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McGraw-Hill/Irwin Copyright 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.
fundamentals of
Human Resource Management 3
rd
edition
by R.A. Noe, J.R. Hollenbeck, B. Gerhart, and P.M. Wright

CHAPTER 11
Establishing a Pay Structure
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What Do I Need to Know?
1. Identify the kinds of decisions involved in
establishing a pay structure.
2. Summarize legal requirements for pay
policies.
3. Discuss how economic forces influence
decisions about pay.
4. Describe how employees evaluate the
fairness of a pay structure.
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What Do I Need to Know? (continued)
5. Explain how organizations design pay
structures related to jobs.
6. Describe alternatives to job-based pay.
7. Summarize how to ensure that pay is actually
in line with the job structure.
8. Discuss 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
organizations goals.
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 Structure
The relative
pay for
different
jobs within
the
organization.
Pay Level
The average
amount the
organization
pays for a
particular
job.
Pay Structure
The pay
policy
resulting
from job
structure
and pay-
level
decisions.
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Figure 11.1:
Issues in Developing a Pay Structure
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Legal Requirements for Pay
Equal employment opportunity
Minimum wages
Pay for overtime
Prevailing wages for federal contractors
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Legal Requirements for Pay:
Equal Employment Opportunity
Employers must not base differences in pay on
an employees 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 the
lowest amount that
employers may pay
under federal or state
law, stated as an
amount of pay per hour.
Fair Labor Standards
Act (FLSA) federal law
that establishes a
minimum wage and
requirements for
overtime pay and child
labor.
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Minimum Wage (continued)
At the federal level, the FLSA establishes a
minimum wage of:
$6.55 per hour as of July 2008
$7.25 per hour as of July 2009
The FLSA also permits a lower training wage
paid to workers under the age of 20 for up to 90
days
approximately 85 percent of the minimum wage
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Legal Requirements for Pay:
Overtime Pay
The overtime rate under the FLSA is 1 times
the employees usual hourly rate, including
any bonuses, and piece-rate payments.
Exempt employees managers, outside
salespeople, and other employees not covered
by the FLSA requirement for overtime pay.
Nonexempt employees employees covered
by the FLSA requirements for overtime pay.
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Figure 11.2: Computing Overtime Pay
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Overtime Pay (continued)
Overtime pay is required, whether or not the
employer specifically asked or expected the
employee to work more than 40 hours.
Thus, if the employer knows the employee is
working overtime but does not pay time and
a half, the employer may be violating the
FLSA.
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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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Legal Requirements for Pay:
Child Labor
Children aged 16 and 17 may not be employed in
hazardous occupations defined by the 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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Economic Influences on Pay
Product Markets
The organizations product
market includes
organizations that offer
competing goods and
services.
Organizations compete on
quality, service, and price.
The cost of labor is a
significant part of an
organizations costs.
Labor Markets
Organizations must
compete to obtain human
resources in labor markets.
Competing for labor
establishes the 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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Tech Workers Out-Earn Managers
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Pay Level: Deciding What to Pay
Pay at the rate set by the market
Pay at a rate above the market
Pay at a rate below the market
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Gathering Information About Market Pay
Benchmarking a
procedure in which an
organization compares
its own practices
against those of
successful competitors
Pay surveys
Trade and industry
groups
Professional groups
Bureau of Labor
Statistics (BLS)
Society for Human
Resource Management
(SHRM)
American Management
Association
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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 (continued)
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) Mariahs job is non-exempt
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Job Structure: Relative Value of Jobs
Job Evaluation
An administrative
procedure for
measuring the relative
internal worth of the
organizations jobs.
Compensable Factors
The characteristics of a
job that the
organization values and
chooses to pay for.
Experience
Education
Complexity
Working conditions
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 structure and the pay
structure more practical by defining key jobs.
Research for creating the pay structure is
limited to the key jobs that play a significant
role in the organization.
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Pay Structure: Putting It All Together
Job
Evaluation
Job
Structure
Define
Key Jobs
Pay
Survey
Pay Policy
Line
Pay Rates
Pay
Grades
Pay
Ranges
Pay
Structure
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Pay Rates
Organization obtains pay survey data
for its key jobs.
Pay policy line is established.
Pay rates for non-key jobs are then
determined.
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Figure 11.4: Pay
Policy Lines
Pay policy line a
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
possible pay rates
defined by a minimum,
maximum, and
midpoint of pay for
employees holding a
particular job or a job
within a particular pay
grade.
Red-circle rate pay at
a rate that falls above
the pay range for the
job.
Green-circle rate pay
at a rate that falls below
the pay range for the
job.
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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 United States 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.
Therefore, some companies pay a differential for
night work to compensate them.
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Alternatives to Job-Based Pay
Delayering
Reducing the number of
levels in the organizations
job structure.
More assignments are
combined into a single layer.
These broader groupings
are called broad bands.
More emphasis on
acquiring experience, rather
than promotions.
Skill-Based Pay Systems
Pay structures that set pay
according to the employees
levels of skill or knowledge
and what they are capable
of doing.
This is appropriate in
organizations where
changing technology
requires employees to
continually widen and
deepen their knowledge.
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Figure 11.6:
IBMs New Job Evaluation Approach
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Pay Structure and Actual Pay
Pay structure represents the organizations
policy.
However, what the organization actually does
may be different.
The HR department should compare actual
pay to the 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 the
midpoint of the pay range.
If the average equals the
midpoint, CR is 1.
If CR is greater than 1, the
average pay is above the
midpoint.
IF CR is less than 1, the
average pay is below the
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?
The 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: Median CEO Compensation at
350 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 organizations
goals, market data, legal requirements, and
principles of fairness.
Together, job structure and pay level establish a pay
structure policy.
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Summary
To meet the standard of equal employment
opportunity, employers must provide equal pay for
equal work, regardless of an employees age, race,
sex, or other protected status.
Differences in pay must relate to factors such as a
persons qualifications or market levels of pay.
Under the Fair Labor Standards Act (FLSA):
The employer must pay at least the minimum wage
established by law.
Overtime pay for hours worked beyond 40 in each week
must be paid.
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Summary (continued)
To remain competitive, employers must meet the
demands of the product and labor markets.
Limit their costs as much as possible.
Pay at least the 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
peoples outcome/input ratios.
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Summary (continued)
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 (continued)
Executive pay has drawn public scrutiny because top
executive pay is much higher than average workers
pay.
The great difference is an issue in terms of equity
theory.
Employees opinions about the equity of executive
pay can have a large effect on the organizations
performance.