Human Resource Management:Gaining a Competitive Advantage

Chapter 11

Pay Structure Decisions

Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Learning Objectives

List major decision areas and concepts in employee compensation management.

Describe 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.

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Learning Objectives

Describe new developments in pay structure designs.

Explain where U. S. stands on pay issues from an international perspective.

Explain reasons for executive pay controversy. 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 and behaviors.

• Employee compensation is significant organizational cost.

Employee’s 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.

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Developing Pay Levels

Pay structure - relative pay of different jobs

(job structure) and how much they are paid (pay level).

Pay level - average pay, including wages, salaries

and bonuses.

Job structure - relative pay of jobs (the range of pay

often expressed by salary grades).

Pay policiesare attached to jobs, not individuals.

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Equity Theory and Fairness

Pay Structure Concepts and Consequences

Pay StructureDecision Area

Pay Level

Job Structure

AdministrativeTool

Market pay surveys

Job evaluation

Focus of Employee PayComparisons

External equity

Internal equity

Consequences ofEquity Perceptions

External employeemovement, laborcosts, employee attitudesInternal employeemovement, cooperation,employee attitudes

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Developing Pay Levels – Market Pressures

2 Competitive Market Challenges in Pay Decisions:

1. Product-market competition –challenge to sell goods and services at a quantity and price thatwill bring a return on investment.

2. Labor-market competition –amount an organization must pay to compete against other organizations that hire similar employees.

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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 HR 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- wages influence worker productivity.

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Market Pay Surveys

Benchmarking is a procedure by which an organization compares its own practices against

the competition.

3 issues to determine before using pay surveys :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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Product MarketV. 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.

Labor-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, Key and Non-key Jobs

Rate ranges- 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.

Non-key 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

Job structure- relative worth of various jobs in the organization, based on internal comparisons.

Job evaluation is an administrative procedure used to measure internal job worth. 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 compensable factors to the organization.

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Developing a Pay Structure

3 Pay-setting Approaches:1. Market Survey Approach - The greatest emphasis is

on external comparisons. It bases pay on market surveys that cover as many key jobs as possible.

2. Pay Policy Line - A mathematical expression that describes the relationship between a job’s pay and its job evaluation points.

3. Pay Grades- Grouping jobs of similar worth or content together for pay administration purposes. Range spread is the distance between minimum and

maximum amounts in a pay grade.

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Conflicts – Market Pay Surveys & Job Evaluation

Internal data would drive up labor costs and create product-market problems.

If external market data are emphasized and a job

is paid lower internally, comparisons that employees make internally would result in dissatisfaction.

An organization should consider its strategy, what

jobs and/or functions will be critical for success and market-competitive pressures.

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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 the correspondence between

actual and intended pay.

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Globalization, Geographic Regionand Pay Structure

Pay structuresdiffer across countriesin level and relative worth of jobs.

Although expatriate pay and benefitshave been linked more closely to the home country, this link now appears to depend more on the assignment’s nature and length.

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The Importance of Process:Participation and Communication

Participation Participation should

involve those who will manage and be affected by the process.

Participation includes recommending, designing and communicating a pay program.

Typically, pay-level decisions are only made by top management.

Communication The effect of

communication is likely to impact employees' perceptions of equity.

Managers must be prepared to explain why the pay structure is designed the way it is and to judge whether changes should be made to the structure.

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Current Challenges

Job-based pay structures can create problems:

reinforces top-down decision making as well as status differentials.

bureaucracy, time and cost required to generate and update job descriptions can become a barrier to change.

job-based structure may not reward desired behaviors, where the knowledge, skills, and abilities needed yesterday may not be helpful today and tomorrow.

system encourages promotion-seeking behavior, but discourages lateral movement.

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Current Challenges

3 Responses to Problems with Job-based Pay Structures:

1. delayer – reducing number of job levels within an organization to provide more flexibility in job assignments and in assigning merit increases.

2. moving away from linking pay to jobs toward building structures on skill, knowledge and competency.

3. Skill-based pay - paying individuals for skills they are capable of using rather than for the job they are performing.

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Can the U.S. Labor Force Compete?

U. S. labor cost are high compared to newly industrialized and developing countries.

4 Factors Shifting Production to Other Countries:

Non-laborconsiderations Productivity

Unit Labor Costs&G.D.P.

Stability

Skill levelsquality &

productivity

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Executive Pay Executive pay has been given widespread

attention in the press. Executive pay accounts for a small proportion

of labor costs. Executives have a disproportionate ability to

influence organizational performance. Executives help set 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

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Reasons for Executive Pay Criticisms

Some executives are very highly paid.

U.S. executives - best paid in the world.

Ratio of executive pay to average worker pay creates a "trust gap" - workers do not trust executives' intentions and resent their pay.

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Equal Employment Opportunity

(EEO) regulations prohibitssex and race-based differences in employment outcomes such as pay, unless justified by business necessity.

Organizations must also deal with changing labor market and demographic realities.

2 Trends Related to EEO:

1. increasing participation of women and nonwhites in the labor force.

2. proportion of wages in 2006 that women earn compared to men was 81 % and black to white earnings was 80 %.

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Comparable Worth

Comparable worth (or pay equity) is a public policy that advocates remedies for any undervaluation 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.

Courts have consistently ruled that using the going market rates of pay is acceptable defense in comparable worth litigation suits.

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Wage Laws

The Fair Labor Standards Act (FLSA) of 1938 established a minimum wageand overtime pay rate. Minimum wage is $7.25 an hour. It is the lowest

amount that employers are legally allowed to pay. Executive, professional, administrative and outside

sales are exempt from FLSA coverage. Exempt – those employees not covered by the

FLSAand not eligible for overtime pay. Davis-Bacon Act and Walsh-Healy Public

Contracts Act require federal contractors to pay employees no less than area’s prevailing wages.

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Summary

Equity theory suggests that social comparisons are an important influence on how employees evaluate their pay.

Employees make external comparisons between their pay and the pay they believe is received by employees in other organizations which may have consequences for employee attitudes and retention.

Employees make internal comparisons between what they receive and what they perceive others within the organization are paid. These comparisons may have consequences for internal movement, cooperation, and attitudes (like organization commitment).

Such comparisons play an important role in the controversy over executive pay.

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Summary, continued

Pay benchmarking surveys and job evaluation are tools used in managing pay level and job structure components of the pay structure.

Pay surveys permit organizations to benchmark their labor costs.

Globalization is increasing the need to be competitive in labor costs and productivity.

Pay structures is moving to fewer pay levels to reduce labor costs and bureaucracy and shifting from paying employees for narrow jobs to giving broader responsibilities and paying them to learn necessary skills.

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