Copyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

FUNDAMEN

TALS

OF

HUMAN RESOURCE

MANAGEMENT

5TH E

DITIO

N

BY R

.A. N

OE, J.

R. HOLL

ENBECK, B

.

GERHART, A

ND P.M. W

RIGHT

CHAPTER 1

1 ESTA

BLISHIN

G A

PAY

STRUCTU

RE

11-2

Need to Know

1. Kinds of decisions involved in establishing a pay structure.

2. Legal requirements for pay policies.

3. How economic forces influence decisions about pay.

4. How employees evaluate the fairness of a pay structure.

5. How organizations design pay structures related to jobs.

6. Alternatives to job-based pay.

7. How to ensure that pay is in line with the pay structure.

8. Issues related to paying employees serving in the military and paying executives.

1. Kinds of decisions involved in establishing a pay structure.

2. Legal requirements for pay policies.

3. How economic forces influence decisions about pay.

4. How employees evaluate the fairness of a pay structure.

5. How organizations design pay structures related to jobs.

6. Alternatives to job-based pay.

7. How to ensure that pay is in line with the pay structure.

8. Issues related to paying employees serving in the military and paying executives.

11-3

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.

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.

11-4

Introduction

• Pay is a powerful tool for meeting the organization’s goals and a major cost.

• 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.

• Pay is a powerful tool for meeting the organization’s goals and a major cost.

• 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.

11-5

Decisions About Pay

11-6

Figure 11.1: Issues in Developing a Pay Structure

11-7

Legal Requirements for Pay

11-8

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 work.

• 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 work.

11-9

•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.

11-10

Legal Requirements for Pay:Minimum Wage

Minimum wage – lowest amount that employers may pay under federal or state law, stated as an amount of pay per hour.

Minimum wage – 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.

Fair Labor Standards Act (FLSA) – federal law that establishes a minimum wage and requirements for overtime pay and child labor.

11-11

Minimum Wage

FLSA establishes a minimum wage of: $7.25 per hour as of July 2014

FLSA also permits a lower “training wage” paid to workers under age of 20 for up to 90 days approximately 85 % of minimum wage

FLSA establishes a minimum wage of: $7.25 per hour as of July 2014

FLSA also permits a lower “training wage” paid to workers under age of 20 for up to 90 days approximately 85 % of minimum wage

11-12

Legal Requirements for Pay:Overtime Pay Overtime rate under FLSA is 1½ times employee’s

usual hourly rate, including any bonuses, and piece-rate payments.

• Exempt employees – managers, outside salespeople, and other employees not covered by FLSA requirement for overtime pay.

• Nonexempt employees – employees covered by FLSA requirements for overtime pay.

Overtime rate under FLSA is 1½ times employee’s usual hourly rate, including any bonuses, and piece-rate payments.

• Exempt employees – managers, outside salespeople, and other employees not covered by FLSA requirement for overtime pay.

• Nonexempt employees – employees covered by FLSA requirements for overtime pay.

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Figure 11.2: Computing Overtime Pay

11-14

Overtime Pay

11-15

Legal Requirements for Pay:Child Labor

• Children aged 16 and 17 may not be employed in hazardous occupations defined by 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.

• Children aged 16 and 17 may not be employed in hazardous occupations defined by 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.

11-16

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.

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.

11-17

Economic Influences on Pay

•Organization’s product market includes organizations that offer competing goods and services.•Organizations compete on quality, service, and price.•Cost of labor is a significant part of an organization’s costs.

•Organization’s product market includes organizations that offer competing goods and services.•Organizations compete on quality, service, and price.•Cost of labor is a significant part of an organization’s costs.

•Organizations must compete to obtain human resources in labor markets.•Competing for labor establishes minimum an organization must pay to hire an employee for a particular job.

•Organizations must compete to obtain human resources in labor markets.•Competing for labor establishes minimum an organization must pay to hire an employee for a particular job.

Product Markets Labor Markets

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.

11-18

11-19

Occupational Employment and Wage Estimates

11-20

Pay Level: Deciding What to Pay

11-21

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

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)

• World at Work

• Bureau of Labor Statistics (BLS)

• Society for Human Resource Management (SHRM)

• World at Work

11-22

Employee Judgments About Pay FairnessEmployees 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.

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.

11-23

Figure 11.3: Opinions About Fairness – Pay Equity

11-24

Pay Equity

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.

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.

11-25

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-livingb) The companies are in different product markets

with different pay strategiesc) Mariah is a poor performerd) Mariah’s job is non-exempt

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-livingb) The companies are in different product markets

with different pay strategiesc) Mariah is a poor performerd) Mariah’s job is non-exempt

11-26

Job Structure: Relative Value of Jobs

Administrative procedure for measuring relative internal worth of the organization’s jobs.

Administrative procedure for measuring relative internal worth of the organization’s jobs.

5 characteristics of a job that the organization values and chooses to pay for.

1. Experience2. Education3. Complexity4. Working conditions5. Responsibility

5 characteristics of a job that the organization values and chooses to pay for.

1. Experience2. Education3. Complexity4. Working conditions5. Responsibility

Job Evaluation Compensable Factors

11-27

Table 11.1: Job Evaluation of Three Jobs with Three Compensable Factors

11-28

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 and pay structures more practical by defining key jobs.•Research for creating the pay structure is limited to key jobs that play a significant role in the organization.

Key Jobs – jobs that have relatively stable content and are common among many organizations.•Organizations can make the process of creating the job and pay structures more practical by defining key jobs.•Research for creating the pay structure is limited to key jobs that play a significant role in the organization.

11-29

Pay Structure: Putting It All Together

11-30

Pay Rates

11-31

Figure 11.4: Pay Policy Lines

Pay policy line –graphed line showing the mathematical relationship between job evaluation points and pay rate.

11-32

Figure 11.5: Sample Pay Grade Structure

Pay grades – sets of jobs having similar worth or content, grouped together to establish rates of pay.

11-33

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.

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 pay range for the job.Green-circle rate – pay at a rate that falls below pay range for the job.

Red-circle rate – pay at a rate that falls above pay range for the job.Green-circle rate – pay at a rate that falls below pay range for the job.

11-34

Test Your Knowledge

To correct a Red-circled employee, I would…a) Give them a raiseb) Demote themc) Give them a bonus, but no raised) Move them to a job with a higher pay range

To correct a Red-circled employee, I would…a) Give them a raiseb) Demote themc) Give them a bonus, but no raised) Move them to a job with a higher pay range

11-35

Pay Differentials

Pay differential – adjustment to a pay rate to reflect differences in working conditions or labor markets.

• Many businesses in the U.S. 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.

Pay differential – adjustment to a pay rate to reflect differences in working conditions or labor markets.

• Many businesses in the U.S. 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.

Night hours are less desirable for most workers so some companies pay a differential for night work to compensate them.

Night hours are less desirable for most workers so some companies pay a differential for night work to compensate them.

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11-37

Alternatives to Job-Based Pay

• Reducing number of levels in organization’s job structure.

• More assignments are combined into a single layer called broad bands.

• More emphasis on acquiring experience, rather than promotions.

• Reducing number of levels in organization’s job structure.

• More assignments are combined into a single layer called broad bands.

• More emphasis on acquiring experience, rather than promotions.

• Pay structures that set pay according to employees’ levels of skill or knowledge and what they are capable of doing.

• Appropriate where changing technology requires employees to continually widen and deepen their knowledge.

• Pay structures that set pay according to employees’ levels of skill or knowledge and what they are capable of doing.

• Appropriate where changing technology requires employees to continually widen and deepen their knowledge.

Delayering Skill-Based Pay Systems

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Figure 11.6: IBM’s Job Evaluation Approach

11-39

Pay Structure and Actual Pay

• Pay structure represents organization’s policy.• However, what the organization actually does may

be different.• HR should compare actual pay to pay structure,

making sure that policies and practices match.• Compa-ratio is the common way to do this.

• Pay structure represents organization’s policy.• However, what the organization actually does may

be different.• HR should compare actual pay to 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 midpoint of pay range.• If average equals midpoint, CR is 1.• If CR is greater than 1, average pay is above midpoint.• IF CR is less than 1, average pay is below midpoint.

Compa-Ratio (CR) – the ratio of average pay to midpoint of pay range.• If average equals midpoint, CR is 1.• If CR is greater than 1, average pay is above midpoint.• IF CR is less than 1, average pay is below midpoint.

11-41

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?

Uniformed Services Employment and Reemployment Rights Act (USERRA)

Pay for Executives Based on equity theory, how does executive

compensation affect employees?

Pay During Military Duty How should companies handle employees who

are called for active duty in the military for extended time periods?

Uniformed Services Employment and Reemployment Rights Act (USERRA)

Pay for Executives Based on equity theory, how does executive

compensation affect employees?

11-42

Figure 11.8: Average CEO Pay at 100 Large U.S. Companies

11-43

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.

• 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.

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Summary• To meet the standard of equal employment

opportunity, employers must provide equal pay for equal work, regardless of an employee’s age, race, sex, or other protected status.

• Differences in pay must relate to factors such as a person’s qualifications or market levels of pay.

• Under the Fair Labor Standards Act (FLSA):• Employer must pay at least minimum wage

established by law.• Overtime pay for hours worked beyond 40 in each

week must be paid.

• To meet the standard of equal employment opportunity, employers must provide equal pay for equal work, regardless of an employee’s age, race, sex, or other protected status.

• Differences in pay must relate to factors such as a person’s qualifications or market levels of pay.

• Under the Fair Labor Standards Act (FLSA):• Employer must pay at least minimum wage

established by law.• Overtime pay for hours worked beyond 40 in each

week must be paid.

11-45

Summary

To remain competitive, employers must meet product and labor market demands.

• Limit costs as much as possible.• Pay at least 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.

To remain competitive, employers must meet product and labor market demands.

• Limit costs as much as possible.• Pay at least 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.

11-46

Summary

• 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.

• 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.

11-47

Summary

• Executive pay has drawn public scrutiny because top executive pay is much higher than average workers’ pay.

• Employees’ opinions about equity of executive pay can have a large effect on the organization’s performance.

• Executive pay has drawn public scrutiny because top executive pay is much higher than average workers’ pay.

• Employees’ opinions about equity of executive pay can have a large effect on the organization’s performance.