McGraw-Hill/Irwin Copyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved.

Need to Know
1. Kinds of decisions involved in establishing a pay structure.
2. Legal requirements for pay policies.
3. How economic forces influence decisions about pay.
4. How employees evaluate the fairness of a pay structure.
5. How organizations design pay structures related to jobs.
6. Alternatives to job-based pay.
7. How to ensure that pay is in line with the pay structure.
8. Issues related to paying employees serving in the military and
paying executives.

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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 a major cost.
• Pay has a large impact on employee attitudes and
behaviors.
• It 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 Pay
Pay Level
Structure Structure
• Relative pay • Average • Pay policy
for different amount the resulting
jobs within organization from job
the pays for a structure
organization particular and pay-
job. level
decisions.

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Figure 11.1: Issues in Developing a Pay
Structure

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Legal Requirements for Pay

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Legal Requirements for Pay:
Equal Employment Opportunity
• Employers must not base differences in pay on
an employee’s age, sex, race, or other protected
status.
• Any differences in pay must be tied to such
business-related considerations as job
responsibilities or performance.
• The goal is for employers to provide equal pay for
equal work.

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•Two employees who do the
same job cannot be paid
different wages because of
gender, race, or age.
•It would be illegal to pay these
two employees differently
because one is male and the
other is female.
•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:
Minimum Wage
 Minimum wage –  Fair Labor Standards
lowest amount that Act (FLSA) – federal law
employers may pay that establishes a
under federal or state minimum wage and
law, stated as an requirements for
amount of pay per overtime pay and child
hour. labor.

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Minimum Wage

 FLSA establishes a minimum wage of:

 $7.25 per hour as of July 2014

 FLSA also permits a lower “training wage”

 paidto workers under age of 20 for up to 90 days
 approximately 85 % of minimum wage

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Legal Requirements for Pay:
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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Figure 11.2: Computing Overtime Pay

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Overtime Pay

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Legal Requirements for Pay:
Child Labor
• Children aged 16 and 17 may not be employed in
hazardous occupations defined by U.S. Department
of Labor.
• Children aged 14 and 15 may work only outside
school hours, in jobs defined as nonhazardous, and
for limited time periods.
• A child under age 14 may not be employed in any
work associated with interstate commerce.
• Exemptions include baby-sitting, acting, and
delivering newspapers.
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Legal Requirements for Pay:
Prevailing Wages
Two federal laws govern pay policies of federal
contractors:
 Davis-Bacon Act of 1931
 Walsh-Healy Public Contracts Act of 1936
Under these laws, federal contractors must pay their
employees at rates at least equal to the prevailing
wages in the area.

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Economic Influences on Pay
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.
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.
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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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Occupational Employment and Wage
Estimates

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Pay Level: Deciding What to Pay

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Gathering Information About Market
Pay
 Benchmarking – a • Bureau of Labor
procedure in which an Statistics (BLS)
organization compares
its own practices • Society for Human
against those of Resource Management
successful competitors (SHRM)
• Pay surveys • World at Work
• Trade and industry groups
• Professional groups

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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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Figure 11.3: Opinions About Fairness –
Pay Equity

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Pay Equity
 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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Test Your Knowledge

 Mariah found out that a friend of hers with a

similar job in the same town makes significantly
more money than she does. Which of the
following is probably not the cause of this?
a) Different cost-of-living
b) The companies are in different product markets with
different pay strategies
c) Mariah is a poor performer
d) Mariah’s job is non-exempt

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Job Structure: Relative Value of Jobs

Job Evaluation Compensable Factors

Administrative 5 characteristics of a job

procedure for measuring that the organization
relative internal worth of values and chooses to
the organization’s jobs. pay for.
1. Experience
2. Education
3. Complexity
4. Working conditions
5. Responsibility

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Table 11.1: Job Evaluation of Three
Jobs with Three Compensable Factors

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Job Structure: Defining Key Jobs

 Key Jobs – jobs that have relatively stable content

and are common among many organizations.
•Organizations can make the process of creating the
job and pay structures more practical by defining key
jobs.
•Research for creating the pay structure is limited to
key jobs that play a significant role in the
organization.

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Pay Structure: Putting It All Together

Job Job Define

Evaluation Structure Key Jobs

Pay Policy Pay

Pay Rates
Line Survey

Pay Pay Pay

Grades Ranges Structure
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Pay Rates

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 Figure 11.4: Pay Policy Lines

Pay policy line –

graphed line
showing the
mathematical
relationship
between job
evaluation points
and pay rate.

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 Figure 11.5: Sample Pay Grade Structure

Pay grades –
sets of jobs
having similar
worth or
content,
grouped
together to
establish rates
of pay.

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Pay Ranges

Pay ranges – a set of Red-circle rate – pay at

possible pay rates a rate that falls above pay
defined by a minimum, range for the job.
maximum, and midpoint Green-circle rate – pay
of pay for employees at a rate that falls below
holding a particular job pay range for the job.
or a job within a
particular pay grade.

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Test Your Knowledge

 To correct a Red-circled employee, I would…

a) Give them a raise
b) Demote them
c) Give them a bonus, but no raise
d) Move them to a job with a higher pay range

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Pay Differentials

 Pay differential – 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 are less desirable for most
workers so some companies pay a
differential for night work to compensate
them.

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Alternatives to Job-Based Pay
Delayering Skill-Based Pay Systems

• Reducing number of levels • Pay structures that set pay

in organization’s job according to employees’
structure. levels of skill or knowledge
• More assignments are and what they are capable
combined into a single of doing.
layer called broad bands. • Appropriate where
• More emphasis on changing technology
acquiring experience, requires employees to
rather than promotions. continually widen and
deepen their knowledge.

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Figure 11.6: IBM’s Job Evaluation
Approach

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Pay Structure and Actual Pay

• Pay structure represents organization’s policy.

• However, what the organization actually does may
be different.
• HR should compare actual pay to pay structure,
making sure that policies and practices match.
• Compa-ratio is 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
midpoint of pay range.
• If average equals midpoint,
CR is 1.
• If CR is greater than 1,

average pay is above midpoint.

• IF CR is less than 1, average
pay is below 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?
 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 11.8: Average CEO Pay at 100
Large U.S. Companies

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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 organization’s
goals, market data, legal requirements, and
principles of fairness.

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Summary
• 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

 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

• 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

• 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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