Chapter Eight

Establishing a pay
Structure

Instructor: MIlkiyas Ayele(PH.D.) 04/05/2024 1

 Pay is a powerful tool
• Pay has a large impact on the organization:

– Affects employee attitudes and behaviors

– Influences which kinds of employees are attracted to and
retained by the organization
– Can align employees’ interests with organizational goals
– Viewed as a sign of status and success

Instructor: MIlkiyas Ayele(PH.D.) 04/05/2024 2

 What is Compensation?

• Compensation refers to the monetary and nonmonetary

consideration employees receive in exchange for the work
they perform for an organization.
– To counterbalance
– To make up for
– To offset
– (inducements) in exchange for employee contributions

Instructor: MIlkiyas Ayele(PH.D.) 04/05/2024 3

 Compensation Approaches
Traditional Approach
• Compensation is primarily
base pay
• Bonuses are for executives
only
• Fixed benefits tied to long
tenure
• Pay grade progression is
based on organizational
promotions
• One organization-wide pay
plan for all employees
Instructor: MIlkiyas Ayele(PH.D.)
Total Rewards Approach
• Variable pay used with base
pay
• Annual/long-term incentive
provided to all employees
• Flexible and portable
benefits offered
• Knowledge-based
broadbands determine pay
grades
• Multiple pay plans consider job
family, location, and business unit
04/05/2024 4
 Total Rewards Components

Instructor: MIlkiyas Ayele(PH.D.) 04/05/2024 5

 The Strategic Compensation Model

Instructor: MIlkiyas Ayele(PH.D.) 04/05/2024 6

 Decisions about Pay
Job Structure Pay level Pay structure
• The relative pay • The average The pay policy
for different jobs amount the resulting from job
within the organization structure and pay
organization pays for a level decisions
particular job.

Instructor: MIlkiyas Ayele(PH.D.) 04/05/2024 7

 Pay is a powerful tool
• Pay structure consists of the relative pay for different jobs
within the organization.
• Pay level is the average amount, including wages, salaries, and
bonuses, the organization pays for a particular job.
• Pay structure and pay levels help the organization achieve
goals related to employee motivation, cost control, and the
ability to attract and retain talented human resources

Instructor: MIlkiyas Ayele(PH.D.) 04/05/2024 8

 Issues in Developing a Pay Structure

Instructor: MIlkiyas Ayele(PH.D.) 04/05/2024 9

 Legal Requirements for Pay
Equal Employment Opportunity

Minimum wages

Pay for Overtime

Prevailing wages for Contractor

Instructor: MIlkiyas Ayele(PH.D.) 04/05/2024 10

 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

Instructor: MIlkiyas Ayele(PH.D.) 04/05/2024 11

 Legal Requirements for Pay:
Equal Employment Opportunity cont’d

Instructor: MIlkiyas Ayele(PH.D.) 04/05/2024 12

 Legal Requirements for Pay:
Minimum Wage
• Fair Labor Standards Act • Minimum wage- the lowest
(FLSA)- federal law that amount that employers may
establishes a minimum pay under the federal or
wage and requirements for state law, stated as an
overtime pay and child labor amount of pay per hour

Instructor: MIlkiyas Ayele(PH.D.) 04/05/2024 13

 Legal Requirements for Pay:
Overtime Pay
 The overtime rate under the FLSA is 1½ times the employee’s
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.
 Non exempt employees – employees covered by the FLSA
requirements for overtime pay

Instructor: MIlkiyas Ayele(PH.D.) 04/05/2024 14

 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
newspaper.

Instructor: MIlkiyas Ayele(PH.D.) 04/05/2024 15

 Economic Influences on
Pay
Product Markets
• The organization’s product
market includes
organizations that offer
competing goods and
services
• Organizations compete on
quality, service & price
• The cost of labor is a
significant part of an
organization’s costs
Instructor: MIlkiyas Ayele(PH.D.)
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,
04/05/2024 16
 Pay Level: Deciding What to Pay

Pay at the rate set by the

market

Pay at the rate above the

market

Pay at the rate below the

market
Instructor: MIlkiyas Ayele(PH.D.) 04/05/2024 17
 Gathering information about Market
Pay
• Bureau of Labor Statistics • Benchmarking – a
(BLS) procedure in which an
organization compares its
• Society for Human resource own practices against those
management of successful competitors
• Pay survey
• Worldatwork • Trade and industry group
• Professional groups

Instructor: MIlkiyas Ayele(PH.D.) 04/05/2024 18

 Employee judgements about pay
fairness
• Employees compare their pay and contributions against three
yardsticks:
– What they think employees in other organizations earn for
doing the same job.
– What they think other employees holding different jobs within
the organization earn for doing work at the same or different
levels.
– What they think other employees in the organization earn for
doing the same job as theirs.

Instructor: MIlkiyas Ayele(PH.D.) 04/05/2024 19

 Pay equity cont’d
• If employees conclude that they are under‐rewarded, they are
likely to make up the difference in one of three ways:
– They might put forth less effort (reducing their inputs).
– They might find a way to increase their outcomes (e.g.,
stealing).
– They might withdraw (by leaving the organization or refusing
to cooperate).
• Employees’ beliefs about fairness also influence their
willingness to accept transfer or promotions

Instructor: MIlkiyas Ayele(PH.D.) 04/05/2024 20

 Job structure: Relative Value of Jobs
Job Evaluation
• An administrative
procedure for measuring the
relative internal worth of
the organization’s jobs.
• Job evaluation will provide
an internally logical ranking
of all jobs which will form
the basis of the company’s
salary structure
Compensable Factors
• The characteristics of a job
that the organization values
and chooses to pay for.
– Experience
– Education
– Complex
– Working conditions
– Responsibility

Instructor: MIlkiyas Ayele(PH.D.) 04/05/2024 21

 Job Evaluation of Three Jobs
with Three Compensable factors

Instructor: MIlkiyas Ayele(PH.D.) 04/05/2024 22

 Principles For Job Evaluation
• Evaluating the job, not the job‐holder.
• Evaluating the present job, not the future job
• Job is being carried out in a fully acceptable and competent
manner.
• Process of evaluation is based on given facts in the job
descriptions.
• Evaluate the job based on the “primary responsibilities” and
ignore the “special personal-to-holder responsibilities

Instructor: MIlkiyas Ayele(PH.D.) 04/05/2024 23

 Methods of Job
Evaluation
• Qualitative Method (an example is the Job Classification
Method and the Job Comparison Method)
• Quantifying the Qualitative Method (an example is the Point
Method)
• Quantitative Method (an example is the Factor comparison
method

Instructor: MIlkiyas Ayele(PH.D.) 04/05/2024 24

 Job Ranking
• Reviewing job descriptions and listing jobs in order from
highest to lowest worth to company.
• Fairly hard to do in a large company.
• Need to create a framework to process the information found
in all the job descriptions.
• Largely subjective

Instructor: MIlkiyas Ayele(PH.D.) 04/05/2024 25

 Job Classification
• Developing broad descriptions for groups of jobs that are
similar in terms of tasks, duties, responsibilities and
qualifications.

• Wage range is attached to each classification reflecting relative

worth of the job in that classification.
– E.g., the federal government’s ‘prefix GS’
– Sometimes managers want to reclassify jobs to give a
particular employee a higher salary

Instructor: MIlkiyas Ayele(PH.D.) 04/05/2024 26

 Point Method
• Quantitative approach that uses a point value scheme resulting
in a score for each job.
• Begins with identifying a set of factors for which the company
is willing to pay — called “compensable factors” .
• Point manual contains description of each factor and what
each degree of the factor represents.
• Represents ranges of jobs in the company

Instructor: MIlkiyas Ayele(PH.D.) 04/05/2024 27

 Point Method cont’d
• Scores for these jobs enable company to compare other jobs to
the benchmark jobs and determine which should be paid more
or less.

• Job grades are created to reflect hierarchy of jobs within the

company

Instructor: MIlkiyas Ayele(PH.D.) 04/05/2024 28

 Establishing the Internal Value of jobs
• Recap:
– Select Compensable factors – Dimensions of work that the
organization values, that helps it pursue its strategy and achieve its
objectives.
– Assign factor weights – what is the relative importance of
each dimension of job performance? Weights enable companies to
allocate more weight to more important compensable factors than
other less important compensable factors.
– Establish degrees of factors present in job – scale the factors
to identify the different levels for each compensable factor.
Essentially, establishing anchors for different levels on a
Compensable factor
Instructor: MIlkiyas Ayele(PH.D.) 04/05/2024 29
 Example of Point Values

Instructor: MIlkiyas Ayele(PH.D.) 04/05/2024 30

 Example of Point Values cont’d

Instructor: MIlkiyas Ayele(PH.D.) 04/05/2024 31

 Factor Comparison

Instructor: MIlkiyas Ayele(PH.D.) 04/05/2024 32

 Pay Structure: Putting It All Together

Instructor: MIlkiyas Ayele(PH.D.) 04/05/2024 33

 Pay Rates
Organization obtains pay survey for its key
jobs

Pay
rates Pay policy line is established

Pay rates for non key jobs then determined

Instructor: MIlkiyas Ayele(PH.D.) 04/05/2024 34

 Conducting a Survey to assess external
•
market rate
Identify Relevant Labor Markets (Ex: relevant labor market
for secretary (local) likely to differ than for engineer
(regional))
• Identify Benchmark Jobs (Key Jobs)
– The contents are well‐known, relatively stable, and agreed
upon by the employees involved.
– The supply and demand for these jobs are relatively stable
and not subject to recent shifts
– They represent the entire job structure under study
– A majority of the workforce is employed in these jobs.
• Market Survey Data Collection

Instructor: MIlkiyas Ayele(PH.D.) 04/05/2024 35

 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

Instructor: MIlkiyas Ayele(PH.D.) 04/05/2024 36

 Salary Surveys
• Provides a systematic way to collect information about wages
in the external labor market.
• Companies can conduct their own surveys or purchase survey
data.
• Should look at companies in the same industry and other
industries that might be competing with you for employees.
• Should come from appropriate geographic labor market

Instructor: MIlkiyas Ayele(PH.D.) 04/05/2024 37

 Job Pricing
• Systematic process of assigning monetary rates to jobs so that
internal wages are aligned with external wages in the market
place.
• Begins with plotting results of salary survey for benchmark
jobs.
• Market line, also know as wage curve, is drawn to represent
relationship between job evaluation points and salaries paid
for jobs.
• Plot actual salaries paid for benchmark jobs and compare them
to results from market.

Instructor: MIlkiyas Ayele(PH.D.) 04/05/2024 38

 Pay Grade
• A pay grade is a horizontal group of different jobs that are
considered substantially equal for pay purposes
• Grades enhance an organization s 's ability to move people
among jobs within a grade with no change in pay.
• The objective is for all the jobs that are similar for pay
purposes to be placed within the same grade

Instructor: MIlkiyas Ayele(PH.D.) 04/05/2024 39

 Pay Ranges
• Red‐circle rate – pay at a • Pay ranges – a set of
rate that falls above the pay possible pay rates defined
range for the job. by a minimum, maximum,
and midpoint pay for
• Green‐circle rate – pay at a employees holding a
rate that falls below the job. particular job or a job within
a particular pay grade.

Instructor: MIlkiyas Ayele(PH.D.) 04/05/2024 40

 Pay Ranges
• Refer to the vertical dimension of the pay structure
• Each pay grade is associated with a pay range consisting of a
midpoint and a specific minimum and maximum
• Midpoints:
– Correspond to competitive pay policy where the pay policy
line crosses each pay grade
– Are the control points of the range
• Range spread – judgment about how the ranges support career
paths, promotions, etc. Typically range between 10 and 120%.
• Minimum of pay range = Midpoint / [1 + (1/2 range spread)]
• Maximum = Minimum + (range of spread *Minimum)
Instructor: MIlkiyas Ayele(PH.D.) 04/05/2024 41
 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

Instructor: MIlkiyas Ayele(PH.D.) 04/05/2024 42

 Alternatives to Job-based pay
Delayering
• Reducing the number of
levels in the organization’s
job structure
• More assignments are
combined into a single layer
• These broader groupings
are called broad bands
• More emphasis on acquiring
experiences, rather than
promotions.
Instructor: MIlkiyas Ayele(PH.D.)
Skill based Pay Systems
• Pay structure that sets pay
according to the employee’s
levels of skills 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 .
04/05/2024 43
 Pay Structure and Actual Pay
• Pay structure represents the organization’s 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.
• Comp-ratio is the common way to do this

Instructor: MIlkiyas Ayele(PH.D.) 04/05/2024 44

 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.
• Together, job structure and pay level establish a pay structure
policy

Instructor: MIlkiyas Ayele(PH.D.) 04/05/2024 45

 Summary
• 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 people’s outcome/input
ratios

Instructor: MIlkiyas Ayele(PH.D.) 04/05/2024 46

Instructor: MIlkiyas Ayele(PH.D.) 04/05/2024 47