Human Resource Management and Development "Pay Structure Decisions" -Equity theory and Fairness -Developing Pay Levels - Current Challenges

1. PAY STRUCTURE DECISIONS

2. OBJECTIVES:
•Understanding the equity theory and fairness
•To know developing pay levels
•To know the importance of process: Participation
and Communication
•To know what are current challenges
•To identify government regulation of employee
compensation

3. FROM THE EMPLOYER’S
POINT OF VIEW
•Pay is critical in attaining strategic
goals.
•Pay has a major impact on
employee attitudes and behaviors.
•Employee compensation is
typically a significant organizational
cost.
FROM THE EMPLOYEE’S
POINT OF VIEW
•Policies having to do with wages,
salaries and other earning affect
their overall income and thus their
standard of living.
•Both level of pay and fairness
compared with other’s pay are
important.

4. DEVELOPING PAY STRUCTURE

5. •WHAT IS PAY STRUCTURE?
The relative pay of different jobs (job structure) and
how much they are paid (pay level).
•WHAT IS PAY LEVEL?
The average pay, including wages, salaries and bonuses
of jobs in an organization.
•WHAT IS JOB STRUCTURE?
The relative pay of jobs in an organization.

6. TWO TYPES OF EMPLOYEE SOCIAL COMPARISON OF PAY,
RELEVANT IN MAKING PAY LEVEL AND STRUCTURE DECISIONS.
•External Equity Pay Comparison
- Focus on what employee in other organization are paid for doing
the same general job.
- Administration tool-market pay survey.
•Internal Equity Pay Comparisons
- Focus on what employees within the same organization, but
indifferent jobs are paid.
-Job evaluation is the administrative tool.

7. Equity Theory and Fairness
Two types of employee social comparisons of pay are
especially relevant in making pay-level and job structure
decisions:
Pay Structure
Decision Area
Pay Level
Job Structure
Administrative
Tool
Market pay surveys
Job evaluation
Focus of
Employee Pay
Comparisons
External equity
Internal equity
Consequences of
Equity Perceptions
External employee
movement, labor
costs, employee
Attitudes
Internal employee
movement, cooperation,
employee attitudes

8. DEVELOPING PAY LEVELS
PRODUCT MARKET COMPETITION
Organizations should compete efficiently in the product market. It
must sell their goods and services at a quality and price that will
bring a return on investment. Price is the most important dimensions
among other dimensions like quality, service etc.
LABOR MARKET COMPETITION
This is the amount an organization must pay to compete against
other companies that hire similar employees. It includes product
markets that hire similar types of employees.

9. EMPLOYEE AS A RESOURCE
Employee is a resource that company has to invest and from it expect
valuable returns.
EFFICIENCY WAGE THEORY
It states that wages influence worker productivity. It explains the
circumstances in which benefits of higher pay outweigh the higher costs.
MARKET PAY SURVEYS
To compete for talent, organizations use benchmarking. Benchmarking is a
procedure in which it compares its own practices against those of the
competition.
RATE RANGES
-Different employees in the same job may have different pay rates.
-It permits a company to recognize differences in employees performance,
seniority, training. Example: blue-collar jobs may have single rate of pay
for all employees within the job.
KEY JOBS
Are benchmarking jobs that have relatively stable content and are
common to many organizations so that market-pay survey data can be
obtained.
DEVELOPING PAY LEVELS

10. Job structure
It is the relative worth of various jobs in the organization, based on internal
comparisons.
Job structure decisions are made through the following:
Job Evaluation
Is composed of compensable factors and a weighing scheme based on the
importance of each compensable factor to the organization. Compensable
factors are the characteristics of jobs that an organization values and
chooses to pay for.
Point Factor System
After generating scores for each compensable factor on each job, job
evaluators often apply a weighing scheme to account for the differing
importance of the compensable factors to the organizations.
DEVELOPING PAY LEVELS

11. DEVELOPING A PAY STRUCTURE
Use of three pay setting approaches:
Market survey data
An approach with the greatest emphasis on external
comparisons (market survey data) is achieved by directly
basing pay on market surveys that cover as many key
jobs as possible.
Pay policy line
Combining information from external and internal
comparisons to derive pay rates for both key and non-key
jobs.
Pay grades
This is to group jobs into a smaller number of pay classes
or pay grades. Each job within a grade would have the
same rate range.
DEVELOPING PAY LEVELS

12. CONFLICT BETWEEN MARKET PAY SURVEYS AND JOB EVALUATION
The relative worth of jobs is quite similar whether based on market pay
survey or job evaluation.
However some inconsistence arise. These are usually indicated by jobs
whose average survey pay is significantly below or above the pay policy line.
HOW THIS CONFLICT CAN BE RESOLVED
An organization can resolve to use only the internal control
An organization can formulate its own strategy by choosing to be a pay
leader.
There are no right answers. An organization should consider its strategy and
what jobs and/or functions will be critical for success.
MONITORING COMPENSATION COSTS
A way to examine the difference between policy and practice is to compute a
compensation, which is an index of correspondence for actual and intended
pay.
DEVELOPING PAY LEVELS

13. The Importance of Process
Participation
 Participation should involve
both those who will manage
the process and those who will
be affected by it.
 Participation includes
recommending, designing, and
communicating a pay program.
 Typically, pay-level decisions
are only made by top
management.
Communication
 The effect of communication is
likely to be an impact on
employees' perceptions of
equity.
 Managers must be prepared to
explain to employees why the
pay structure is designed the
way it is and to judge whether
changes to the structure
should be made.

14. Problems with job-based pay structure.
May encourage bureaucracy
Bureaucracy may encourage lack of flexibility and a lack of initiative on
the part of employees.
Hierarchical nature reinforces a top down decision making.
Structure’s hierarchical nature reinforces a top down decision making
and information flow as well as status differentials-prevent taking
advantages of skills and knowledge of closet to production.
Becomes a barrier to change
Bureaucracy becomes a barrier to change because wholesale change to
job descriptions involves a lot to time and cost.
It may not reward desired behaviors.
Encourages promotion seeking behavior
Emphasis on job levels and status differentials encourages promotion-
seeking behavior but discourage lateral employee movement.
CURRENT CHALLENGES

15. RESPONSES TO PROBLEM WITH JOB BASED PAY STRUCTURE
Delayering and Banding
Reducing number of job levels to achieve more flexibility in job
assignments and in assigning merit increases.
Paying the person: pay for skill, knowledge and competency
Moving away from linking pay to jobs and towards building
structures based on individual characteristics such as skill
and knowledge.
Skill –based pay systems seems to fit well with the increased
breadth and depth of skill that changing technology
continues to bring.
CURRENT CHALLENGES

16. Equal Employment Opportunity
EEO regulation prohibits sex, religion, nation of origin and race based
differences in employment outcomes such as pay unless justified by
business necessity. Organizations must deal with changing labor
market and demographic realities.
NEW DEVELOPMENTS IN DESIGN OF PAY STRUCTURES
With globalization there is need for organizations to be competitive both
in labor costs and productivity. The nature of pay structures is
undergoing a fundamental change. One such change is the move to
power pay levels to reduce labor costs and bureaucracy.
Some employers are shifting from paying employees for narrow jobs to
giving them broader responsibilities and paying them to learn the
necessary skills.
GOVERNMENT REGULATION OF
EMPLOYEE COMPENSATION