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11-1McGraw-Hill/Irwin Copyright 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

fundamentals of

Human Resource Management 4theditionby R.A. Noe, J.R. Hollenbeck, B. Gerhart, and P.M. Wright

CHAPTER 11

Establishing a Pay Structure

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Figure 11.1:

Issues in Developing a Pay Structure

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Legal Requirements for Pay:

Equal Employment Opportunity

Employers must not base differences in pay on

an employees age, sex, race, or other

protected status.

Any differences in pay must be tied to such

business-related considerations asjob

responsibilitiesorperformance.

The goal is for employers to provide equal pay

for equal work.

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Economic Influences on Pay

Product Markets

The organizationsproduct

marketincludes

organizations that offercompeting goods and

services.

Organizations compete on

quality, service, and price. The cost of labor is a

significant part of an

organizations costs.

Labor Markets

Organizations must

compete to obtain human

resources in labor markets. Competing for labor

establishes the minimum an

organization must pay to

hire an employee for aparticular job.

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Gathering Information About Market Pay

Benchmarkingaprocedure in which anorganization comparesits own practicesagainst those ofsuccessful competitors

Pay surveys

Trade and industrygroups

Professional groups

Bureau of Labor

Statistics (BLS)

Society for Human

Resource Management(SHRM)

WorldatWork

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Employee Judgments About Pay 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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Job Structure: Relative Value of Jobs

Job Evaluation

An administrative

procedure for

measuring the relativeinternal worth of the

organizations jobs.

Compensable Factors

The characteristics of a

job that the

organization values andchooses to pay for.

Experience

Education

Complexity

Working conditions

Responsibility

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Pay Ranges

Pay rangesa set of

possible pay rates

defined by a minimum,

maximum, andmidpoint of pay for

employees holding a

particular job or a job

within a particular paygrade.

Red-circle ratepay at

a rate that falls above

the pay range for the

job. Green-circle ratepay

at a rate that falls below

the pay range for the

job.

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Pay Differentials

Pay differentialadjustment to a pay rate to

reflect differences in working conditions or

labor markets.

Many businesses in the United States 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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Pay Structure and Actual Pay

Pay structure represents the organizations

policy.

However, what the organization actually does

may be different.

The HR department should compare actual

pay to the pay structure, making sure that

policies and practices match.

Compa-ratiois the common way to do this.

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Figure 11.7: Finding a Compa-Ratio

Compa-Ratio (CR) the

ratio of average pay to the

midpoint of the pay range.

If the average equals the

midpoint, CR is 1.

If CR is greater than 1, the

average pay is above the

midpoint.

IF CR is less than 1, the

average pay is below the

midpoint.

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Current Issues in Pay

Pay During Military Duty

How should companies handle employees who

are called for active duty in the military for

extended time periods?

The 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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Summary

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 organizations

goals, market data, legal requirements, and

principles of fairness.

Together, job structure and pay level establish a pay

structure policy.