Pay Structures: Proprietary Content. ©great Learning. All Rights Reserved. Unauthorized Use or Distribution Prohibited

Pay Structures
Proprietary content. ©Great Learning. All Rights Reserved. Unauthorized use or distribution prohibited
Agenda
In this video we will discuss the following concepts:
• Old pay versus new pay
• Explain the nature of reward strategy and the total reward concept
• Evaluate the principal characteristics of graded pay, market-related pay and performance-related pay strategies
Defining Reward
Introduction
• Reward encompasses pay, remuneration and compensation and represents a portfolio of financial and non-
financial elements which add value and leads to a competitive advantage.
• Reward is used as a holistic term to reflect a more dynamic and a more flexible approach.
• Reward is the old total remuneration concept of pay and benefits combined with non-financial recognition and
motivation and applied in a contemporary HRM context.
Defining Compensation
• Compensation refers to the monetary and non-monetary rewards- often referred to as “total rewards”- that
employees receive from their employer in exchange for the work they perform.
• Compensation is a form of motivation.
• It motivates employees to create value for the organization by following the firm’s vision, strategy, process, or
priorities to produce sought-after outcomes.
• Extrinsic rewards- salary, benefits, perks etc.
• Intrinsic rewards are harder to quantify, but are no less important (such as self-esteem, meaning, freedom and
status) and can be powerful motivators.
Old Pay vs New Pay
• Old pay is characterized by bureaucratic salary administration, organizational hierarchy, rigid job evaluation and
grading systems, incremental progression and is based on fairness, consistency, equity and transparency.
• This system was compatible with the traditional organization structures and employment relationships of the
1970s and the 1980s but does not hold true in the current context.
• In the 21st century old pay, inhibits organizational responsiveness and development in more turbulent
organizational environments.
Old Pay vs New Pay (Cont.,.)
• New pay is an adaptation to changes in the external context (flatter organizations, flexible organizational forms)
and increasing competitive pressures.
• The characteristics of new pay are the integration of pay with corporate strategy in order to achieve
organizational objectives and the use of pay and reward as a lever to apply pressure to employee performance.
• New pay fits well with the ‘people make the difference’ doctrine by seeking to reward individuals in line with
managerial perceptions.
Reward Management
• Reward management refers to processes of formulation, implementation, maintenance, and communication of

strategies and policies with the purpose of rewarding people fairly, equitably and consistently in accordance with
their relative contribution to the organization to achieve its objectives.
• Is about:
1. Development
2. Implementation
3. Maintenance
4. Communication and
5. Evaluation of reward processes.
Presumptions of Reward Management
• Rewards reinforce behaviors that need to be repeated and reinforced
• Employees realize the value of rewards are its link to performance and therefore work harder.
• Employee needs are met by the rewards.
• Rewards are perceived as fair, equitable and valued.
• Rewards recognizes different needs.
Total Reward Dimensions
Financial rewards= Pay and benefits Work-life balance

(tangible)
Recognition, development and self- The work environment and the work
actualization itself
Factors Affecting Rewards
Globalization
Government
Economic
Regulation &
Changes
Social Security
C&
B
Collective
Demographics
Bargaining
Social Changes
Reward Strategy: Some Examples
• Glaxo-Wellcome, as a world leader in pharmaceutical research and knowing that long-term investment is needed
for survival at the top, has a reward strategy of paying salaries at the upper quartile level to attract, develop,
motivate and retain quality research staff.
• Dow Chemicals has a strategy to recognize the quality of performance of both employees and the business.
• Textron uses rewards to support a strategy of employee flexibility through skills-based pay.
• Whitbread Beer Company and Vauxhall both use rewards to encourage initiative and innovations.
Total Reward and Talent Management at Yahoo
• Everyone at Yahoo! is talent but there are three types of special talent.
• Special talent is identified through the consideration of ‘winning behaviours’, ‘competencies’ and ‘engagement’
and allocated to one of three categories, which in turn influence their pay.
• Critical talent represents the organization's ‘winners’ and they are paid in the upper quartile
• High performers are the ‘stars’ and are paid in quartiles three and four.
• High potentials (HIPOs) are the ‘future’ and defined as those who are likely to perform in the top 25 per cent
when promoted, and are paid in quartile three.
3P Model
Person Premium, typically
Based on
• Competency assessment
• Skill/ qualification/ credentials
• Market Worth
Pay for Person
Total Compensation
Position Pay typically based of Employee
on Mixed on the basis of
• Position evaluation multiple factors like
• Market pay level for
Pay for
• Nature of industry
position Position • Work Profile
• Organization philosophy
Pay for
Performance
Performance award, typically

based on\
• Individual performance
• Organization performance
Wage Mix
Pay Strategies
There are three basic strategies used, which are:

1. Graded pay based on job evaluation and incremental progression
2. Market-related pay
3. Performance-related pay
• Graded pay reflects the relative worth of an employee, relative to the importance of the job that an employee
does; market-related pay reflects the commercial worth of an employee, in relation to the value of the employee
in the labor market; and performance-related pay reflects the individual worth of an employee, in relation to the
perceived desirability of an individual’s performance and behaviours from a managerial perspective.
Graded Pay & Job Evaluation
• Graded pay structures are developed following a process of formal or informal job evaluation.
• The output is a distribution of jobs based on their ranking or points rating about how jobs will be clustered.
• Traditional graded structures cluster jobs in narrow pay bands with some overlapping of the grades.
• The number of grades will depend on the organizational structure, with a tall organizational structure generating
more grades, while a flatter structure will require fewer grades.
• Traditionally, graded pay is the structure deployed in the public sector, although increasingly public sector
organizations are using a hybrid model that has elements of graded incrementalism.
• Graded pay structures are transparent where everyone knows the grades and the monetary values assigned to
the grades.
• Broadbanding is done to give more flexibility to the graded pay structure.
Market Related Pay
• Market-related pay is reward approach where pay and benefits policy and practice is responsive to the external
labor market.
• It incorporates the philosophy of a particular job being ‘worth’ what the labor market commands at any one time
• Market-related pay is based on classical economic theory, where pay decisions are influenced by market supply
and demand for labor.
• Where supply of labor exceeds demand this will tend to suppress levels of pay; conversely, where the demand for
work or skills of a particular kind exceeds supply there will be a tendency for upward pressure on pay.
Performance Related Pay
• The standard by which managers tie compensation to employee effort and performance.
• Although associated with ‘new pay’, performance-related pay (PRP) is not a new phenomenon, however, in
recent years PRP has received increased emphasis within reward strategies that seek alignment with corporate
strategies
• PRP remains more common in the private sector, while the public and voluntary sectors are more likely to use
service-related progression.
• Refers to a wide range of compensation options, including merit-based pay, bonuses, salary commissions, job and
pay banding, team/group incentives, and various gainsharing programs.
What has changed?
What has changed? (Cont.,.)
• The trend in reward strategy has changed drastically in the last few years.
• It has moved from a “STRUCTURED SYSTEM” to a “CUSTOMITIZED SYSTEM”.
• Traditionally, reward strategy had been based upon the job in order to maintain internal pay equity.
• It focused on role/person and the reward was aligned with relevant job market condition, development and
skill/competency requirements of the person.
What has changed? (Cont.,.)
• Now the earlier syndrome “One size fits all” has paved the way for the customization of rewards based on
personalized risk levels, and individual value of rewards.
• Now more than ever, employees especially the ‘talented’ ones have the negotiating leverage to reach up the
expectations for their careers.
• The compensation cost of employees in general and talented individuals in particular is continuously rising……
Summary
• ‘New pay’ is a label for contemporary reward practices which are strategically aligned with business strategy and
which use pay as an HR lever on employee performance and behaviours.
• A total reward approach utilizes financial and non-financial rewards such as work–life balance opportunities,
recognition, opportunities for development and interesting work to enhance the value proposition to employees
with the aim of achieving higher quality recruitment, motivation, performance and retention.
• Graded pay reflects the relative worth of an employee, market-related pay reflects the commercial worth of an
employee and performance-related pay reflects individual worth.
Summary ( Cont..)
• The basis for a graded pay structure is job evaluation which provides a systematic method for the rank ordering
of jobs within an organization.
• An increasingly dominant feature of current reward strategies is to seek to relate pay to employee performance.
• While performance-related pay is an attractive concept there are conflicts and ambiguities which need to be
addressed in practice.

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Pay Structures

In this video we will discuss the following concepts:

• Old pay versus new pay

• Compensation is a form of motivation.

• Extrinsic rewards- salary, benefits, perks etc.

• Reward management refers to processes of formulation, implementation, maintenance, and communication of

• Rewards reinforce behaviors that need to be repeated and reinforced

• Employee needs are met by the rewards.

• Rewards are perceived as fair, equitable and valued.

• Rewards recognizes different needs.

Financial rewards= Pay and benefits Work-life balance

Performance award, typically

There are three basic strategies used, which are:

• It has moved from a “STRUCTURED SYSTEM” to a “CUSTOMITIZED SYSTEM”.

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