COMPENSATION OF HUMAN

RESOURCES
Pay structure decisions
Employee compensation management
From the Er’s point of view, pay is a powerful tool for
furthering the orgn’s strategic goals. It has a large impact on
Ee attitudes and behaviors. It influences the kind of Ees who
are attracted to (and remain with the org’n). Pay can also be a
powerful motivational tool for aligning current Ee’s interests
w/ those of the broader org’n. Also impt., Ee compensation is
typically a significant orgt’l cost and thus requires close
scrutiny. Historically, total compensation (cash and benefits)
accounts for 9% to 46% of revenues, depending on the
industry. From the Ee’s point of view, policies having to do w/
wages, salaries, and other earnings affect their overall income
and thus their standard of living. Both the level of pay and its
seeming fairness compared w/ others’ pay are impt. Pay is
often also considered a sign of status and success.
 Pay structure
Salary level decisions can be broken into two areas:
pay structure and individual pay. Pay structure
entails a consideration of pay level and job
structure. Pay level is the average pay (including
wages, salaries, and bonuses) of jobs in an org’n.
Job structure refers to the relative pay of jobs in an
org’n. Both pay level and job structure are
characteristics of organizations and reflect decisions
about jobs rather than about individual employees.
Pay policies are often attached to particular jobs
rather than tailored entirely to individual Ees.
 Equity theory and fairness
Equity theory suggests that people evaluate the fairness
of their situations by comparing them w/ those of other
people. Equity is not equality. Accdg to equity theory, a
person compares her own ratio of perceived outcomes
(pay, benefits, working conditions) to perceived inputs
(effort, ability, experience) to the ratio of a comparison. If
equity is perceived, no change is expected in the Ee’s
attitudes/behavior. In contrast, perceived inequity may
cause the Ee to restore equity. Some ways of restoring
equity are counterproductive (1) reducing one’s own
inputs (not working as hard), (2) increasing one’s
outcomes (such as by theft), or (3) leaving the situation
that generates perceived inequality (leaving the org’n.
 Equity theory and fairness (con’t)
or refusing to work or cooperate w/ Ees who are
perceived as overrewarded). Equity theory’s main
implication for managing Ee compensation is that to
an impt extent, Ees evaluate their pay by comparing
it w/ what others get paid, and their work attitudes
and behaviors are influenced by such comparisons.
Another implication is that Ee perceptions are what
determine their evaluation. The fact that mgmt
believes its Ees are paid well compared w/ those of
other companies does not necessarily translate into
Ees’ beliefs.Ees may have different information or
make different comparisons than management.
 Equity theory and fairness (con’t)
Two types of Ee social comparisons of pay
especially relevant in making pay level and job
structure decisions: external equity pay
comparisons focus on what Ees in other org’ns are
paid for doing the same general job. Such
comparisons are likely to influence the decisions of
applicants to accept job offers as well as the
attitudes and decisions of Ees about whether to
stay w/ an org’n or take a job elsewhere. The
org’ns choice of pay level influences its Ees’ external
pay comparisons and their consequences. A market
pay survey is a useful administrative tool.
 Equity theory and fairness (con’t)
Second, internal equity pay comparisons focus on what
Ees within the same org’n, but in different jobs, are paid.
Ees make comparisons w/ lower-level jobs, jobs at the
same level (but perhaps in different skill areas or product
divisions), and jobs at higher levels. These comparisons
may influence general attitudes of employees; their
willingness to transfer to other jobs w/in the org’n.; their
willingness to accept promotions; their inclination to
cooperate across jobs, functional areas, or product
groups; and their commitment to the org’n. The org’ns
choice of job structure influences its Ees’ internal
comparisons and their consequences. Job evaluation is
the adminis tool org’ns use to design job structures.
 Developing pay levels
Two impt competitive market challenges in deciding
what to pay its Ees: product market competition
and labor market competition. Orgns must
compete effectively in the product market. They
must be able to sell their goods and services at a
quantity and price that will bring a sufficient return
on their investment. Orgns compete on multiple
dimensions (quality, service, and so on), and price is
one of the most impt dimensions. An impt
influence of price is the cost of production. Labor
market competition reflects the number of
workers available relative to the number of jobs
 Developing pay levels (con’t)
available. Shortages and surpluses influence pay levels.
A shortage of workers will put upward pressure on wages
and salaries, as orgns must pay to compete against other
companies that hire similar Ees. These labor market
competitors typically include not only companies that
have similar products but also those in different product
markets that hire similar types of Ees. If an orgn is not
competitive in the labor market, it will fail to attract and
retain Ees of sufficient numbers and quality. Because
org’ns have to compete in the labor market, they should
consider their Ees not just as a cost but as a resource in
w/c the org’n has invested and from w/c it expects
valuable returns.
 Developing pay levels (con’t)
Pay policies and programs are one of the most impt
resource tools for encouraging desired Ee behaviors and
discouraging undesired behaviors. Therefore, must be
evaluated not just in terms of cost but in terms of the
returns they generate – how they attract, retain, and
motivate a high-quality workforce.
Efficiency wage theory – states that wages influence
worker productivity. Benefits of higher pay outweigh the
cost when orgns have technologies or structures that
depend on highly skilled Ees, or when an org’n has
difficulties observing and monitoring its Ee’s
performance. It may therefore wish to provide an above-
market pay rate to ensure the incentive to put forth
 Developing pay levels (con’t)
maximum effort. The theory is that Ees who are paid
more than they would be paid elsewhere will be reluctant
to shirk because they wish to retain their good jobs.
Major administrative tools used to manage Ee
compensation: benchmarking through pay surveys, rate
ranges, key jobs and nonkey jobs, job structure, job
evaluation, pay structure, pay policy line (to derive pay
rates for both key and nonkey jobs), pay grades. Read
pps. 463-471 of Noe, Hollenbeck, Gerhart, and Wright’s
book: Human Resource Management: Gaining a
Competitive Advantage, 10th edition (2017).
 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 the jobs.
Compared with cities in China,India, and Mexico
the labor markets in U.S and German cities
provide much lower levels of pay overall and
also different payoffs to skill, education and
advancement. These differences create a
dilemma for global companies.
 Problems with job-based pay
structures
Defining pay structures in terms of jobs and their associated
responsibilities, remains the most widely used in practice.
Potential limitations: they may encourage bureaucracy; the
structure’s hierarchical nature reinforces a top-down decision
making and information flow as well as status differentials ,
w/c do not lend themselves to taking advantage of the skills
and knowledge of those closest to prodtn; the bureaucracy
required to generate and update job descriptions and job
eval’n can become a barrier to change because wholesale
changes to job descriptions can involve a tremendous amount
of time and cost; job-based pay structure may not reward the
desired behaviors, particularly in a rapidly changing
environment where the knowledge, skills, and abilities
needed yesterday may not be helpful today and tomorrow.
Responses to problems with job-based
structures
Delayering. Reducing the number of job levels to
achieve more flexibility in job assignments and in
assigning merit increases. Pratt and Whitney, for
ex, changed from 11 pay grades and 3,000 job
descriptions for entry-level through middle-mgmt
positions to 6 pay grades and several hundred job
descriptions. These broader groupings of jobs are
also known as broad bands. One possible
disadvantage of delayering and banding is a
reduced opportunity for promotion. Org’ns need to
consider what they will offer Ees instead.
Responses to problems with job-based
pay structures (con’t)
Skill-based pay. Pay based on the skills Ees acquire and
are capable of using. Skill-based pay systems seem to fit
well with the increased breadth and depth of skill that
changing technology continues to bring. Research
demonstrates that workforce flexibility is significantly
increased under skill-based pay. An impt potential
advantage of this system is its contribution to increased
workers’ flexibility, w/c in turn facilitates the
decentralization of decision making to those who are
most knowledgeable. Competency-based pay is similar
but usually refers to a plan that covers exempt Ees (such
as managers).
 Potential disadvantges of skill-based
and competency-based approaches
Although the plan will likely enhance skill acquisition, the
org’n may find it a challenge to use the new skills
effectively. w/o careful planning, it may find itself w/
large new labor costs but little payoff. In other words, if
skills change, work design must change as quickly to take
full advantage. Second, if pay growth is based entirely on
skills, problems may arise if Ees “top out” by acquiring all
the skills too quickly, leaving no room for further pay
growth. Third, skill-based plans may generate a large
bureaucracy. Training programs need to be developed.
Skills must be described, measured, and assigned
monetary values. Certification tests must be developed
to determine whether an Ee has acquired a certain skill.
 Potential disadvantages of skill-based
and competency-based approaches
There is almost no body of knowledge regarding
how to price combinations of skills (versus jobs)
in the marketplace. Obtaining comparison data
from other org’ns will be difficult until skill-
based plans become more widely used.
 End topic assignments
INDIVIDUAL ASSIGNMENT: Read pp. 459-60 (Equity Theory and Fairness) of Noe,
Hollenberg, Gerhart and Wrights’ book HRM: Gaining a Competitive Advantage, 10th
ed. (2018). Conduct additional readings on the topic. TAKE THE SELF-ASSESSMENT
EXERCISE IN pps. 469-470 and answer the guide questions. In addition answer the
following questions:
Analyze and evaluate your work and pay conditions. Would you say there is external
equity in your case? Explain/support your answer by citing results of your own
survey/research among colleagues.
Is there internal equity in your case? Explain/support your answer by citing
sources of information in your workplace.
If your answer to either or both of the previous queries is “NO”, what do you
propose to do about it?
Group Work – compensation of human
resources
Still from the same title, read the case that will be assigned to
your group. Realignments will have to be done. Group
forming and case assignment will be done in class.
Pay to Quit p. 464
Walmart p. 475
Manufacturing and Labor Cost p. 479
European Retailers p. 481
US Automakers p. 490
Reporting the Ratio of Executive Pay pps. 490-491
Dates for report submission of individual work and class
reporting of group work will be announced later.