BA 105 HRM Chapter 11

1. Chapter 11
Pay Structure Decisions
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Learning Objectives 1 of 2
LO11-1 List the main decision areas and concepts in
employee compensation management.
LO11-2 Describe the major administrative tools used to
manage employee compensation.
LO11-3 Explain the importance of competitive labor market
and product market forces in compensation
decisions.
LO11-4 Discuss the significance of process issues such as
communication in compensation management.

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Learning Objectives 2 of 2
LO11-5 Describe new developments in the design of pay
structures.
LO11-6 Explain where the United States stands on pay
issues from an international perspective.
LO11-7 Explain the reasons for the controversy over
executive pay.
LO11-8 Describe the regulatory framework for employee
compensation.

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Introduction
Employer’s View
• Pay is critical in attaining strategic goals.
• Pay impacts employee attitudes & behaviors.
• Employee compensation is significant
organizational cost.
Employee’s View
• Policies regarding wages, salaries & other
earnings affect their overall income and standard
of living.
• Both level of pay & fairness compared with
others’pay are important.
LO 11-1

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Equity Theory and Fairness 1 of 2
People evaluate
the fairness of
their situations by
comparing them
with those of
other people.
People compare their
own ratio of perceived
outcomes (pay, benefits,
working conditions) to
perceived inputs (effort,
ability, experience) to
the ratio of a
comparison other.

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Equity Theory and Fairness 2 of 2
A person (p) compares her own ratio of perceived
outcomes O (pay, benefits, working conditions) to
perceived inputs I (effort, ability, experience) to the ratio of
a comparison other (o).
𝑂 𝑝
𝐼 𝑝
<, >, 𝑜𝑟 =
𝑂𝑜
𝐼𝑜
?
If p’s ratio (𝑂 𝑝/𝐼 𝑝) is smaller than the comparison other’s
ratio (𝑂 𝑜/𝐼𝑜), then underreward inequity results. If p’s ratio
is larger, then overreward inequity results.

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Table 11.2 Pay Structure Concepts and
Consequences
PAY STRUCTURE
DECISION AREA
ADMINISTRATIVE
TOOL
FOCUS OF
EMPLOYEE PAY
COMPARISONS
CONSEQUENCES OF
EQUITY PERCEPTIONS
Pay level Market pay
surveys
External Equity External employee
movement; labor
costs; employee
attitudes
Job structure Job evaluation Internal Equity Internal employee
movement;
cooperation among
employees;
employee attitudes

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Developing Pay Levels 1 of 14
Market Pressures
• Product Market Competition
• Organizations must be able to sell their goods and
services at a quantity and price that will bring a sufficient
return on their investment.
• Product market competition places an upper bound on
labor costs and compensation.
LO 11-2

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Developing Pay Levels 2 of 14
Market Pressures continued
• Labor Market Competition
• Reflects the number of workers available relative to the
number of jobs available.
• If an organization is not competitive in the labor market,
it will fail to attract and retain employees of sufficient
numbers and quality.

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Developing Pay Levels 3 of 14
Employees as a Resource
• Pay policies and programs matter.
• Need to evaluate in terms of cost and the returns
they generate – how they attract, retain, and
motivate a high-quality workforce.

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Developing Pay Levels 4 of 14
Deciding What to Pay
• Efficiency wage theory
• Employees who are paid more than they would
be paid elsewhere will wish to retain their good
jobs.

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Developing Pay Levels 5 of 14
Market Pay Surveys
• Benchmarking – comparing an organization’s
practices against those of the competition
• Pay surveys require answers
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 the rates of pay
weighted and combined?

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Developing Pay Levels 6 of 14
Market Pay Surveys continued
• Rate ranges
• Permit a company to recognize differences in employee
performance, seniority, training, and so forth in setting
individual pay
• For some jobs, there may be a single rate of pay for all
employees within the job.

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Developing Pay Levels 7 of 14
Market Pay Surveys continued
• Key jobs and nonkey jobs
• Key jobs are benchmark jobs.
• Have stable content and are common
• Nonkey jobs are unique to organizations.
• Cannot be directly valued or compared through
market surveys

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Developing Pay Levels 8 of 14
Developing a Job Structure
• Job Evaluation
• Composed of compensable factors and a weighting
scheme
• Typically includes input from a number of people

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Developing Pay Levels 9 of 14
Developing a Job Structure continued
• The point-factor system
• First, a priori weights can be assigned.
• Second, weights can be derived empirically based on
how important each factor seems in determining pay in
the labor market.

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Developing Pay Levels 10 of 14
Developing a Pay Structure
• Market survey data
• Has the greatest emphasis on external comparisons.
• Pay policy line
• Combines information from external and internal
comparisons is to use the pay policy line to derive pay
rates for both key and nonkey jobs.
• Does not use actual market rates.

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Developing Pay Levels 11 of 14
Developing a Pay Structure continued
• Pay grades
• Grouping jobs into pay classes
• Each job within a grade has the same rate range
• Permits greater flexibility in moving employees from job to
job
• Range spread is larger at higher levels

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Developing Pay Levels 12 of 14
Conflicts Between Market Pay Surveys and Job
Evaluation
• Sometimes average pay for a job falls significantly
above or below the policy line.
• Supply and demand
• Which positions are most central to dealing with critical
environmental challenges and opportunities in reaching
the organization’s goals?
• Most organizations now emphasize external
comparisons/market pricing
LO 11-3

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Developing Pay Levels 13 of 14
Monitoring Compensation Costs
• Pay structure represents the organization’s
intended policy, but actual practice may not
coincide with it.
• Grade compa-ratio = Actual average pay for
grade/Pay midpoint for grade

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Developing Pay Levels 14 of 14
Globalization, Geographic Region, and Pay
Structures
• Market pay structures can differ substantially
across countries both in terms of their level and in
terms of the relative worth of jobs.
• Expatriate pay

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Figure 11.3 Net Earnings (after Taxes and Social Security
Contributions) in Selected Occupations, Six World Cities
Jump to long description in appendix

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The Importance of Process: Participation
and Communication
Participation
• Employee participation in pay decisions tends to
be rare.
• Line managers should be involved.
Communication
• Has a large, independent effect on employees’
attitudes and behaviors.
• Employees use different comparison standards.
• Managers must explain pay structure to
employees.
LO 11-4

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Challenges 1 of 8
Problems with Job-Based Pay Structures
• May encourage bureaucracy
• Reinforces a top-down decision making and
information flow as well as status differentials
• The bureaucracy may become a barrier to change
• May not reward desired behaviors
• Encourages promotion-seeking behavior but may
discourage lateral employee movement
LO 11-5

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Challenges 2 of 8
Responses to Problems with Job-Based Pay
Structures
• Delayering and Banding
• Delayering and banding offer fewer opportunities for
promotion
• Broad bands can lead to weaker budgetary control and
rising labor cost

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Challenges 3 of 8
Responses to Problems with Job-Based Pay
Structures continued
• Paying the person: Pay for skill, knowledge, and
competency
• Competency-based pay - if you want employees to learn
more skills and become more flexible in the jobs they
perform, you should pay them to do it
• Skill-based pay
• Increases workforce flexibility
• Facilitates the decentralization of decision making to those
who are most knowledgeable
• Contributes to a climate of learning and adaptability and
give employees a broader view of organization functions

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Challenges 4 of 8
Can the U.S. Labor Force Compete?
• Instability of country differences in labor costs
• Relative labor costs are very unstable over time
• Influenced by currency rates, currency exchange hedging,
and proximity to the U.S. market
LO 11-6

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Challenges 5 of 8
Can the U.S. Labor Force Compete? continued
• Skill levels
• Quality and productivity of national labor forces can vary
dramatically
• Lower labor costs may reflect the lower average skill level
of the workforce

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Challenges 6 of 8
Can the U.S. Labor Force Compete? continued
• Productivity
• Labor cost per hour divided by productivity per hour
worked
• Gross domestic product

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Figure 11.4 Gross
Domestic Product
(GDP) per Person,
Adjusted for
Purchasing Power
Differences, U.S.
dollars
Jump to long description in appendix
SOURCE: OECD, OECD Statistics, http://stats.oecd.org, accessed April 19, 2017.

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Challenges 7 of 8
Can the U.S. Labor Force Compete? continued
• Considerations other than labor cost
• Location
• Product development speed
• Quick response to customers
• Inventory levels

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Challenges 8 of 8
Executive Pay
• Influence the organization’s performance
• Set the culture of the organization
• Long-term compensation is usually stock plans
• The ratio of top-executive pay to that of an
average worker is 280.
• Trust gap
LO 11-7

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Table 11.11 Highest-Paid Executives
Blank TOTAL COMPENSATION
Sundar Pichai, Alphabet, Inc.
(Google)
$100.5 million
Thomas M. Rutledge,
Charter Comm., Inc.
$98.5 million
Dara Khosrowshahi,
Expedia, Inc.
$94.6 million
Leslie Moonves, CBS $69.6 million
SOURCE: R. Lightner and T. Francis, “How Much Do Top CEOs Make?” Wall Street Journal, April 20, 2017

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Government Regulation of Employee
Compensation 1 of 3
Equal Employment Opportunity
• Title VII of the Civil Rights Act
• Prohibits sex- and race-based differences in
employment outcomes such as pay, unless
justified by business necessity
• Percent of women and non-whites in workforce is
increasing
• Significant differences in pay
• Comparable worth – no legal mandate
LO 11-8

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Government Regulation of Employee
Compensation 2 of 3
Equal Employment Opportunity continued
• Executive Order 11246 prohibits race- or sex-
based “systemic compensation discrimination”
• 2009 Lilly Ledbetter Fair Pay Act

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Government Regulation of Employee
Compensation 3 of 3
Minimum Wage, Overtime, and Prevailing Wage
Laws
• 1938 Fair Labor Standards Act (FLSA) establishes
a minimum wage
• Requires paying overtime after 40 hours in a week
• The sharing economy
• Exempt and nonexempt employees
• Davis-Bacon Act of 1931 and the Walsh-Healey Public
Contracts Act of 1936—require federal contractors to pay
employees no less than the prevailing wages in the area

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Appendix of Image Long
Descriptions

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Appendix 1 Figure 11.3 Net Earnings (after Taxes and Social
Security Contributions) in Selected Occupations, Six World Cities
BLANK Department
Manager, Industrial
Sector,
Metalworking
Industry
Skilled Worker,
Industrial Sector,
Metalworking
Industry
Beijing $19,107 $6,197
Copenhagen $72,099 $45,202
Mexico City $14,581 $8,856
Mumbai $16,200 $5,045
Munich $87,211 $36,324
New York City $142,500 $47,000
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Appendix 2 Figure 11.4 Gross Domestic Product (GDP) per
Person, Adjusted for Purchasing Power Differences, U.S. dollars
United States $56,066
Germany $48,908
Japan $40,737
Czech Republic $35,014
Korea $34,569
Mexico $17,894
China $14,388
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