CHAPTER 8 PAY STRUCTURE DECISIONS
Pay is considered a sign of status and success
Pay Structure - The relative pay of different jobs and how much they are paid
Pay Level - The average pay, including wages, salaries, and bonuses of jobs in a organization
Job Structure - The relative pay of jobs within an organization
Why is the focus on jobs in developing a pay structure?
- Although employees are unique and require some degree of individualized treatment , standardizing
the treatment of similar employees can help make compensation administration and decision making
more manageable and more equitable.
- Policies are often attached to particular jobs rather than tailored entirely to individual employees
Equity Theory And Fairness
Equity Theory - suggests that people evaluate the fairness of their situations by comparing them with
those of other people
- Implications for managing employee compensation
Employees evaluate their pay by comparing it with what others get paid, and their work
attitudes and behaviours are influenced by such comparisons
Employee perceptions determine their evaluation
External Equity - pay comparison that focuses on what employees in other organizations are paid for
doing the same general job
Internal Equity - pay comparison that focuses on what employees within the same organization, but in
different jobs, are paid Developing Pay Levels
Product Market Competitions
- challenge to sell goods and services at a quantity and price that will bring a return on investment
Labour Market Competition
-amount an organization must pay to compete against other organizations that hire similar employees.
Employees as a Resource
- Organizations consider employees as a cost and as a resource in which the organization has invested
and from whit it expects valuable returns.
- Pay policies and programs are one of the most important human resources tools for encouraging
desired employee behaviours and discouraging undesired behaviours.
Pay Levels: Deciding What to Pay
- The advantage of paying above the market average is the ability to attract and retain the top talent
available which can translate into a highly effective and productive workforce. Disadvantage is the
- Efficiency Wage Theory - A theory stating that wages influence worker productivity
- Employees who are paid more than they would be paid elsewhere will be reluctant to shirk
Market Pay Surveys
- Benchmarking - comparing and organizations practices against those of the competition
Issues to determine before using pay surveys :
1. Which employers should be included in the survey?
2. Which jobs are included in the survey?
3. If multiple surveys are used, how are all of the rates of pay weighted and combined?
Product market comparisons that focus on labour costs are likely to deserve greater weight when:
1. Labour costs represent a large share of total costs
2. Product demand is elastic
3. The supply of labour is inelastic
4. Employee skills are specific to the product market
Labour market comparisons may be more important when:
1. Attracting and retaining qualified employees is difficult
2. The costs of recruiting replacements is high
Rate Ranges - Different employees in the same job may have different pay rates
Benchmark Jobs - Jobs used in the pay surveys that have relatively stable content and are common to
Nonbenchmark Jobs - Jobs that are unique to organizations and that cannot be directly valued or
compared through the use of market surveys. Compensable Factors - The characteristics of jobs that an organization values and chooses to pay for
Job Evaluation - An administrative procedure used to measure internal job worth.
1. Ranking Method
- Simplest and cheapest of all job evaluation approaches
- Consists of asking a committee of job evaluators to examine jobs and rank from highest to
- Alternation Ranking - Evaluators begin by examining all jobs in the organization, and rank
based on they know about the jobs. --> create a hierarchical job structure based on what the
- Paired Comparison - Each individual job is methodically compared to each other in a one by
one matrix to determine which is more valuable. Jobs are ranked based on outcomes of many
2. Classification (Grade Description Method
- Uses generic organization wide descriptions to classify jobs into groups with other similar jobs
that fit the same descriptions
- Grades are assigned to each class to differentiate the level of skill, experience, complexity
- The advantage of such systems is efficient and cost effective
- The disadvantage is that if descriptions are too broad, there is room for error and conflict
3. The Point Method
- Based on breaking an individual job down into the key characteristics of jobs that an
organization values. --> compensable factors -- derived from organization job analysis as well as
the weight derived from each compensable factor --> use benchmark jobs when deciding on
- Weights are used to score each compensable factors. 2 ways they can be generated:
- Priori weights - factors are weighted using expert judgements about their importance
- Weights can be derived empirically based on how important each factor seems
Developing Pay Structure
3 Pay Setting Approaches:
1. Market Survey Data - The greatest emphasis is on external comparisons. It bases pay on market
surveys that cover as many key jobs as possible.
- Pay Policy Line - Mathematical expression that describes the relationship between a job's pay
and its job evaluation points --> generated using regression analysis
2. Adjusted Pay Policy Line - uses the Market Policy Line to derive pay rates for both benchmark
and non- benchmark jobs.
- Compensation manager draws a line above/below the market pay line to ensure that the
adjusted line puts the company's pay level intentions into practice