure 11.1: Issues in Developing a Pay Structure
Establishing a pay structure simplifies the process of making decisions about individual employees’ pay by grouping together employees with similar jobs.
As shown in Figure 11.1, HR professionals develop this structure based on:
Legal requirements
Market forces
The organization’s goals

8. Legal Requirements for Pay
Equal employment opportunity
Minimum wages
Pay for overtime
Prevailing wages for federal contractors
Government regulation affects pay structure in the areas of:
Equal employment opportunity
Minimum wage
Pay for overtime
Prevailing wages for federal contractors
All of an organization’s decisions about pay should comply with applicable laws.

9. Legal Requirements for Pay: Equal Employment Opportunity
Employers must not base differences in pay on an employee’s age, sex, race, or other protected status.
Any differences in pay must be tied to such business-related considerations as job responsibilities or performance.
The goal is for employers to provide equal pay for equal work.
These laws do not guarantee equal pay for men and women, whites and minorities, or any other groups, because so many legitimate factors, from education to choice of occupation, affect a person’s earnings.

10. Two employees who do the same job cannot be paid different wages because of gender, race, or age.
It would be illegal to pay these two employees differently because one is male and the other is female.
Only if there are differences in their experience, skills, seniority, or job performance are there legal reasons why their pay might be different.

11. Legal Requirements for Pay: Minimum Wage
Minimum wage – the lowest amount that employers may pay under federal or state law, stated as an amount of pay per hour.
Fair Labor Standards Act (FLSA) – federal law that establishes a minimum wage and requirements for overtime pay and child labor.
In the United States, employers must pay at least the minimum wage established by law.
A wage is the rate of pay per hour.

12. Minimum Wage (continued)
At the federal level, the FLSA establishes a minimum wage of:
$7.25 per hour as of July 2009
The FLSA also permits a lower “training wage”
paid to workers under the age of 20 for up to 90 days
approximately 85 percent of the minimum wage
Some states have laws specifying minimum wages; in these states, employers must pay whichever rate is higher.

13. Legal Requirements for Pay: Overtime Pay
The overtime rate under the FLSA is 1½ times the employee’s usual hourly rate, including any bonuses, and piece-rate payments.
Exempt employees – managers, outside salespeople, and other employees not covered by the FLSA requirement for overtime pay.
Nonexempt employees – employees covered by the FLSA requirements for overtime pay.
Another requirement of the FLSA is that employers must pay higher wages for overtime, as defined as hours worked beyond 40 hours per week.
Figure 11.2 on the next slide shows a sample calculation of overtime pay.

14. Figure 11.2: Computing Overtime Pay
Figure 11.2 computes the overtime ay for an employee who works 50 hours to earn a base rate of $10 per hour plus a weekly bonus of $30.
The overtime pay is based on the base pay ($400) plus the bonus ($30), for a rate of $10.75 per hour.
For each of the 10 hours of overtime, the employee would earn $16.13, so the overtime pay is $ ($16.13 times 10).
When employees are paid per unit produced or when they receive a monthly or quarterly bonus, those payments must be converted into wages per hour, so the employer can include these amounts when figuring the correct overtime rate.

15. Overtime Pay (continued)
Overtime pay is required, whether or not the employer specifically asked or expected the employee to work more than 40 hours.
Thus, if the employer knows the employee is working overtime but does not pay time and a half, the employer may be violating the FLSA.

16. Legal Requirements for Pay: Child Labor
Children aged 16 and 17 may not be employed in hazardous occupations defined by the U.S. Department of Labor.
Children aged 14 and 15 may work only outside school hours, in jobs defined as nonhazardous, and for limited time periods.
A child under age 14 may not be employed in any work associated with interstate commerce.
Exemptions include baby-sitting, acting, and delivering newspapers.
The FLSA sharply restricts the use of child labor, with the aim of protecting children’s health, safety, and educational opportunities.
The restrictions apply to children younger than 18.

17. Legal Requirements for Pay: Prevailing Wages
Two federal laws govern pay policies of federal contractors:
Davis-Bacon Act of 1931
Walsh-Healy Public Contracts Act of 1936
Under these laws, federal contractors must pay their employees at rates at least equal to the prevailing wages in the area.
These laws do not cover all companies.
Davis-Bacon covers construction contractors that receive more than $2,000 in federal money.
Walsh-Healy covers all government contractors receiving$10,000 or more in federal funds.

18. Economic Influences on Pay
Product Markets
Labor Markets
The organization’s product market includes organizations that offer competing goods and services.
Organizations compete on quality, service, and price.
The cost of labor is a significant part of an organization’s costs.
Organizations must compete to obtain human resources in labor markets.
Competing for labor establishes the minimum an organization must pay to hire an employee for a particular job.
An organization cannot make spending decisions independent of the economy.
Organizations must keep costs low enough that they can sell their products profitably, yet they must be able to attract workers in a competitive labor market.

19. There is currently a strong demand for nurses in the labor market.
Ask students: “How does this differ from the current airline industry’s labor market?”
There is currently a strong demand for nurses in the labor market.
Hospitals will have to pay competitive wages and other perks to attract and retain staff.

20. Tech Workers Out-Earn Managers
Looking at broad occupational categories, people in technology-related jobs are some of the nation’s top earners.
The pay rates are for the median worker in each category (half the employees earn more and half earn less).

21. 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
Although labor and product markets limit organizations’ choices about pay levels, there is a range within which organizations can make decisions.
The size of this range depends on the details of the organization’s competitive environment.
If many workers are competing for a few jobs, employers will have more choice.
Employers can be more flexible about pay policies if they use technology and work design to get better results from employees than competitors do.

22. Gathering Information About Market Pay
Benchmarking – a procedure in which an organization compares its own practices against those of successful competitors
Pay surveys
Trade and industry groups
Professional groups
Bureau of Labor Statistics (BLS)
Society for Human Resource Management (SHRM)
WorldatWork
HR professionals need to determine whether to gather data focusing on particular industries or on job categories.
Instructors: see the HR How To on page 336 in the text.

23. Employee Judgments About Pay Fairness
Employees compare their pay and contributions against three yardsticks:
What they think employees in other organizations earn for doing the same job.
What they think other employees holding different jobs within the organization earn for doing work at the same or different levels.
What they think other employees in the organization earn for doing the same job as theirs.
In developing a pay structure, it is important to keep in mind employees’ opinions about fairness. After all, one of the purposes of pay is to motivate employees, and they will not be motivated by pay if they think it is unfair.

24. Figure 11.3: Opinions About Fairness – Pay Equity
The ways employees respond to their impressions about equity can have a great impact on the organization.
Typically, if employees see their pay as equitable, their attitudes and behavior continue unchanged.
If employees see themselves as receiving an advantage, they usually rethink the situation to see it as merely equitable.
If employees conclude that they are under-rewarded, they are likely to make up the difference in one of three ways. (These are discussed on the following slide.)

25. Pay Equity (continued)
If employees conclude that they are under-rewarded, they are likely to make up the difference in one of three ways:
They might put forth less effort (reducing their inputs).
They might find a way to increase their outcomes (e.g., stealing).
They might withdraw (by leaving the organization or refusing to cooperate).
Employees’ beliefs about fairness also influence their willingness to accept transfers or promotions.
Equity theory tells organizations that employees care about their pay relative to what others are earning and that these feelings are based on what employees perceive (what they notice and form judgments about). An organization can do much to contribute to what employees know and, as a result, what they perceive.
If the organization researches salary levels and concludes that it is paying its employees generously, it should communicate this. If the employees do not know what the organization learned from its research, they may reach an entirely different conclusion about their pay.

26. Test Your Knowledge
Mariah found out that a friend of hers with a similar job in the same town makes significantly more money than she does. Which of the following is probably not the cause of this?
Different cost-of-living
The companies are in different product markets with different pay strategies
Mariah is a poor performer
Mariah’s job is non-exempt
Mariah found out that a friend of hers with a similar job in the same town makes significantly more money than she does. Which of the following is probably not the cause of this?
Different cost-of-living
The companies are in different product markets with different pay strategies
Mariah is a poor performer
Mariah’s job is non-exempt
Answer A – if they live in the same town, they would presumably have the same cost-of living. Given that they are similar jobs they probably are both either exempt or non-exempt but even if they were different, non-exempt jobs often make more money than exempt positions.

27. Job Structure: Relative Value of Jobs
Job Evaluation
Compensable Factors
An administrative procedure for measuring the relative internal worth of the organization’s jobs.
The characteristics of a job that the organization values and chooses to pay for.
Experience
Education
Complexity
Working conditions
Responsibility
Along with market forces and principles of fairness, organizations consider the relative contribution each job should make to the organization’s overall performance.
Creation of a pay structure requires that the organization develop an internal structure showing the relative contribution of its various jobs.
One typical way of doing this is with a job evaluation.

28. Table 11.1: Job Evaluation of Three Jobs with Three Compensable Factors
To conduct a job evaluation, the organization’s job evaluation committee identifies each job’s compensable factors – the characteristics of a job that the organization values and chooses to pay for.
As shown in Table 11.1, an organization might value the experience and education of people performing computer-related jobs, as well as the complexity of those jobs. Other compensable factors might include working conditions and responsibility. Based on the job attributes defined by the job analysis (see Chapter 4), the jobs are rated for each factor. Job evaluation points are assigned to each factor. As in the example in Table 11.1, the scores for each factor are totaled to arrive at an overall evaluation for each job.

29. Job Structure: Defining Key Jobs
Key Jobs – jobs that have relatively stable content and are common among many organizations.
Organizations can make the process of creating the job structure and the pay structure more practical by defining key jobs.
Research for creating the pay structure is limited to the key jobs that play a significant role in the organization.

30. Pay Structure: Putting It All Together
Job Evaluation
Job Structure
Define Key Jobs
Pay Survey
Pay Policy Line
Pay Rates
Pay Grades
Pay Ranges
Pay Structure
The pay structure reflects decisions about how much to pay (pay level) and the relative value of each job (job structure).
The organization’s pay structure should reflect what the organization knows about market forces, as well as its own unique goals and the relative contribution of each job to achieving the goals.
By balancing this external and internal information, the organization’s goal is to set levels of pay that employees will consider equitable and motivating.
Organizations typically apply the information by establishing some combination of:
Pay rates
Pay grades
Pay ranges

31. Pay Rates Organization obtains pay survey data for its key jobs.
Pay policy line is established.
Pay rates for non-key jobs are then determined.

32. Figure 11.4: Pay Policy Lines
Pay policy line – a graphed line showing the mathematical relationship between job evaluation points and pay rate.
The pay policy line reflects the pay structure of the external market in relationship to the job evaluation points for the organization’s key jobs.
It is then used to determine salaries for non-key jobs, for which the organization has no survey data.
For example, using the pay policy line in Figure 11.4, a job with 315 job evaluation points would have a predicted salary of $6, 486 per month.

33. Figure 11.5: Sample Pay Grade Structure
Pay grades – sets of jobs having similar worth or content, grouped together to establish rates of pay.

34. Pay Ranges
Pay ranges – a set of possible pay rates defined by a minimum, maximum, and midpoint of pay for employees holding a particular job or a job within a particular pay grade.
Red-circle rate – pay at a rate that falls above the pay range for the job.
Green-circle rate – pay at a rate that falls below the pay range for the job.

35. Test Your Knowledge To correct a Red-circled employee, I would…
Give them a raise
Demote them
Give them a bonus, but no raise
Move them to a job with a higher pay range
To correct a Red-circled employee, I would…..
Give them a raise – will exacerbate the problem
Demote them – will lower their morale
Give them a bonus, but no raise – good way to reward them without increasing salary costs
Move them to a job with a higher pay range – need to ensure they had the requisite skills for a different position
Answer: C, is probably the best answer. A discussion of the pros and cons of each of these approaches in relation to the organization’s goals may be beneficial

36. Pay Differentials
Pay differential – adjustment to a pay rate to reflect differences in working conditions or labor markets.
Many businesses in the United States provide pay differentials based on geographic location.
The most common approach is to move an employee higher in the pay structure to compensate for higher living costs.
In some situations organizations adjust pay to reflect differences in working conditions or labor markets.

37. Night hours are less desirable for most workers.
Therefore, some companies pay a differential for night work to compensate them.

38. Alternatives to Job-Based Pay
Skill-Based Pay Systems
Delayering
Reducing the number of levels in the organization’s job structure.
More assignments are combined into a single layer.
These broader groupings are called broad bands.
More emphasis on acquiring experience, rather than promotions.
Pay structures that set pay according to the employees’ levels of skill or knowledge and what they are capable of doing.
This is appropriate in organizations where changing technology requires employees to continually widen and deepen their knowledge.
The traditional and most widely used approach to developing a pay structure focuses on setting pay for jobs or groups of jobs. This emphasis on jobs has some limitations.
One approach is to move away from job-based pay toward pay structures that reward employees based on their knowledge and skills.

39. Figure 11.6: IBM’s New Job Evaluation Approach
Figure 11.6 shows descriptions of several job characteristics used by IBM. Job descriptions are assigned to the band whose characteristics best match those in the job description. Broad bands reduce the opportunities for promoting employees, so organizations that eliminate layers in their job descriptions must find other ways to reward employees.

40. Pay Structure and Actual Pay
Pay structure represents the organization’s policy.
However, what the organization actually does may be different.
The HR department should compare actual pay to the pay structure, making sure that policies and practices match.
Compa-ratio is the common way to do this.
Usually, the human resource department is responsible for establishing the organization’s pay structure. But building a structure is not the end of the organization’s decisions about pay structure.

41. Figure 11.7: 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.
When compa-ratios are more or less than 1, the numbers signal a need for the HR department to work with managers to identify whether to adjust the pay structure or the organization’s pay practices.
The compa-ratios may indicate that pay structure no longer reflects market rates of pay. Or perhaps performance appraisals need to be more accurate (as discussed in Chapter 8).

42. Current Issues in Pay Pay During Military Duty Pay for Executives
How should companies handle employees who are called for active duty in the military for extended time periods?
The Uniformed Services Employment and Reemployment Rights Act (USERRA)
Pay for Executives
Based on equity theory, how does executive compensation affect employees?
An organization’s policies regarding pay structure greatly influence employees’ and even the general public’s opinions about the organization.
Recent issues related to pay structure include:
Pay during Military Duty
How should companies handle employees who are called for active duty in the military for extended time periods?
Employees on active military duty – the law ensures that employers make jobs available for active military when they return for up to five years. But often their military pay is a fraction of what they earn as a civilian. Some companies will pay the difference between the military pay and their normal pay or some will continue to pay health benefits. While this is expensive, many companies feel that maintaining a positive relationship with employees and the goodwill of the American public make the expense worthwhile.
Pay for Executives
Based on equity theory, how does executive compensation affect employees?
Equity theory would suggest that the amount more that CEO’s receive should be reflected in that much greater impact on the organization. If employees don’t perceive that equity they may find companies to work for in which CEO compensation is more fair.

43. Figure 11.8: Average CEO Pay in S&P 500 Companies
Bonus
In recent years, as shown in Figure 11.8, the total compensation paid to executives of large companies was typically more than $6 million, of which about $2.5 million was in the form of salary plus bonus.

44. Summary
Organizations make decisions to define a job structure, or relative pay for different jobs within the organization. Organizations also must establish pay levels, or the average paid for the different jobs.
These decisions are based on the organization’s goals, market data, legal requirements, and principles of fairness.
Together, job structure and pay level establish a pay structure policy.

45. Summary
To meet the standard of equal employment opportunity, employers must provide equal pay for equal work, regardless of an employee’s age, race, sex, or other protected status.
Differences in pay must relate to factors such as a person’s qualifications or market levels of pay.
Under the Fair Labor Standards Act (FLSA):
The employer must pay at least the minimum wage established by law.
Overtime pay for hours worked beyond 40 in each week must be paid.

46. Summary (continued)
To remain competitive, employers must meet the demands 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 their pay relative to their inputs – training, experience, and effort.
To decide whether their pay is equitable, they compare their outcome (pay)/input ratio with other people’s outcome/input ratios.

47. Summary (continued)
The traditional approach to building a pay structure is to use a job-based approach.
Alternatives to the traditional approach include broad banding and skill-based pay.
The Uniformed Services Employment and Reemployment Rights Act (USERRA) requires employers to make jobs available to any of their employees who leave to fulfill military duties for up to five years.

48. Summary (continued)
Executive pay has drawn public scrutiny because top executive pay is much higher than average workers’ pay.
The great difference is an issue in terms of equity theory.
Employees’ opinions about the equity of executive pay can have a large effect on the organization’s performance.