Pay Structure DecisionsPay Structure Decisions

After reading this chapter, you should be able to:List the major decision areas and concepts in employee compensation management.Describe the 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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7

Pay Structure DecisionsPay Structure Decisions

Describe new developments in the design of pay structures.Explain where the United States stands from an international perspective on pay issues.Explain the reasons for the controversy over executive pay.Describe the regulatory framework for employee compensation.

Chapter

7

IntroductionIntroduction

From the employer’s point of view:

Pay is critical in attaining strategic goals.

Pay has a major impact on employee attitudes and behaviors.

Employee compensation is typically a significant organizational cost.

From the employee’s point of 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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Equity FairnessEquity Fairness

Two types of employee social comparisons of pay are especially relevant in making pay-level and job structure decisions:

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

Developing Pay Levels - Market Pressures

Two important competitive market challenges in deciding what to pay its employees:Product-market competition – the

challenge to sell goods and services at a quantity and price that will bring a return on investment.

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

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Employees as a ResourceEmployees 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 human resource tools for encouraging desired employee behaviors and discouraging undesired behaviors.

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Deciding What to PayDeciding 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 states that wages influence worker productivity. The benefits of higher wages may outweigh higher costs when

the organization's technology or structure depends on highly skilled employees or when the organization has difficulty observing and monitoring employee performance.

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Market Pay SurveysMarket Pay Surveys

Benchmarking is a procedure by which an organization compares its own practices against those of the competition.

The following issues must be determined before pay surveys are used:Which employers should be included in the survey?Which jobs are included in the survey?If multiple surveys are used, how are all the rates of pay

weighted and combined?

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Product Market v. Labor Market Comparisons

Product Market v. 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.

Product-market comparisons will be more important when:

Attracting and retaining employees is difficult.

The costs of recruiting are high.

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Rate RangesRate Ranges

Rate ranges refer to 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.

Nonkey 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 StructureDeveloping a Job Structure

A job structure refers to the relative worth of various jobs in the organization, based on internal comparisons.

Job evaluation is an administrative procedure that measures a job's worth to the organization.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 the compensable factors to the organization.

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Developing a Pay StructureDeveloping a Pay Structure

Three pay-setting approaches include:Market survey approach - The greatest emphasis is on

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

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

Pay grades - Grouping jobs of similar worth or content together for pay administration purposes. The range spread is the distance between the minimum and

maximum amounts in a pay grade.

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Conflicts between Market Pay Surveys and Job Evaluation

Conflicts between Market Pay Surveys and Job Evaluation

In resolving the conflict, emphasizing the internal data would drive up labor costs and creates product-market problems.

If external market data are emphasized and a job is paid lower internally, the comparisons that employees make internally would result in dissatisfaction.

There are no right answers. An organization should consider its strategy and what jobs and/or functions will be critical for success.

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Monitoring Compensation CostsMonitoring Compensation Costs

One way to examine the

difference between policy

and practice is to compute a

compa-ratio, which is an

index of correspondence for

actual and intended pay.

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Globalization, Geographic Region, and Pay Structure

Globalization, Geographic Region, and Pay Structure

Pay structures can differ substantially across countries both in terms of their level and in terms of the relative worth of jobs.

Expatriate pay and benefits continue to be linked more closely to the home country. However, this link appears to be slowly weakening and now depends more on the nature and length of the assignment.

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The Importance of ProcessThe Importance of Process

Participation Participation should involve

both those who will manage the process and those who will be affected by it.

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 be an impact on employees' perceptions of equity.

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

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Current ChallengesCurrent Challenges

Job-based pay structures can create the following problems:They encourage bureaucracy.They reinforce top-down decision making as well as status

differentials.The bureaucracy, time, and cost required to generate and

update job descriptions can become a barrier to change.The job-based structure may not reward desired behaviors,

where the knowledge, skills, and abilities needed yesterday may not be helpful today and tomorrow.

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

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Current ChallengesCurrent Challenges

Responses to problems with job-based pay structures include the following:Delayering is reducing the number of job levels. This

provides more flexibility in job assignments and assigning merit increases.

A second response to job-based pay structure problems has been to move away from linking pay to jobs and toward building structures on skill, knowledge, and competency. Skill-based pay typically pays individuals for the skills they are

capable of using rather than for the job they are performing at a point in time.

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Can the U.S. Labor Force Compete?Can the U.S. Labor Force Compete?

Costs for labor are high in the United States, particularly in comparison to newly industrialized and developing countries.

Factors to consider in shifting production to other countries include:

Nonlaborconsiderations

Unit labor costsand G.D.P

Stability

Quality andproductivity

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Executive PayExecutive Pay

Executive pay has been given widespread attention in the press. However, executive pay accounts for a small proportion of the

labor costs of an organization, and executives have a disproportionate ability to influence organizational performance.

Executives also help set the 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. DollarsCEO Remuneration in U.S. Dollars

COUNTRYUnited StatesBrazilFranceArgentinaGermanyJapanMexico

CEO TOTALREMUNERATION$ 1,404,000 597,000 540,000 861,000 422,000 546,000 649,000

CEO/MANUFACTURINGEMPLOYEE TOTALREMUNERATION MULTIPLE

31 60 15 48 11 11 46

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Reasons for Executive Pay Criticisms

Reasons for Executive Pay Criticisms

Some executives are very highly paid, such as the CEO of Walt Disney, who earns over $600 million.

Executives in the United States are the best paid in the world.

The ratio of executive pay to average worker pay is cited as creating a "trust gap" in which workers do not trust executives' intentions and resent their pay.

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Equal Employment OpportunityEqual Employment Opportunity

Equal Employment Opportunity (EEO) (Title VII) prohibits discrimination in all employment outcomes, including pay, unless business necessity can be proven.

Two trends related to EEO are the increasing participation of women and nonwhites in the labor force. The proportion of wages that women earn compared to

men was 76 percent in 2000.The proportion of black to white earnings in 2000 was

79 percent.

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Comparable WorthComparable Worth

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

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

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Wage LawsWage Laws

The Fair Labor Standards Act (FLSA) of 1938 established a minimum wage and overtime pay rate.

Minimum wage is the lowest amount that employers are legally allowed to pay. Minimum wage now stands at $5.15 an hour. Executive, professional, administrative, and outside sales are

exempt from FLSA coverage. Exempt means that these employees are not covered by the

FLSA, and they are not eligible for overtime pay.The Davis-Bacon Act and Walsh-Healy Public Contracts Act

require federal contractors to pay employees no less than the prevailing wages in the area.

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The EndThe End