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Management and Organizational Studies
Management and Organizational Studies 4485F/G
Linda Eligh

Chapter 8 – Pay Structure decisions Introduction  Pay is a powerful tool for strategic goals o Significant impact on employee attitudes and behaviours o Influences attraction of employees and retention  Pay decisions can be broke into two areas: o Pay structure  The relative pay of different jobs (job structure) and how much they are paid (pay level)  Consideration of pay level and job structure o Pay level  The average pay, including wages, salaries, and bonuses of jobs in an organization o Job Structure  The relative pay of jobs within an organization Equity Theory and Fairness  Consider pay relative to other employees o Equity theory, determines fairness based on comparative pay o Perceived Outcomes by Perceived Inputs to determine fariness  External Equity o Comparisons focus on what employees in other organizations are paid for doing the same general job  Job applicants  Market play survey is primary administrative tool organizations use in choosing a pay level  Internal Equity o Comparison focus on what employees within the same organization, but in different jobs are paid.  Lower-level jobs comparisons  Jobs at the same level  Jobs at higher levels  Affects willingness to change jobs, accept promotions, cooperate Developing Pay Levels Market Pressures Product Market Competition  Must compete effectively on the product market o Quality, service, price o Price is determined by costs of production  Higher labour costs can be a weakness o Generally higher product prices  Labour Force Wages can cause huge problems or create huge advantages o GM vs. Toyota  Product market competition places an upper bound on labour costs and compensation o Constrictive when labour costs are a large share of total costs and demand changes with price (elastic) Labour Market Competition  Is the amount an organization must pay to compete against other companies that hire similar employees o Not only similar products, but companies that hire similar employees o If not competitive, fail to attract or retain employees o Labour market competition places a lower bound on pay levels Employees as a Resource  Consider employees a cost, and a resource that’s an investment  Higher labour costs can be good if you have the best labour and better product quality o Pay policies and programs are one of the most important human resource tools for encouraging desired employee behaviours and discourageing undesired behaviours Pay levels: Deciding What to pay  Efficiency wage Theory o A theory stating that wages influence worker productivity o Do the benefits of higher pay outweigh the higher costs o High pay warranted on products highly dependent on highly skilled employees  When difficulties observing and monitoring its employees’ performance  Ensures maximum effort Market Pay Surveys  Benchmarking: Comparing an organization’s practices against those of competition  Product market comparisons that focus on labor costs are likely to deserve greater weight when o Labour costs represent a large share of total costs o Product demand is elastic o Supply of labour is inelastic o Employee skills are specific to the product market  Labour market comparisons may be more important when: o Attracting and retaining qualified employees is difficult o The costs of recruiting replacements is high (disruption, administration) Rate Ranges  Different employees in the same job may have different pay rates o Recognizes differences in employee performance, seniority, training o Blue collar jobs may have single rate of pay for all jobs Benchmark jobs and nonbenchmark jobs  Benchmark jobs: Key jobs used in pay surveys, that have relatively stable content and are common to many organizations  Non-benchmark jobs: jobs that are unique to organizations and that cannot be directly valued or compared through the use of market surveys Developing a Job Structure Job Evaluation  An administrative procedure used to measure internal job worth  Compensable Factors o The characteristics of jobs that an organization values and chooses to pay for  Break the job down into compensable factors, evaluators assign each a point value according to a predetermined points table in a job evaluation manual  Job evaluation is not a one-time process, each time a job is created, must be evaluated to determine its internal worth relative to existing jobs in the organization.  Jobs may need to be re-evaluated from time to time o Changes with technology, or organization acquisitions, or new job roles  Legislation must be considered  All evaluation methods create a hierarchy Ranking Method  Ranking is the simplest and cheapest of all job evaluation approaches, at least initially o Often chosen by small firm or startup with few jobs to evaluate  Ranks jobs from highest to lowest  Variations o Alternation ranking  Evaluators begin by examining all jobs in the organization, on basis of what they know about the job determines the most valuable job in the organization and the least valuable job in the organization. Then the next most valuable and next least valuable is determined. o Paired comparison  Works better when there are many more jobs to be considered  Each job is methodically compared to each other job in the organization one by one in a matrix to determine which is more valuable. Jobs is then ranked from highest to lowest depending on the outcomes from specific comparisons  Accuracy fo ranking process depends on criteria established and number of people involved  As process continues, becomes more difficult to discern the difference among jobs that are ranked closer to the middle  Subjectivity involved  Not being able to explain pay differences may lead to employee doubts on validity and fairness of process Classification (Grade Description) Method  Many large public-sector organizations such as federal government, universities, colleges, and government agencies use the classification method of job evaluation  Uses generic organization-wide descriptions to classify jobs into groups with other similar jobs  Process o Starts creating general classes such as administrative, professional, technical and writing descriptions of each o Once class is created, series of grades to differentiate level of skill, experience, complexity required for jobs placed in each grade within a classification  Advantages o Once in place, universal and easy approach for coping with hundreds of jobs in efficient and cost-effective manner o Defensible based on universally agreed—upon and transparent classification and grade descriptions.  Disadvantages o If too broad in description, room for error and conflict o If too detailed, system becomes very cumbersome allowing little flexibility o Does not allow for comparison of jobs from different families  Comparing scientist vs clerical job  This creates pay equity problems  Key consideration in Unions Point Method  Based on breaking an individual job down into key characteristics of jobs that an organization values or compensable factors  Compensable factors are derived from the organizations’ job analysis and resulting job descriptions as well as the weight assigned to each compensable factor  The weighted value is determined in advance and integrated into a point matrix system as well as a description of each compensable factor  Begin with four key characteristics universal to all jobs o Skill, effort responsibility and working conditions  Broken down into subfactors  Best to benchmark jobs in the organization when deciding on compensable factors  Each factor is broken into degrees o Each degree must have a written description of that level o Creating a point table that affixes a point band reflecting an increasing value for each degree of the compensable factor (pg. 311) o Weights can be generated in two ways, a prior weights can be assigned, which means factors are weighted using expert judgements about the importance of each compensable factor o Or can be derive weights empirically based on how important each factor seems in determining pay in the labor market  Use statistics Developing a pay structure  Note internal and external comparisons must be considered in making compensation decisions o Must carefully balance them  Three pay setting approaches Market Survey Data  Approach with greatest emphasis on external comparisons is achieved by directly basing pay on market surveys that cover as many key jobs as possible o For nonbenchmark jobs, we must proceed differently o Develop a market pay policy line  A mathematical expression that describes the relationship between a job’s pay and its job evaluation points  N Adjusted Pay Policy Line  A second approach  Combines information from external and internal comparisons is to use the market pay policy line to derive pay rates for both benchmark and non-benchmark jobs that reflect the firm’s intended pay level policy o Uses pay policy line as a starting point, then draws a new line above or below market pay policy line by whatever percentage it takes to ensure the adjusted pay policy line puts the company’s level intentions into practice o This approach differs from the first approach in that actual market rates are no longer used for benchmark jobs o Greater degree of internal consistency Pay Grades  Jobs of similar worth or content grouped together for pay administration purposes o Group jobs into a smaller number of pay classes or pay grades o Each job within a grade would have the same rate range  Advantage of this approach is that the administrative burden of setting separate rates of pay for hundresds of different jobs is reduced.  Greater flexibility
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