Because learning changes everything.

Chapter 11

Pay Structure Decisions

Human Resource Management
Gaining A Competitive Advantage
TWELFTH EDITION
Raymond Noe, John Hollenbeck, Barry Gerhart,
Patrick Wright

© 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw Hill.
 Learning Objectives 1

LO 11-1 List the main decision areas and concepts in

employee compensation management.

LO 11-2 Describe the major administrative tools used to

manage employee compensation.

LO 11-3 Explain the importance of competitive labor market

and product market forces in compensation
decisions.

LO 11-4 Discuss the significance of process issues such as

communication in compensation management.

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 Learning Objectives 2

LO 11-5 Describe new developments in the design of pay

structures.

LO 11-6 Explain where the United States stands on pay

issues from an international perspective.

LO 11-7 Explain the reasons for the controversy over

executive pay.

LO 11-8 Describe the regulatory framework for employee

compensation.

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 Introduction 1

Pay from Employer’s View

• Impacts employee attitudes and behaviors

• Motivational tool for aligning employees’ interests with broader
organization

• Significant organizational cost

• Critical part of business strategy

LO 11-1
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 Introduction 2

Pay from Employee’s View

• Policies regarding wages, salaries, and other earnings
affect overall income and standard of living
• Both level of pay and fairness compared with others’ pay
are important
• A sign of status and success

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 Introduction 3

Salary Levels
• Pay structure
• Pay level

• Job structure

• Individual pay

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 Equity Theory and Fairness 1

People evaluate the People compare their

fairness of their own ratio of perceived
situations by outcomes (pay, benefits,
comparing them working conditions) to
with those of other perceived inputs (effort,
people. ability, experience) to
the ratio of a
comparison other.

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 Equity Theory and Fairness 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).
Op Oo
<, >,or = ?
Ip Io

If p’s ratio (Op I p ) is smaller than the comparison other’s ratio

(Oo Io ), then underreward inequity results. If p’s ratio is
larger, then overreward inequity results.

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 Equity Theory and Fairness 3

Social Comparisons of Pay

• External equity
• Focus on what employees in other organizations are paid for doing
same job

• Market pay surveys

• Internal equity
• Focus on what employees within same organization are paid

• Job evaluations

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 Table 11.2 Pay Structure Concepts and Consequences

PAY ADMINISTRATIVE FOCUS OF CONSEQUENCES OF

STRUCTURE TOOL EMPLOYEE EQUITY PERCEPTIONS
DECISION PAY
AREA COMPARISONS
Pay level Market pay surveys External Equity External employee
movement (attraction and
retention of quality
employees); labor costs;
employee attitudes
Job structure Job evaluation Internal Equity Internal employee
movement (promotion,
transfer, job rotation;
cooperation among
employees; employee
attitudes

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 Developing Pay Levels 1

Market Pressures
• Product market competition
• Organizations must sell goods and services at a quantity and price
that brings a sufficient return on investment

• Places an upper bound on labor costs and compensation

• Labor costs include direct and indirect payments, staffing levels

LO 11-2
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 Developing Pay Levels 2

Market Pressures continued

• Labor market competition

• Reflects number of workers available relative to number of jobs
available

• Shortages and surpluses influence pay levels

• Organizations not competitive in labor market will not attract and

retain employees of sufficient numbers and quality

• Places a lower bound on pay levels

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 Developing Pay Levels 3

Employees as a Resource

• Invest in employees and expect valuable returns

• Pay policies and programs most important HR tool

• Evaluate in terms of cost and returns

• Should attract, retain, and motivate a high-quality workforce

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 Developing Pay Levels 4

Deciding What to Pay

• Range of pay depends on the competitive environment

• Efficiency wage theory

• Employees paid more than they would receive elsewhere will put
forth effort to retain good jobs

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 Developing Pay Levels 5

Market Pay Surveys

• Benchmarking: comparing an organization’s practices
against those of the competition
• Pay surveys require answers to:
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 rates of pay
weighted and combined?
• Determine return of investment in employees using
revenues/employees and revenues/labor costs ratios

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 Developing Pay Levels 6

Market Pay Surveys continued

• Rate ranges (pay grades)
• Permit company to recognize differences in employee performance,
seniority, and training in setting individual pay

• May be single rate for all employees within same job

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 Developing Pay Levels 7

Market Pay Surveys continued

• Key jobs
• Benchmark jobs

• Stable content, common to many organizations

• Nonkey jobs
• Unique to organizations

• Cannot be directly valued or compared through market surveys

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 Developing Pay Levels 8

Developing a Job Structure

• Job evaluation
• Composed of compensable factors and a weighting scheme

• Typically includes input from many people

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 Developing Pay Levels 9

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

Developing a Pay Structure

• Market survey data

• Greatest emphasis on external comparisons

• Pay policy line

• Combines external and internal comparisons to derive pay rates for
both key and nonkey jobs

• Does not use actual market rates—greater degree of internal

consistency

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 Figure 11.1 Pay Policy Lines, Linear and Natural
Logarithmic Functions

Access the text alternative for slide images.

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 Developing Pay Levels 11

Developing a Pay Structure continued

• Pay grades
• Grouping jobs into pay classes

• Each job within a grade has same rate range

• Permits greater flexibility in moving employees from job to job

• Range spread is larger at higher levels

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 Figure 11.2 Sample Pay Grade Structure

Access the text alternative for slide images.

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 Developing Pay Levels 12

Conflicts Between Market Pay Surveys and Job Evaluation

• Sometimes average pay falls significantly above or below

the policy line
• Supply and demand

• Consider which positions are most central to dealing with critical

environmental challenges and opportunities in reaching
organization’s goals

• Most organizations emphasize external comparisons/market pricing

LO 11-3
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 Developing Pay Levels 13

Monitoring Compensation Costs

• Pay structure represents organization’s intended policy,
but actual practice may not coincide
• Grade compa-ratio = Actual average pay for grade/Pay midpoint
for grade

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 Developing Pay Levels 14

Globalization, Geographic Region, and Pay Structures

• Market pay structures can differ substantially across

countries in terms of level and relative worth of jobs.
• Expatriate pay more closely linked to home country

• Within U.S., pay differentials based on geographic location

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 Figure 11.3 Earnings in Selected Occupations, Six World
Cities

Access the text alternative for slide images.

© McGraw Hill SOURCE: Prices and Earnings 2018, Zurich: USB, 2018. 27
 The Importance of Process: Participation and
Communication 1

Participation

• Employee participation takes many forms.

• But participation in pay decisions rare

• Line managers typically responsible for making policies

work and should be involved in pay changes

LO 11-4
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 The Importance of Process: Participation and
Communication 2

Communication
• Has large effect on employees’ attitudes and behaviors
• Employees use different comparison standards, which
influences attitudes
• Managers must explain pay structure to employees.

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 Challenges 1

Problems with Job-Based Pay Structures

• May encourage bureaucracy
• Reinforces top-down decision making and information flow
as well as status differentials
• Bureaucracy may become 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

Responses to Problems with Job-Based Pay Structures

• Delayering and banding
• Reduces opportunities for promotion

• Broad bands can weaken budgetary control, lead to rising labor

costs

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 Challenges 3

Responses to Problems with Job-Based Pay Structures

continued

• Paying the person: Pay for skill, knowledge, and

competency
• Competency-based pay: compensate employees to learn more
skills and become more flexible in their jobs
• Skill-based pay
• Increases workforce flexibility
• Facilitates decentralization of decision making to those who are most
knowledgeable
• Contributes to a climate of learning and adaptability and gives
employees a broader view of organization functions

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 Challenges 4

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 U.S. market

LO 11-6
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 Challenges 5

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 lower average skill level of workforce

• Productivity
• Labor cost per hour divided by productivity per hour worked

• Gross domestic product

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 Figure 11.4
Gross Domestic
Product per
Worker, Adjusted
for Purchasing
Power
Differences, U.S.
Dollars

Access the text alternative for slide images.

© McGraw Hill SOURCE: International Labor Organization. Output per Worker (GDP constant 2011 international $ in PPP). March 27, 2019. www.ilo.org/ilostat. 35
 Challenges 6

Can the U.S. Labor Force Compete? continued

• Considerations other than labor cost

• Total operating costs

• Location in terms of proximity for:

• Product development speed

• Quick response to customers

• Reduced inventory levels

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 Challenges 7

Executive Pay
• Influences organization’s performance
• Set tone or culture of the organization
• Long-term compensation is usually stock plans
• Ratio of top-executive pay to average worker is 300
• Trust gap

LO 11-7
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 Table 11.11 Highest-Paid Executives

TOTAL COMPENSATION
Hock E. Tan (Broadcom) $103 million
Frank J. Bisignano (First Data) $102 million
Michael Rapino (Live Nation $71 million
Entertainment)

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 Government Regulation of Employee Compensation 1

Equal Employment Opportunity (EEO)

• 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 remain

LO 11-8
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 Government Regulation of Employee Compensation 2

Equal Employment Opportunity continued

• Comparable worth
• Job evaluation

• Not a legal mandate

• 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

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

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 Government Regulation of Employee Compensation 4

Minimum Wage, Overtime, and Prevailing Wage Laws

continued

• Exempt status depends on job responsibilities and salary

• Nonexempt employees are hourly
• Davis-Bacon Act of 1931 and 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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© 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw Hill.