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

McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All Rights Reserved. 11-1
 What Do I Need to Know?

1. Identify the kinds of decisions involved in

establishing a pay structure.
2. Summarize legal requirements for pay
policies.
3. Discuss how economic forces influence
decisions about pay.
4. Describe how employees evaluate the
fairness of a pay structure.

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 What Do I Need to Know? (continued)

5. Explain how organizations design pay

structures related to jobs.
6. Describe alternatives to job-based pay.
7. Summarize how to ensure that pay is actually
in line with the pay structure.
8. Discuss issues related to paying employees
serving in the military and paying executives.

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 Your Opinion

1-Strongly Disagree, 3-Neutral, 5- Strongly Agree

1.Pay decisions should be based on
performance, not seniority.
2.I would like to know what my coworkers get
paid.
3.I would not mind if others knew my salary.
4.Pay secrecy helps a company stay competitive.

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 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.

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 Decisions About Pay

Job Structure Pay Level Pay Structure

• The relative • The average • The pay

pay for amount the policy
different organization resulting
jobs within pays for a from job
the particular structure
organization. job. and pay-
level
decisions.

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Figure 11.1:
Issues in Developing a Pay Structure

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 Legal Requirements for Pay

Equal employment opportunity

Minimum wages

Pay for overtime

Prevailing wages for federal contractors

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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.

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• 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.

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Legal Requirements for Pay:
Minimum Wage
• Minimum wage – the • Fair Labor Standards
lowest amount that Act (FLSA) – federal law
employers may pay that establishes a
under federal or state minimum wage and
law, stated as an requirements for
amount of pay per hour. overtime pay and child
labor.

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 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

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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.

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Figure 11.2: Computing Overtime Pay

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 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.
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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.
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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.

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 Economic Influences on Pay
Product 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.
Labor Markets
• 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.
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• 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.

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Tech Workers Out-Earn Managers

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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

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 Gathering Information About Market Pay

• Benchmarking – a • Bureau of Labor

procedure in which an Statistics (BLS)
organization compares
its own practices • Society for Human
against those of Resource Management
successful competitors (SHRM)
• Pay surveys • WorldatWork
• Trade and industry
groups
• Professional groups

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Employee Judgments About Pay Fairness

• Employees compare their pay and

contributions against three yardsticks:
1. What they think employees in other
organizations earn for doing the same job.
2. What they think other employees holding
different jobs within the organization earn for
doing work at the same or different levels.
3. What they think other employees in the
organization earn for doing the same job as
theirs.
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Figure 11.3: Opinions About Fairness –
Pay Equity

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 Pay Equity (continued)
• If employees conclude that they are under-rewarded,
they are likely to make up the difference in one of
three ways:
1. They might put forth less effort (reducing their inputs).
2. They might find a way to increase their outcomes (e.g.,
stealing).
3. They might withdraw (by leaving the organization or
refusing to cooperate).
• Employees’ beliefs about fairness also influence their
willingness to accept transfers or promotions.

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 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?
a) Different cost-of-living
b) The companies are in different product markets
with different pay strategies
c) Mariah is a poor performer
d) Mariah’s job is non-exempt

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 Job Structure: Relative Value of Jobs

Job Evaluation Compensable Factors

• An administrative • The characteristics of a
procedure for job that the
measuring the relative organization values and
internal worth of the chooses to pay for.
organization’s jobs. – Experience
– Education
– Complexity
– Working conditions
– Responsibility

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Table 11.1: Job Evaluation of Three Jobs
with Three Compensable Factors

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 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.

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Pay Structure: Putting It All Together

Job Job Define

Evaluation Structure Key Jobs

Pay Policy Pay

Pay Rates
Line Survey

Pay Pay Pay

Grades Ranges Structure
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 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.
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Figure 11.4: Pay
Policy Lines
Pay policy line – a
graphed line showing
the mathematical
relationship between
job evaluation points
and pay rate.

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

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 Pay Ranges

• Pay ranges – a set of • Red-circle rate – pay at

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

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 Test Your Knowledge

• To correct a Red-circled employee, I would…

a) Give them a raise
b) Demote them
c) Give them a bonus, but no raise
d) Move them to a job with a higher pay range

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 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.

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

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 Alternatives to Job-Based Pay
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.
Skill-Based Pay Systems
• 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.
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Figure 11.6:
IBM’s New Job Evaluation Approach

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 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.

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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.

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 Current Issues in Pay

• Pay During Military Duty

– 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?

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Figure 11.8: Average CEO Pay in S&P 500
Companies

Bonus

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 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.

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 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.
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 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.

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 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.

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 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.

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