Download Pay Structure Decisions

Chapter
7
Pay Structure Decisions
After reading this chapter, you should be able to:
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 productmarket forces in compensation decisions.
Discuss the significance of process issues such as
communication in compensation management.
Chapter
7
Pay Structure Decisions
Describe
new developments in the design of pay structures.
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 for employee compensation.
Introduction
From the employer’s point of
view:
 Pay is critical in attaining
strategic goals.
 Pay has a major impact on
employee attitudes and
behaviors.
 Employee compensation is
typically a significant
organizational cost.
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From the employee’s point of
view:
 Policies having to do with
wages, salaries, and other
earnings affect their overall
income and thus their standard
of living.
 Both level of pay and fairness
compared with others’ pay are
important.
© 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Equity Fairness
Two types of employee social comparisons of pay are
especially relevant in making pay-level and job structure
decisions:
Pay Structure
Decision Area
Administrative
Tool
Focus of
Employee Pay
Comparisons
Consequences of
Equity Perceptions
Pay Level
Market pay surveys
External equity
Job Structure
Job evaluation
Internal equity
External employee
movement, labor
costs, employee
attitudes
Internal employee
movement, cooperation,
employee attitudes
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Developing Pay Levels - Market
Pressures
Two
important competitive market
challenges in deciding what to pay its
employees:
competition – the
challenge to sell goods and services at a
quantity and price that will bring a return
on investment.
 Labor-market competition – the amount
an organization must pay to compete
against other organizations that hire
similar employees.
 Product-market
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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 one of the
most important human resource tools for
encouraging desired employee behaviors
and discouraging undesired behaviors.
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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 states that wages influence worker
productivity.
 The
benefits of higher wages may outweigh higher costs when
the organization's technology or structure depends on highly
skilled employees or when the organization has difficulty
observing and monitoring employee performance.
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Market Pay Surveys
Benchmarking
is a procedure by which an
organization compares its own practices against
those of the competition.
The following issues must be determined before
pay surveys are used:
 Which
employers should be included in the survey?
 Which jobs are included in the survey?
 If multiple surveys are used, how are all the rates of pay
weighted and combined?
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Product Market v. Labor Market
Comparisons
Product-market
comparisons will be more
important when:
 Labor costs represent a large
share of total costs.
 Product demand is elastic.
 The supply of labor is
inelastic.
 Employee skills are specific to
the product market.
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Product-market
comparisons will be more
important when:
 Attracting and retaining
employees is difficult.
 The costs of recruiting are
high.
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Rate Ranges
 Rate
ranges refer to different employees in the
same job that may have different pay rates.
 Key jobs are benchmark jobs that have
relatively stable content and are common to
many organizations so that market-pay survey
data can be obtained.
 Nonkey 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
 A job
structure refers to the relative worth of various jobs in
the organization, based on internal comparisons.
 Job evaluation is an administrative procedure that
measures a job's worth to the organization.
 The
evaluation process is composed of compensable factors,
which are the characteristics of jobs that an organization
values and chooses to pay for.
 Job evaluators often apply a weighting scheme to account for
the differing importance of the compensable factors to the
organization.
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Developing a Pay Structure
 Three
pay-setting approaches include:
 Market
survey approach - The greatest emphasis is on
external comparisons. It bases pay on market surveys that
cover as many key jobs as possible.
 Pay-policy line - A mathematical expression that describes
the relationship between a job’s pay and its job evaluation
points.
 Pay grades - Grouping jobs of similar worth or content
together for pay administration purposes.

The range spread is the distance between the minimum and
maximum amounts in a pay grade.
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Conflicts between Market Pay
Surveys and Job Evaluation
In
resolving the conflict, emphasizing the internal data
would drive up labor costs and creates product-market
problems.
If external market data are emphasized and a job is
paid lower internally, the comparisons that employees
make internally would result in dissatisfaction.
There are no right answers. An organization should
consider its strategy and what jobs and/or functions
will be critical for success.
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Monitoring Compensation Costs
One way to examine the
difference between policy
and practice is to compute a
compa-ratio, which is an
index of correspondence for
actual and intended pay.
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Globalization, Geographic Region,
and Pay Structure
Pay
structures can differ substantially
across countries both in terms of their
level and in terms of the relative worth
of jobs.
Expatriate pay and benefits continue
to be linked more closely to the home
country. However, this link appears to
be slowly weakening and now depends
more on the nature and length of the
assignment.
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The Importance of Process
Participation
 Participation should involve
both those who will manage
the process and those who will
be affected by it.
 Participation includes
recommending, designing, and
communicating a pay program.
 Typically, pay-level decisions
are only made by top
management.
McGraw-Hill/Irwin
Communication
 The effect of communication is
likely to be an impact on
employees' perceptions of
equity.
 Managers must be prepared to
explain to employees why the
pay structure is designed the
way it is and to judge whether
changes to the structure should
be made.
© 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Current Challenges
 Job-based
pay structures can create the following problems:
 They
encourage bureaucracy.
 They reinforce top-down decision making as well as status
differentials.
 The bureaucracy, time, and cost required to generate and
update job descriptions can become a barrier to change.
 The job-based structure may not reward desired behaviors,
where the knowledge, skills, and abilities needed yesterday
may not be helpful today and tomorrow.
 The system encourages promotion-seeking behavior, but
discourages lateral movement.
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Current Challenges
 Responses
to problems with job-based pay structures
include the following:
 Delayering
is reducing the number of job levels. This
provides more flexibility in job assignments and assigning
merit increases.
 A second response to job-based pay structure problems has
been to move away from linking pay to jobs and toward
building structures on skill, knowledge, and competency.

Skill-based pay typically pays individuals for the skills they are
capable of using rather than for the job they are performing at a
point in time.
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Can the U.S. Labor Force Compete?
 Costs
for labor are high in the United States, particularly in
comparison to newly industrialized and developing
countries.
 Factors to consider in shifting production to other countries
include:
Stability
Quality and
productivity
Nonlabor
considerations
Unit labor costs
and G.D.P
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Executive Pay
 Executive
pay has been given widespread attention in the
press.
 However,
executive pay accounts for a small proportion of the
labor costs of an organization, and executives have a
disproportionate ability to influence organizational
performance.
 Executives also help set the 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
CEO TOTAL
COUNTRY REMUNERATION
United States $ 1,404,000
597,000
Brazil
540,000
France
861,000
Argentina
422,000
Germany
546,000
Japan
649,000
Mexico
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CEO/MANUFACTURING
EMPLOYEE TOTAL
REMUNERATION MULTIPLE
31
60
15
48
11
11
46
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Reasons for Executive Pay
Criticisms
Some
executives are very highly paid,
such as the CEO of Walt Disney, who
earns over $600 million.
Executives in the United States are the
best paid in the world.
The ratio of executive pay to average
worker pay is cited as creating a "trust
gap" in which workers do not trust
executives' intentions and resent their
pay.
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Equal Employment Opportunity
 Equal
Employment Opportunity (EEO) (Title VII) prohibits
discrimination in all employment outcomes, including pay,
unless business necessity can be proven.
 Two trends related to EEO are the increasing participation
of women and nonwhites in the labor force.
 The proportion of wages that women earn compared to
men was 76 percent in 2000.
 The proportion of black to white earnings in 2000 was 79
percent.
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Comparable Worth
Comparable
worth (or pay equity) is a public
policy that advocates remedies for any under
evaluation 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.
 The courts have consistently ruled that using the going
market rates of pay is an acceptable defense in
comparable worth litigation suits.
McGraw-Hill/Irwin
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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 the lowest amount that employers are
legally allowed to pay.
 Minimum
wage now stands at $5.15 an hour.
 Executive, professional, administrative, and outside sales are
exempt from FLSA coverage.
 Exempt means that these employees are not covered by the
FLSA, and they are not eligible for overtime pay.
 The Davis-Bacon Act and Walsh-Healy Public Contracts Act
require federal contractors to pay employees no less than the
prevailing wages in the area.
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The End