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10

Compensation:
An Overview

McGraw-Hill/Irwin
Human Resource Management, 10/e © 2007 The McGraw-Hill Companies, Inc. All rights reserved.
10-3
Compensation
The HRM function that deals with reward
individuals receive in exchange for performing tasks
The major cost of doing business for many
organizations
The chief reason why most individuals seek
employment
In 2004, U.S. employers paid an average of $22.22
per hour worked
$15.62 (73%) was straight-time wages and salaries
Benefits accounted for $6.60 (7%)
10-4
Compensation
Financial compensation is either direct or indirect
Direct compensation consists of wages, salaries,
bonuses, or commissions
Indirect compensation includes all financial rewards
not included in direct compensation, such as
insurance, vacation, and childcare services (benefits)
Non-financial rewards, such as praise, self-esteem,
and recognition, affect employee:
Motivation
Productivity
Satisfaction
10-5
Compensation
Toemployees, pay is a necessity of life
It also indicates his or her worth to an organization

Pay often equals 50 percent or more of cash flow

It attracts and motivates employees

Compensation is a significant component of the

economy
For the past 30 years, salaries and wages have
equaled 60 percent of the gross national product of
the U.S. and Canada
10-6
Objective of Compensation

The objective of compensation is to create a system

of rewards that is equitable to both the employer and
the employee
The desired outcome is an employee who is attracted
to the work and motivated to do a good job
10-7
Objective of Compensation
Patton suggests that to be effective compensation
should be:
Adequate
Equitable
Balanced
Cost-effective
Secure
Incentive-providing
Acceptable to the employee
10-8
External Influences on Compensation
Externalinfluences include:
The labor market
The economy
The government
Unions
10-9
The Labor Market and Compensation
In times of full employment, wages may have to be
higher
Pay may also be higher if few skilled employees are
in the job market
In depressions, pay can be lower

Differential pay levels:

Different skills seek different pay levels
There may also be differences between government
and private employees, exempt and nonexempt
employees, and nations
10-10
The Labor Market and Compensation
Styles of managing and rewarding are changing in
response to diversity
Diversity is more than demographics; it means
differing value, lifestyles, body types, and so on
Diversity refers to any mixture of items characterized
by differences and similarities
The easiest relationship to imagine between rewards
and diversity has to do with benefits
Changing demographics require employers to offer
more, and more varied, benefits to motivate, satisfy,
and retain employees
10-11
The Labor Market and Compensation
The increasing level of formal education will also
impact reward systems
In 2005, over 50 percent of all adult Americans have
some college education
50 percent of all college students are over 25
More than half of all college graduates are women

This increasingly educated population will not

hesitate to ask for changes in pay and benefits
10-12
The Labor Market and Compensation
Generation X has the higher percentage of members
who have finished high school and college
They value financial security, power, and status
However, they don’t always bring applicable job
skills to the organization
Designing a reward system that would motivate them
is in conflict with the value that they actually bring
Two other types present compensation challenges:
Technological experts (nerds)
Temporary or contingent workers
10-13
An International Labor Force
Compensation specialists must base their
compensation plan on a competitive, global
marketplace
Global wage differentials verging on the extreme
Moving American employees to foreign locations
Employing local (foreign) managers and workers
Moving foreign workers to the U.S.
Offshoring jobs, projects, and work
10-14
Economic Conditions and Compensation
The economic conditions of the industry and
competitiveness affect an organization’s ability to
pay high wages
The more competitive the situation,
the less able the organization is to
pay higher wages
If a firm is very productive,
it can pay higher wages
10-15
Economic Conditions and Compensation
Productivity can be increased through:
Advanced technology
More efficient operating methods
A harder-working and more talented workforce
A combination of these

A productivity index used to determine a general

level of wages:
The Bureau of Labor Statistics’ “Output per Man-
hour in Manufacturing”
10-16
Economic Conditions and Compensation
For 70 years, productivity increased at 3 % per year
The percentage increase in average weekly earnings
in the U.S. is closely related to:
The percentage change in productivity
Plus the percentage change in the consumer price
index
10-17
Government Influences & Compensation

The government directly affects compensation

through wage controls and guidelines
Pay raises may be prohibited at certain times
Laws establish minimum wage rates and work hours
Discrimination is prohibited
10-18
Wage Controls and Guidelines
Wage freezes and guidelines were imposed several
times in the past
Wage freezes are government orders that forbid wage
increases
Wage controls limit the size of wage increases
Wage guidelines are voluntary wage controls
10-19
Wage Controls and Guidelines
Since 1942, three acts were passed to stabilize the
economy:
Wage Stabilization Act (1942): imposed to slow
inflation during World War II, it set “going rates” of
pay for key occupations
Defense Production Act (1950): a similar wage freeze
imposed during the Korean War
Economic Stabilization Act (1970): granted the
president the authority to impose wage and price
controls in times of national necessity
10-20
Wage Controls and Guidelines
The use of wage freezes, controls, and guidelines is
controversial
Advocates believe that such restrictions reduce
inflation
Critics argue that it disrupts resource allocation and
the market process
10-21
Wage and Hour Regulations
The Fair Labor Standards Act (FLSA) of 1938 is the
basic pay regulation act
It was passed to counteract the abuses encountered by
production workers in the manufacturing sector
There are four provisions:
Minimum wage
Overtime
Child labor
The Equal Pay Act of 1963
10-22
Wage and Hour Regulations
FLSA covers businesses with two or more employees
engaged in:
About 92
Interstate commerce percent of
nonsupervisory
The production of goods for
wage earners
interstate commerce are covered
The handling, selling, or working on
goods or materials that have been moved
in, or produced for, interstate commerce
FLSA is administered by the Dept. of Labor, which
also acts as the enforcement agency
10-23
FLSA Exemption Guidelines
Exempt from minimum wage and overtime:
Executive, administrative, and professional
employees, and outside sales persons
Employees at seasonal amusement or recreational
establishments
Employees of certain small newspapers
Switchboard operators of small telephone companies
Seamen employed on foreign vessels
Employees engaged in fishing operations
Farm workers employed on small farms
Casual baby-sitters, companions to the elderly/infirm
10-24
FLSA Exemption Guidelines
Exempt from overtime pay requirements only:
Commissioned employees of retail and
service companies
Auto, truck, trailer, farm implement,
boat or aircraft workers
Parts clerks and mechanics servicing autos, trucks, or
farm implements who sell to the ultimate purchasers
Railroad and air carrier employees, taxi drivers,
certain employees of motor carriers, seamen on
American vessels, and local delivery employees paid
on trip rate plans
10-25
FLSA Exemption Guidelines
Exempt from overtime pay requirements only:
Announcers, news editors, and chief engineers of
certain non-metropolitan broadcasting stations
Domestic service workers who reside in their
employer’s residence
Employees of motion picture theaters
Farm workers
10-26
Minimum Wage
The minimum wage provision of FLSA establishes
an income floor for low-paying jobs
The provision has been amended several times since
1938, when the minimum wage was 25 cents per hour
The latest change was to $5.15 per hour in
September, 1997
The typical minimum-wage worker is female, over
age 25, and employed part-time
3 in 5 minimum-wage workers are women
One-third are teenagers on their first job
10-27
Minimum Wage
Employees under 20 years of age may be paid an
“opportunity wage” of 1/3 of the minimum wage
during the first 90 consecutive days of employment
Certain fulltime students, student learners,
apprentices, and disabled employees may be paid less
than minimum wage under special certificates issued
by the Dept. of Labor
Workers who receive tips must be paid at least $2.13
per hour
10-28
Minimum Wage
The minimum wage is a controversial provision
Classical economists contend that a rise in the
minimum wage is offset by an immediate rise in
unemployment
Others hold that the minimum wage harmlessly raises
the wages of the lowest-paid workers
A change in minimum wage causes a 5.3 percent
increase in wage costs for employees earning less
than the new minimum
Retailing, food, and lodging are the businesses most
likely to be affected
10-29
Overtime Pay
Virtually all hourly (nonexempt) employees must
receive overtime compensation for working:
More than 40 hours per week
More than 8 hours per day
The law requires “time and a half”

Salaried employees do not receive overtime pay

A salaried employee is one who regularly receives a
predetermined amount constituting all or part of
her/her compensation
10-30
Overtime Pay
Distinguishing between exempt and nonexempt
workers is not always easy
Exempt employees are in managerial, administrative,
or professional positions and are paid on a salaried
basis
If federal and state law conflict, the one that is the
most generous to the employee applies
Violation of the overtime provision can result in
having to pay for uncompensated overtime, civil
penalties, and liquidated damages
10-31
Child Labor
Child labor is any economic activity performed by
an individual under the age of 15
This provision:
Forbids employing minors under 14 in
nonagricultural jobs
Restricts hours of work
Limits occupations for 14- and 15-year-olds
Forbids 16- and 17-year-olds from being employed
in hazardous occupations
10-32
Equal Pay Act of 1963 (EPA)
EPA is an amendment to the FLSA
Its goal is to guarantee that women holding the same
jobs as men will be treated with respect and fairly
compensated regarding all rewards of work
Comparisons cannot be made between individuals
holding the same job at different companies
Employers may pay workers of one gender more than
another on the basis of any factor other than sex
The gender pay gap in 2001 averaged 26 percent
The average woman made 74 percent of the earnings
of the average white male
10-33
Equal Pay Act of 1963 (EPA)
Four elements establish the equality of positions:
Skill
Effort
Responsibility
Working conditions

A difference in wages includes additional forms of

compensation, such as:
Vacations and holiday pay, leave of absence,
overtime, lodging, food, and reimbursement for
clothing or other expenses
10-34
Equal Pay Act of 1963 (EPA)

When filing a claim under EPA, the plaintiff must

prove that one man or one woman is making more
for doing the same job
The doctrine of comparable worth attempts to prove
that employers systematically discriminate by paying
women less than their work is intrinsically worth
10-35
Equal Pay Act of 1963 (EPA)
Comparable worth means different things to
different people
Comparable worth relates to jobs that are dissimilar
in their content, but of equal value to the organization
and society (nurse and plumber)
Women appear to be concentrated in lower-paying,
predominantly female jobs
When men take “women’s work” they are at the top
of the pay scale there too
10-36
Equal Pay Act of 1963 (EPA)
The notion of value is important in examining the
differentials between men and women
Water is more valuable than diamonds, but diamonds
cost more
This is because the supply of water is abundant
relative to demand
When secretaries, librarians, and cashiers are in short
supply, employers will have to pay them more
To close the gap between women’s and men’s pay,
women’s real wages must rise faster than men’s
10-37
Equal Pay Act of 1963 (EPA)
The Walsh-Healy Act of 1936
Requires firms doing business with the federal
government to pay wages at least equal to the industry
minimum
It parallels the Fair Labor Standards Act on child
labor, and requires time-and-a-half for any work
performed after eight hours a day
Certain industries are exempt
10-38
Equal Pay Act of 1963 (EPA)
The Davis-Bacon Act of 1931
Requires the payment of minimum prevailing wages
of the locality to workers engaged in federally
sponsored public works
The McNamara-O’Hara Service Contract Act
Requires employers who have contracts with the
federal government of $2,500 or more per year, or
who provide services to federal agencies as
contractors or subcontractors, to pay prevailing wages
and fringe benefits to their employees
10-39
Equal Pay Act of 1963 (EPA)
Civil Rights Act of 1964 and the Age Discrimination
Act of 1967
Ensure that people of similar ability, seniority, and
background receive the same pay for the same work
The Federal Wage Garnishment Act of 1970
Limits what can be deducted from pay to reduce
debts
Prohibits an employer from firing an employee if
he/she goes into debt only once and has pay garnished
Employers may deduct whatever is required for
alimony, child support, taxes, or bankruptcy court
rulings
10-40
Other Government Influences
The government requires employers to deduct funds
from employees’ wages for:
Federal income taxes
Social security taxes
State and local income taxes

Other ways government influences compensation:

If the government is the employer, it can legislate pay
levels by setting statutory rates
The government may create jobs for certain
categories of workers, thus reducing the supply of
workers and affecting pay rates
10-41
Union Influences
Unions exert influence on compensation programs
Unionized workers work longer hours and make more
than non-unionized workers
Unions tend to be pacesetters in demands for pay,
benefits, and improved working conditions
There is supportive interaction between unions and
the government
The Davis-Bacon Act requires employers with
government contracts to pay prevailing wages
The Wagner Act makes it illegal to change wage rates
during a union organizing campaign
10-42
Union Influences
The union is more likely to increase the
compensation of its members when:
It is financially and competitively strong
It has the finances to support a strike
It has the support of other unions
Employment is low
The economy is strong
10-43
Union Influences
Unions prefer fixed pay for each job category, or
rates that reflect seniority rather than merit increases
Unions press for time pay rather than merit pay when
performance is tied to technology
Although union membership in the U.S. has
declined, the influence on wages cannot be discounted
10-44
Internal Influences on Compensation

Internal factors that affect pay include:

The size and age of the organization
The labor budget
Who makes pay decisions for the organization
10-45
The Labor Budget
The labor budget sets the amount of money available
for annual employee compensation
The budget does not normally state the amount of
money allocated to each employee
Rather, it states how much is available for the unit or
division
Discretion in allocating pay is left to the department
heads and supervisors
10-46
Who Makes Compensation Decisions
Compensation decisions are influenced from the top
to the bottom of the organization
In publicly held organizations, stockholders and the
board greatly influence pay, especially at the top of
the organization
Top management determines:
How much of the firm’s budget is earmarked for pay
The form of pay to be used (time based vs. incentive)
Other pay policies

As the firm grows, compensation specialists,

general managers, and job incumbents may also have input
10-47
Who Makes Compensation Decisions
Both large and small organizations now involve
more individuals in determining pay
At Whirlpool Corporation, top managers and
compensation specialists jointly establish financial
and operating goals
Com-Com Industries allows workers to set
compensation rates through a volunteer committee
of 10 to 15 members
10-48
Pay and Motivation

Motivation is the set of attitudes and values that

predisposes a person to act in a specific, goal-
directed manner
This behavior has two components:
The direction of behavior
The strength of the behavior
10-49
Pay and Motivation
In motivating employees, most of the focus has
been on money
From Aristotle through Frederick
W. Taylor, philosophers, scientists,
industrial engineers, and managers
believed money was the only motivator
Beginning in the 1930s, sociologists, psychologists,
and human relations theorists proposed that cognitive
and acognitive processes affected the relationship
between pay and motivation
10-50
Pay and Motivation
Needs theorists say that all human behavior stems
from needs or drives, which are biological in origin
Maslow’s hierarchy of needs takes the form of a
pyramid
Physiological
Safety
Social
Esteem
Self-actualization
Lower-order needs motivate employees to earn
money
10-51
Pay and Motivation
Herzberg’s two-factor theory of motivation tries to
find out what people want from work
Dissatisfiers (hygiene factors) and satisfiers
(motivators) influence work behavior
Hygiene factors include pay, working conditions,
supervision, and so on; they do not motivate
Motivators include achievement, recognition,
responsibility, advancement, growth, and the work
itself
Motivators become operational only when
dissatisfiers are removed
10-52
Pay and Motivation
Herzberg concludes that changing pay will not
motivate
However, dissatisfaction results if:
Pay is inadequate,
Of the wrong type, or
Is mismatched to employees’ needs
10-53
Pay and Motivation
Social comparison theories suggest that motivation is
influenced by how fairly an employee thinks he/she is
being paid
The key to understanding social comparison theories
is the idea of perceived fairness
Does the employee think he/she is being paid fairly?
10-54
Pay and Motivation
Per Tolman and Vroom’s expectancy theory, motivation
depends on the expectation that effort will produce
performance
Various outcomes have different levels of desirability
(valence)
A direct application of expectancy theory to
compensation is the idea of earning days of
vacation or sick leave
By becoming senior employees, other desired
outcomes are achieved, such as annual raises
This concept is the instrumentality of goal-directed behavior
10-55
Pay and Motivation
According to reinforcement, behavior modification,
and other social-behaviorist theories:
Motivation results from the direct interaction of the
individual with the external environment
These theories were developed by Pavlov, Watson,
Thorndike, and Skinner
They hold that if pay, benefits, services, or rewards
are received after performing certain tasks, then the
desired behavior will be repeated
10-56
Pay and Motivation

Because different things motivate different individuals,

and theorists don’t agree on what motivates, motivation
is a complicated and difficult, if not impossible, task
10-57
Pay and Employees’ Satisfaction
Pay satisfaction refers to an employee’s liking for, or
dislike of, the compensation package
There is no proof that worker satisfaction leads to
increased productivity
The clearest indication of satisfaction may be patterns
of absenteeism and turnover
According to Edward Lawler:
If employees believe that the amount they receive is
equal to what others receive, pay satisfaction results
The feedback loop between perception, fairness, and
work behavior leads to fluctuations in output
10-58
Pay and Employees’ Satisfaction
Research by Simons found that the pay components
that lead to satisfaction differ by type of worker:
Industrial workers prefer interesting jobs more than
high pay
Hotel workers prefer high wages above all else

Other predictors of pay satisfaction include:

Pay desired versus pay earned
Feelings of being entitled or deserving
Relative deprivation
10-59
Pay and Employees’ Satisfaction
Relative deprivation theory suggests that pay
dissatisfaction is a function of six judgments:
A discrepancy between what employees want and
what they receive
A discrepancy between a comparison Herzberg
concluded that
outcome and what they get pay simply
Past expectations of receiving more prevents workers
from being
rewards demotivated
Low expectations for the future
A feeling of deserving or being entitled to more
Not feeling personally responsible for poor results
10-60
Pay and Employees’ Productivity
In addition to motivation, high performance
requires:
Ability
Adequate equipment
Good physical working conditions
Effective leadership and management
Health
Safety

If pay is tied to performance, the employee produces

a higher quality and quantity of work
10-61
Pay and Employees’ Productivity
Incentive wages were supported by early economists
on the basis of the “hungry man” theory
Adam Smith (1776) modified this to the “economic
man” theory
Instead of physiological needs, money became the
motivator for work
The more money a person made, the harder he/she
would work
This is the basis of the modern wage incentive plan
10-62
Pay and Employees’ Productivity
Frederick W. Taylor built on Smith’s theory
He used managers to design jobs properly and then
linked pay directly to measurable productivity
Workers who met production standards were paid
125 percent of base pay
Those who failed to meet standards were paid a
very low wage
Some argue that tying pay to performance destroys
the intrinsic rewards a person gets from doing the
job well
The importance of money varies from person to
person
10-63
Pay and Employees’ Productivity
If an organizations has an incentive pay system but
pays for seniority, the motivation of pay is lost
The key is be be sure that compensation systems are
directly connected to expected behaviors
Research on the relationship between pay, employee
satisfaction, and productivity continues, but with
contradictory results
It can still be concluded, however, that pay is an
important outcome to employees
10-64
Compensation Decisions
Pay for a position is set relative to three groups:
Group A: employees working on similar jobs in
other organizations
Group B: employees working on different jobs
within the organization
Group C: employees working on the same job within
the organization
10-65
Compensation Decisions
The decision to examine pay relative to group A is
called the pay-level decision
Be competitive in the marketplace
Use the pay survey to help with decisions

The pay decision relative to group B is the pay-

structure decision
Use job evaluations to set a value for each job
relative to all other jobs
The pay decision relative to group C is individual pay
determination
10-66
The Pay-Level Decision
Managers compare the pay of people working inside
the organization to those outside it
There are three pay-level strategies:
High
Low
Comparable

High-pay strategy:
Managers pay at higher-than-average levels to attract
and hold the best employees
Companies using this strategy are called pacesetters
10-67
The Pay-Level Decision
Low-pay strategy:
The manager pays at the minimum level needed to
hire enough employees
This strategy may be used because this is all the
organization can pay
Any pay strategy
Comparable-pay may have to be
strategy: modified for hard-
 The most frequently used strategy to-fill jobs

The going rate is determined from pay surveys

Pay is set at the current market rate in the community
or industry, ± 5 percent or so
10-68
Choice of a Strategy
Strategy also reflects the motivation and attitudes of
the manager
With a high need for recognition, the high-pay
strategy might be chosen
If ethically oriented, a low-pay strategy will not
be chosen willingly
Two other factors affect a pay-level strategy:
How easily a company can attract/retain personnel
The organization’s ability to pay
10-69
Choice of a Strategy
Factors affecting the attraction and retention of
human resources include:
The availability of qualified labor
Job security
Level of benefits

Factors affecting the ability to pay include:

Cost of labor
Profit margins
Stage of the firm
10-70
Choice of a Strategy
Many external factors also affect the process, such as
government and unions
This is compounded by employees’ job preferences,
which include pay and nonpay aspects
Many employees do not understand all these factors

An organization has a great deal of room for

maneuvering in the pay-level decision
To help make the decision, managers use a pay or
wage survey, market pricing, or bench-marking
10-71
Pay Surveys
Pay surveys collect data about compensation paid to
employees by all employers in:
A geographic area
An industry
An occupational group

They help gauge market rates for various positions

Obtaining valid, reliable information is critical
10-72
Who Conducts Pay Surveys?
Pay surveys are conducted by:
Professional and consulting enterprises
Trade associations
The government
Unions
Competitors

Competitive salary information can acquired by:

Purchasing or joining an existing survey
Conducting a survey
Doing a telephone survey of competitors
Collecting information from proxy statements
10-73
Usefulness of Surveys
Critical issues affecting the usefulness of surveys:
Are the jobs covered?
Who will be surveyed?
Which method will be used?

Survey methods include:

Personal interview
Mailed questionnaires
Telephone inquiries
10-74
The Best Surveys
Use clear, concise job descriptions
Give clearly written instructions
Include a good sample of organizations (names identified)
Use a consistent sample of participants for each iteration
Provide data on base pay, bonuses, total compensation
Provide 25th, 50th, and 75th percentile data for both base
and total compensation
Include information on benefits
List numbers of incumbents for each job surveyed
Are completed by human resource professionals
Are reviewed by compensation professionals
10-75
The Pay Structure Decision
The next step is to construct
an internal pay hierarchy or
pay structure
The traditional way was to
make a systematic comparison
between the worth of one job and
the worth of another, using job evaluation
10-76
Job Evaluation
Job evaluation is a process by which the relative
worth of various jobs is determined for pay purposes
It relates the amount of pay for each job to the extent
to which it contributes to organizational effectiveness
It is subject to job evaluator errors

Because computing contributions to organizational

effectiveness is difficult, proxies are used
Skills required to do the job
Amount and significance of responsibilities
Effort required
Working conditions
10-77
Job Evaluation
The first step in using job evaluation effectively is to
involve employees and/or the union
Employees should be allowed to express their
perceptions of the relative merits of their jobs
This gives management an opportunity to explain the
job evaluation process to those most affected by it
After the program is off to a cooperative start, a
committee evaluates the jobs
Job evaluation is usually performed by analyzing job
descriptions and sometimes job specifications
10-78
Job Evaluation
Select and weigh the criteria (compensable factors)
used to evaluate the job
Factors most frequently used:
Education
Experience
Amount of responsibility
Job knowledge
Work hazards
Working conditions
10-79
Job Evaluation
Frequently used methods of job evaluation:
Job ranking
Classification
Point system
Factor comparison
10-80
Ranking of Jobs
Ranking is the system used primarily in smaller,
simpler organizations
The evaluator rank-orders whole jobs, from the
simplest to the most challenging
The ranking may not occur at equal intervals
If an organization has many jobs, this system is
clumsy to use and the ratings may be unreliable
Ranking is the least frequently used method of job
evaluation
10-81
Classification or Grading System
Classification or grading groups a set of jobs
Sets are then ranked by difficulty or sophistication
It is a job-to-standard comparison

The evaluator first decides how many classifications

the job structure has to be broken into
Then, definitions are written for each class
After the classes are defined, job are compared with
the definition and placed into the proper classification
10-82
Classification or Grading System
Insert Exhibit 10-5 here
10-83
Classification or Grading System
A job classification system can be constructed
quickly, simply, and cheaply
It is also easy to understand and to communicate to
employees
Drawbacks include:
More detailed than job ranking
Assumes a rigid relationship between job factors
and value
Can be difficult to decide how many classifications
there should be
10-84
Point System
The greatest number of job evaluation plans use the
point system
More sophisticated than ranking/classification systems
Relatively easy to use

Requires evaluators to assign points on the basis of:

Skill required
Physical and mental effort needed
Degree of dangerous/unpleasant working conditions
Amount of responsibility

When these are summed, the job has been evaluated

10-85
Factor Comparison
Developed by Eugene Benge, it permits job
evaluation to be done factor-by-factor
Jobs are compared to a “benchmark” of five key
points:
Responsibilities
Skill
Physical effort
Mental effort
Working conditions
10-86
Factor Comparison
Insert exhibit 10-6 here
10-87
Factor Comparison
Advantages:
A step-by-step, formal method of evaluation
Shows how differences in rankings translate into
dollars and cents
Is easy to explain to subordinates

Disadvantages:
Complex
Difficultto show how such a system is developed
Relies on the subjective judgments of a committee
10-88
Pay Classes, Rate Changes, Classifications

The pay-structure process is completed by

establishing:
Pay curves
Pay classes
Rate ranges
Job classifications

At intervals of 50 points or so, a new pay class is

marked off
10-89
The Pay Curve
The next slide shows a single-rate pay system
All jobs within a given labor class receive the same
rate of pay
In this example, pay classes are determined by the
point value that was set through job evaluation
A pay class (pay grade) is a grouping of jobs that are
similar in terms of difficulty and responsibility
10-90
The Pay Curve
Insert Exhibit 10-7 here
10-91
The Pay Curve
The next slide shows how data from a wage and
salary survey are combined with job evaluation
information to determine pay structure
A compensation trend line is derived by establishing
the general pay pattern
The trend line can then be determined
The pay rate for any job can be ascertained by
calculating the point value of the job and then
locating that value on the trend line
Minimum and maximum limit lines can be set by
setting a percentage above or below the trend line
10-92
The Pay Curve
Insert Exhibit 10-8 here
10-93
The Pay Curve
Although it is possible for a pay class to have a single
pay rate, the more likely condition is a pay range
Pay ranges are usually divided into a series of steps:
Step 1 $5,000-5,400
Step 2 $5,401-5,600
Step 3 $5,601-5,850
These steps are in effect raises within the pay range
Within-grade increases are typically based on
seniority, merit, or both

The pay structure should be periodically evaluated and adjusted

10-94
Delaying and Broadbanding
Broadbanding approaches are an attempt to:
Improve efficiency
Reduce the complexities of job-based pay structures

Delayering:
A reduction in the total number of job levels
Increases flexibility by allowing employees to move
among a wider range of job tasks without having to
adjust pay with each move
10-95
Delaying and Broadbanding
Broadbanding:
More emphasis on individual performance
Multiple salary grades and ranges are collapsed into a
few wide levels (bands)
Entry-level employees start at the range minimum;
movement upward is based on performance (merit)
Allows managers to reward top performers while
saving money on mediocre employees

When shifting pay decisions to managers, the firm must guard

against abuse: favoritism can result in unfair use
10-96
The Individual Pay Decision
How does the organization determine what two
people doing the same job should make?
The decision is called individual pay determination
This topic will be covered in Chapter 11