Human Resource Management: Gaining a Competitive Advantage Chapter 11 Pay Structure Decisions McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc All rights reserved Developing Pay Levels  Pay structure - relative pay of different jobs (job structure) & how much they are paid (pay level)  Pay level - average pay, including wages, salaries & bonuses  Job structure - relative pay of jobs (range of pay often expressed by salary grades)  Pay policies are attached to jobs, not individuals 11-2 Equity Theory & Fairness Pay Structure Concepts & Consequences 11-3 Developing Pay Levels-Market Pressures Competitive Market Challenges in Pay Decisions: Product-market competition-challenge to sell goods and services at a quantity and price that will bring a return on investment Labor-market competition-amount an organization must pay to compete against other organizations that hire similar employees  Unless higher labor costs are offset by higher worker productivity or desirable product features that allow a higher product price, it will be difficult to sustain relatively high costs in a competitive product market 11-4 Components of Labor Costs 11-5 Employees as a Resource  A philosophy that considers employees to be an investment that will yield valuable returns  Controlling costs through noncompetitive pay can result in low employee productivity and quality  Pay policies and programs are important HR tools for encouraging desired employee behaviors and discouraging undesired behaviors 11-6 Deciding What to Pay  Deciding pay levels is discretionary and is based on a broad range  The organization has to decide whether to pay at, below, or above the market average  Efficiency wage theory- wages influence worker productivity 11-7 Market Pay Surveys  Benchmarking- procedure by which an organization compares its own practices against the competition  issues to consider before using pay surveys: Which employers should be included in the survey? Which jobs are included in the survey? If multiple surveys are used, how are all rates of pay weighted and combined? 11-8 Product Market VS Labor Market Comparisons 11-9 Rate Ranges, Key & Non-key Jobs  Rate ranges- different employees in same job that may have different pay rates  Key jobs- benchmark jobs that have relatively stable content and are common to many organizations so that market-pay survey data can be obtained  Non-key jobs are unique to organizations and cannot be directly valued or compared through the use of market surveys 11-10 Developing a Job Structure  Job structure- relative worth of various jobs in based on internal comparisons  Job evaluation- administrative procedure used to measure internal job worth  The evaluation process is composed of compensable factors, which are characteristics of jobs that an organization values and chooses to pay  Job evaluators often apply a weighting scheme to account for differing importance of compensable factors to the organization 11-11 Developing a Pay Structure  Pay-setting Approaches: Market Survey Approach - 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 Pay Grades- Grouping jobs of similar worth or content together for pay administration purposes  Range spread -distance between minimum & maximum amounts in a pay grade 11-12 Conflicts – Market Pay Surveys & Job Evaluation  Internal data drives up labor costs and create productmarket problems  If external market data are emphasized and a job is paid lower internally, comparisons that employees make internally would result in dissatisfaction  An organization should consider its strategy, what jobs and/or functions will be critical for success and marketcompetitive pressures 11-13 Monitoring Compensation Costs To examine the difference between policy and practice, compute a compa-ratio, which is an index of the correspondence between actual and intended pay 11-14 Globalization, Geographic Region & Pay Structure  Pay structures differ across countries in level & relative worth of jobs  Expatriate pay and benefits depend on assignment’s nature and length 11-15 Current Challenges  Job-based pay structures can create problems:  reinforces top-down decision making as well as status differentials  bureaucracy, time and cost required to generate and update job descriptions can become a barrier to change  job-based structure may not reward desired behaviors, where the knowledge, skills, and abilities needed yesterday may not be helpful today and tomorrow  system encourages promotion-seeking behavior, but discourages lateral movement 11-16 Responses Job-Based Pay Structures 11-17 Can the U.S Labor Force Compete?  U.S labor cost are high compared to newly industrialized and developing countries  Factors Shifting Production to Other Countries: 11-18 Executive Pay  Executive pay has been given widespread attention in the press  Executive pay accounts for a small proportion of labor costs  Executives have a disproportionate ability to influence organizational performance  Executives help set culture, so if their pay seems unrelated to organizational performance, employees may not understand why their pay should be at risk depending on the organization's performance 11-19 CEO Remuneration in U.S Dollars 11-20 Reasons for Executive Pay Criticisms  Some executives are very highly paid  U.S executives - best paid in the world  Ratio of executive pay to average worker pay creates a "trust gap" - workers not trust executives' intentions and resent their pay 11-21 EEO- Employment Compensation  among executives women appear to have lower pay than men  women comprised 47% of all employees in 2011 11-22 Equal Employment Opportunity  (EEO) regulations prohibits sex & race-based differences in employment outcomes such as pay, unless justified by business necessity  Trends Related to EEO: increasing participation of women and    nonwhites in the labor force proportion of wages in 2010: women compared to men was 81% black to white was 80% Hispanic-Latino to white earning was 70% 11-23 Comparable Worth  Comparable worth (or pay equity) is a public policy that advocates remedies for any undervaluation of women's jobs  Based on the idea that individuals should obtain equal pay, not just for jobs of equal content, but for jobs of equal value or worth  Courts have consistently ruled that using the going market rates of pay is acceptable defense in comparable worth litigation suits 11-24 Wage Laws  The Fair Labor Standards Act (FLSA) of 1938 established a minimum wage and overtime pay rate  Minimum wage is $7.25 an hour It is the lowest amount that employers are legally allowed to pay  Exempt –those employees (executive, professional, administrative and outside sales) not covered by the FLSA and not eligible for overtime pay  Davis-Bacon Act and Walsh-Healy Public Contracts Act require federal contractors to pay employees no less than area’s prevailing wages 11-25 ... organization 11- 11 Developing a Pay Structure  Pay-setting Approaches: Market Survey Approach - greatest emphasis is on external comparisons It bases pay on market surveys that cover as many... comparable worth litigation suits 11- 24 Wage Laws  The Fair Labor Standards Act (FLSA) of 1938 established a minimum wage and overtime pay rate  Minimum wage is $7.25 an hour It is the lowest amount... for pay administration purposes  Range spread -distance between minimum & maximum amounts in a pay grade 11- 12 Conflicts – Market Pay Surveys & Job Evaluation  Internal data drives up labor