Compensating Human Resources 4 Compensating Human Resources Establishing a Pay Structure Recognizing Employee Contributions with Pay Providing Employee Benefits

Establishing a Pay Structure 1 1 C H A P T E R Establishing a Pay Structure Decisions About Pay Legal Requirements for Pay Economic Influences on Pay Employee Judgments about Pay Fairness Job Structure: Relative Value of Jobs Pay Structure: Putting it All Together Pay Structure and Actual Pay Current Issues Involving Pay Structure

Ch. 11 Learning Objectives Identify the kinds of decisions involved in establishing a pay structure. Summarize legal requirements for pay policies. Discuss how economic forces influence decisions about pay. Describe how employees evaluate the fairness of a pay structure. Explain how organizations design pay structures related to jobs.

Ch. 11 Learning Objectives Describe alternatives to job-based pay. Summarize how to ensure that pay is actually in line with the job structure. Discuss issues related to paying employees serving in the military and paying executives.

Your Opinion 1-Strongly Disagree, 3-Neutral, 5- Strongly Agree Pay decisions should be based on performance, not seniority. I would like to know what my coworkers get paid. I would not mind if others knew my salary. Pay secrecy helps a company stay competitive. Use these questions to begin a discussion of issues surrounding pay philosophies and perceptions of fairness. 1-Strongly Disagree, 3-Neutral, 5- Strongly Agree Pay decisions should be based on performance, not seniority. I would like to know what my coworkers get paid. I would not mind if others knew my salary. Pay secrecy helps a company stay competitive. From the employer’s point of view, pay is a powerful tool for meeting the organization’s goals. Pay has a large impact on the organization such as: 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 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.

Decisions About Pay Job Structure Pay level Pay structure Relative pay for different jobs within the organization Pay level Average amount the organization pays for a particular job Pay structure The pay policy resulting from job structure and pay-level decisions Decisions about pay need to be made within an organized set of rules that are aligned with the organization’s goals. Job 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.

Issues in Developing a Pay Structure When developing a pay structure several considerations need to be made as outlined on this graphic. We’ll talk about each of them.

Legal Requirements Equal Employment Opportunity Differences in pay must be tied to business-related considerations Fair Labor Standards Act of 1938 Establishes a minimum wage and requirements for overtime pay and child labor Exempt….from overtime Non-exempt – can be paid overtime Government regulation affects pay structure in the areas of: Equal employment opportunity Minimum wages Pay for overtime Prevailing wages for federal contractors Equal employment opportunity - Employers may not base differences in pay on an employee’s age, race, or other protected status. Any differences in pay must be tied to business-related considerations such as job responsibilities or performance. Job descriptions, job structures, and pay structures can help organizations demonstrate that they are upholding these laws. Comparable worth policy: uses job evaluation to establish the worth of an organization's job The Fair Labor Standards Act of 1938 Establishes a minimum wage and requirements for overtime pay and child labor. For overtime, the act states that indicates that employees must be compensated by wages that equal one and a half times the usual hourly rate for hours worked beyond 40 per week. Exempt employees: employers are not required to pay overtime; typically includes managers, outside salespeople Nonexempt employees: most workers paid on an hourly basis and are not in one of the exempt categories

Legal Requirements Child Labor Children 16 and 17 cannot be employed in hazardous occupations Children 14 and 15 may only work outside school hours for limited time periods Children aged 16 and 17 may not be employed in hazardous occupations. Children aged 14 and 15 may work only outside school hours in nonhazardous jobs for limited time periods. Children under age 14 may not be employed in any work associated with interstate commerce except in a nonhazardous job for a family-owned business. Many states require working papers or work permits for minors.

Economic Influences on Pay Product Markets Organizations that offer competing goods and services Labor costs are a key consideration to stay competitive Labor Markets Companies have to stay competitive with regard to pay to attract the best employees Cost-of-Living An organization’s product market includes all the organizations that offer competing goods and services. An important influence on price is the cost to produce the goods and services for sale. The cost of labor is a significant part of an organization’s costs. Organizations under pressure to cut costs may respond by: Reducing staff levels Postponing hiring decisions Requiring employees to bear more of the costs Labor Markets Organizations must compete to obtain human resources in labor markets. Competitors includes companies with similar products and companies in other industries that hire similar employees. An influence on labor markets is the cost of living. Consumer Price Index (CPI) is a measure of the cost of living. Also, different geographic regions demand different salary levels because of the cost of living.

Employee Judgments About Pay Fairness In developing a pay structure, it is important to keep in mind employees’ opinions about fairness. Employees evaluate their pay relative to that of other employees. According to equity theory, people measure outcomes such as pay in terms of their inputs. The way employees respond to their impression about equity can have a great impact on the organization. Discussion Question: What might employees do if they perceive pay unfairness? Behaviors continue unchanged Rethink the situation Make up the difference in one of three ways: Less effort Find ways to increase outcomes Withdrawal from the organization What might employees do if they perceive pay unfairness?

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? Different cost-of-living The companies are in different product markets with different pay strategies Mariah is a poor performer 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? Different cost-of-living The companies are in different product markets with different pay strategies Mariah is a poor performer Mariah’s job is non-exempt Answer A – if they live in the same town, they would presumably have the same cost-of living. Given that they are similar jobs they probably are both either exempt or non-exempt but even if they were different, non-exempt jobs often make more money than exempt positions.

Job Structure: Relative Value of Jobs Job evaluation An administrative procedure for measuring the relative internal worth of the organization's jobs Hay Guide-Chart Profile Method Method of job evaluation that creates a profile for each position based on its Required know=how Degree of problem solving Accountability Along with market forces and principles of fairness, organizations consider the relative contribution each job should make to the organization’s overall performance. Job evaluation: an administrative procedure for measuring the relative internal worth of the organization’s jobs. Usually the organization does job evaluation by assembling and training a committee consisting of individuals familiar with the jobs to be evaluated. The Hay Guide-Profile method is a way for organizations to evaluate managerial and professional jobs separately. The Hay plan creates a profile for each position based on three variables: Know-how – the required skills, area of knowledge, and abilities Problem solving – the required degree of analysis, creativity, and reasoning Accountability – the level of responsibility and the job’s impact on the organization.

Pay Structure: Putting it all Together Pay may be in terms of Salary, hourly rate, piecework rate Pay policy line Shows the mathematical relationship between job evaluation points and pay rate Pay Grades Sets of jobs having similar worth or content, grouped together to establish rates of pay Organizations may state pay in terms of: Hourly wage Piecework rate Salary If the organization’s main concern is to match what people are earning in comparable jobs, it can base pay directly on market research into as many of its key jobs as possible. Pay policy line is a graphed line showing the mathematical relationship between job evaluation and pay rate. Organizations must weigh all the objectives of their pay structure to arrive at suitable rates. Pay grades: sets of jobs having similar worth or content, grouped together to establish rates of pay. Pay range: minimum, maximum, and midpoint of pay for employees holding a particular job within a particular pay grade. Red-circle rates Green-circle rates

Sample Pay Grade Structure Pay policy line is a graphed line showing the mathematical relationship between job evaluation and pay rate. Organizations must weigh all the objectives of their pay structure to arrive at suitable rates. There may be instances where certain positions pay is not aligned with the pay policy line or internal value to the organization. In these circumstances organizations have to decide how they will handle paying these positions. If they stick to the job evaluation points, they may be paying too much or not enough compared to the market. But if they only consider the market rate, they may create internal equity issues among current employees. Pay grades: sets of jobs having similar worth or content, grouped together to establish rates of pay. Pay range: minimum, maximum, and midpoint of pay for employees holding a particular job within a particular pay grade. Red-circle rates – pay rate that falls above the pay range for the job Green-circle rates – Pay at a rate that falls below the pay range for the job

Test Your Knowledge To correct a Red-circled employee, I would….. Give them a raise Demote them Give them a bonus, but no raise Move them to a job with a higher pay range To correct a Red-circled employee, I would….. Give them a raise – will exacerbate the problem Demote them – will lower their morale Give them a bonus, but no raise – good way to reward them without increasing salary costs Move them to a job with a higher pay range – need to ensure they had the requisite skills for a different position Answer: C, is probably the best answer. A discussion of the pros and cons of each of these approaches in relation to the organization’s goals may be beneficial

Alternatives to Job-Based Pay Delayering Reducing the number of levels in the organization’s job structure – creates broad bands rather than several pay grades What are the pros and cons of delayering? Skill-based pay systems Pay structures that set pay according to the employees’ levels of skill or knowledge and what they are capable of doing What are the pros and cons of skill-based systems? The traditional and most widely used approach to developing pay structure focuses on setting pay for jobs or groups of jobs. Delayering refers to reducing the number of levels in the organization’s job structure. Broad bands are broader groupings of jobs. What are the advantages of delayering? Pros - Supports a culture of empowerment Promotes taking lateral moves that have developmental value Cons – is that it reduces the promotions employees can get so job titles are no longer signs of achievement. Other ways to reward employees need to be considered. Skill-based pay systems are pay structures that set pay according to the employees’ level of knowledge and what they are capable of doing. Pros – encourages employees to add to their knowledge so they can make decisions in many areas. Increases flexibility and innovation, encourages a climate of learning and adaptability Cons of skill-based pay systems- rewards employees for acquiring skills but does not provide a way to ensure that employees can use their new skills.. The challenge is do design work so that the work design and pay structure support one another. Also, if the employees learn skills very quickly, they may reach the maximum skill and pay level quickly and without new rewards to attain. It also requires records related to skills, training, and knowledge acquired.

Pay Structure and Actual Pay HR is typically responsible for setting the pay structure and monitoring it over time Compa-Ratio- ratio of average pay to the midpoint of the pay range Usually the human resource department is responsible for establishing the organization's pay structure. The structure represents the organization’s policy, but what the organization actually does may be different. The HR department should compare actual pay to the pay structure to make sure policies and practices match. A common way to do this is to measure a compa-ratio. If the compa-ratio is bigger than one, the organization is paying slightly more than it planned, less than one means it’s paying less than planned and 1 means it’s paying within its structure. This number is a good indicator for HR and manager to know when a change is necessary Figure 11.7

Current Issues in Pay Pay during Military Duty Pay for Executives How should companies handle employees who are called for active duty in the military for extended time periods? Pay for Executives Based on equity theory, how does executive compensation affect employees? An organization’s policies regarding pay structure greatly influence employees’ and even the general public’s opinions about the organization. Recent issues related to pay structure include: Pay during Military Duty How should companies handle employees who are called for active duty in the military for extended time periods? Employees on active military duty – the law ensures that employers make jobs available for active military when they return for up to five years. But often their military pay is a fraction of what they earn as a civilian. Some companies will pay the difference between the military pay and their normal pay (e.g., Home Deport) or some will continue to pay health benefits. While this is expensive, many companies feel that maintaining a positive relationship with employees and the goodwill of the American public make the expense worthwhile. Pay for Executives Based on equity theory, how does executive compensation affect employees? Equity theory would suggest that the amount more that CEO’s receive should be reflected in that much greater impact on the organization. If employees don’t perceive that equity they may find companies to work for in which CEO compensation is more fair.