Chapter 12

ESTABLISHING A PAY
STRUCTURE

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• Your Opinion

1- Strongly Disagree, 3- Neutral, 5- Strongly Agree

1.Pay decisions should be based on performance,

not seniority.
2.I would like to know what my coworkers get paid.
3.I would not mind if others knew my salary.
4.Pay secrecy helps a company stay competitive.

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• Introduction

• Pay is a powerful tool for meeting the organization’s

goals and costs a company between 5% and 40% of
revenues.
• Pay has a large impact on employee attitudes and
behaviors and influences the kinds of people who
are attracted to (or remain with) the organization.
• Employees attach great importance to pay decisions
when they evaluate their relationship with their
employer.

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• Decisions About Pay

Job Structure Pay Structure Pay Level

Relative pay for Pay policy resulting Average amount
different jobs within from job structure the organization
the organization and pay-level pays for a
decisions. particular job.

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 • Figure 12.1 Issues in Developing a Pay
Structure

Jump to Appendix 1 long image

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• Pay differences

Two employees who do the

same job cannot be paid
different wages because of
race or age. Only if there are
differences in their experience,
skills, seniority, or job
performance are there legal
reasons why their pay might
be different

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• Legal Requirements for Pay 4 of 6

Overtime Pay
–Overtime rate under FLSA is 1½ times employee’s
usual hourly rate, including any bonuses, and piece-rate
payments.
–Exempt employees – managers, outside salespeople,
and other employees not covered by FLSA requirement
for overtime pay.
–Nonexempt employees – employees covered by FLSA
requirements for overtime pay.

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• Economic Influences on Pay 1 of 3
Product Markets
• Organization’s product
market includes
organizations that offer
competing goods and
services.
• Organizations compete on
quality, service, and price.
• Cost of labor is a
significant part of an
organization’s costs.
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Labor Markets
• Organizations must
compete to obtain human
resources in labor
markets.
• Competing for labor
establishes minimum an
organization must pay to
hire an employee for a
particular job.
• Nurses

There is currently a strong demand for nurses in the labor

market. Hospitals will have to pay competitive wages and
other perks to attract and retain staff.
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• Economic Influences on Pay 2 of 3

Pay Level: Deciding What to Pay

– Pay ranges depend on the competitive environment.
– Market rate vs. paying above market rate to acquire
top talent
– Pay policies are one of the most important human
resource tools for encouraging desired employee
behaviors and discouraging undesired behaviors.

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• Employee Judgments About Pay Fairness 1 of 3

Judging Fairness
• Employees compare their pay and contributions against
three yardsticks:
1. What they think employees in other organizations earn
for doing the same job.
2. What they think other employees holding different jobs
within the organization earn for doing work at the same or
different levels.
3. What they think other employees in the organization earn
for doing the same job as theirs.

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• Figure 12.3 Opinions About Fairness – Pay Equity

Jump to Appendix 4 long image

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• Employee Judgments About Pay Fairness 2 of 3

• If employees conclude that they are under-rewarded,

they are likely to make up the difference in one of
three ways:
1. They might put forth less effort (reducing their inputs).
2. They might find a way to increase their outcomes (e.g.,
stealing).
3. They might withdraw (by leaving the organization or
refusing to cooperate).
• Employees’ beliefs about fairness also influence their
willingness to accept transfers or promotions.

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• Employee Judgments About Pay Fairness 3 of 3

Communicating Fairness
– Employees’ feelings about their pay relative to others’
are based on what they perceive.
– Companies should assume that shared knowledge
includes pay.
– The Internet makes it easy to gather wage and salary
data.

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• Job Structure: Relative Value of Jobs 1 of 2
Job Evaluation Compensable Factors
Administrative procedure for 5 characteristics of a job
measuring relative internal that the organization values
worth of the organization’s and chooses to pay for:
jobs. 1. Experience
2. Education
3. Complexity
4. Working conditions
5. Responsibility

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• Pay Structure: Putting It All Together 1 of 5

Piecework
Hourly wage rate Salary
• Pay in terms of • Rate of pay for • Rate of pay
a rate per hour each unit per month or
produced year

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• Pay Structure: Putting It All Together 2 of 5

Pay Rates
– Determining salaries for nonkey jobs
– Pay policy line reflects the pay structure in the market
Pay Grades
– Sets of jobs having similar worth or content, grouped
together to establish rates of pay
– May not match market rate

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• Pay Structure: Putting It All Together 3 of 5
Pay ranges Red-circle rate
A set of possible pay Pay at a rate that falls
rates defined by a above pay range for the job.
minimum, maximum,
and midpoint of pay
for employees
holding a particular
Green-circle rate
job or a job within a
particular pay grade. Pay at a rate that falls below
pay range for the job.

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• Pay Structure: Putting It All Together 4 of 5

Pay differentials
– Adjustment to a pay rate to reflect differences in working
conditions or labor markets.
– Many businesses in the U.S. provide pay differentials based
on geographic location.
– The most common approach is to move an employee
higher in the pay structure to compensate for higher living
costs.

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• Night Hours

Night hours are less desirable for most workers so some

companies pay a differential for night work to
compensate them.
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• Current Issues Involving Pay Structure

Pay During Military Duty

• How should companies handle employees who are
called for active duty in the military for extended time
periods?
• Uniformed Services Employment and Reemployment
Rights Act (USERRA)
Pay for Executives
• Based on equity theory, how does executive
compensation affect employees?

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• Figure 12.7 Average CEO Pay at 100 Large
U.S. Companies

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• Summary 1 of 6

• Organizations make decisions to define a job structure, or

relative pay for different jobs within the organization.
Organizations also must establish pay levels, or the
average paid for the different jobs.
• These decisions are based on the organization’s goals,
market data, legal requirements, and principles of
fairness.

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• Summary 2 of 6
• To meet the standard of equal employment opportunity,
employers must provide equal pay for equal work,
regardless of an employee’s age, race, sex, or other
protected status.
• Differences in pay must relate to factors such as a
person’s qualifications or market levels of pay.
• Under the Fair Labor Standards Act (FLSA):
• Employer must pay at least minimum wage established by law.
• Overtime pay for hours worked beyond 40 in each week must
be paid.

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• Summary 3 of 6
• To remain competitive, employers must meet product and
labor market demands.
• Limit costs as much as possible.
• Pay at least going rate in their labor markets.
• According to equity theory, employees think of their pay
relative to their inputs – training, experience, and effort.
• To decide whether their pay is equitable, they compare
their outcome (pay)/input ratio with other people’s
outcome/input ratios.

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• Summary 4 of 6

• The traditional approach to building a pay structure is to

use a job-based approach.
• Alternatives to the traditional approach include broad
banding and skill-based pay.
• The Uniformed Services Employment and Reemployment
Rights Act (USERRA) requires employers to make jobs
available to any of their employees who leave to fulfill
military duties for up to five years.

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• Summary 5 of 6

• Executive pay has drawn public scrutiny because top

executive pay is much higher than average workers’ pay.
• Employees’ opinions about equity of executive pay can
have a large effect on the organization’s performance.

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• Summary 6 of 6

According to equity theory, employees think of their pay

relative to their inputs, such as training, experience, and
effort. To decide whether their pay is equitable, they
compare their outcome (pay)/input ratio with other people’s
outcome/input ratios.

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