HRM Chapter 12

Establishing a Pay Structure

• Pay is a powerful tool for meeting the organization’s goals and costs a company between 5% and 40% of revenues. (Healthcare, IT, Education, Professional services, Manufacturing, Retail, Hospitality and restaurant, Construction, etc)

• Pay has a large impact on employee attitudes and behaviors and 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.

Decisions about pay

Job Structure

• Relative pay for different jobs within the organization

Pay Level

• Average amount the organization pays for a particular job. (for external benchmarking)

Pay Structure

• Pay policy resulting from job structure and pay-level decisions.

Issues in Developing a Pay Structure

Legal Requirements

• Equal pay for equal work

• Minimum wage

• Overtime pay

• Restrictions on child labor

Market Forces

• Product markets

• Labor markets

Organization’s Goals

• High-quality workforce

• Cost control

• Equity and fairness

• Legal compliance

Pay Level Decision, Job Structure Decision, Pay Structure Decisions

• Pay rates

• Pay grades

• Pay ranges

• Pay differentials

Legal Requirements for Pay - (1) Equal Employment Opportunity

• Employers must not base differences in pay on an employee’s age, sex, race, or other protected status.

• No guarantee of equal pay for men and women, white and minorities or any other group

• There are many legitimate factors that influence a person’s earnings: differences in their experience, skills, seniority, or job performance

• Comparable-worth policies are controversial: the same worth labor, the same pay

Legal Requirements for Pay - (2) Minimum wage

Lowest amount that employers may pay under national law, states as an amount of pay per hour.

A wage is the rate of pay per hour.

2024 Korea: 9,860 Won

2024 USA: varies by states: $16 (california), $15 (Massachusetts), $7.25 (Iowa, Texas, etc)

Fair Labor Standards Act (FLSA)

Federal law establishes a minimum wage and requirements for overtime pay and child labor.

Korean Labor Standard Act

Legal Requirements: (3) Overtime Pay

• Overtime rate under Labor Standard Act is 1.5 times employee’s usual hourly rate, including any bonuses, and piece-rate payments.

  • Exempt employees - managers, outside salespeople, and other employees not covered by Labor Standard Act requirement for overtime pay.

  • Nonexempt employees - employees covered by Labor Standard Act requirements for overtime pay.

Legal Requirements: (4) Child Labor (South Korea)

Under 14 years old

• Employment strictly prohibited

14-15 years old

• Requires work permit from Ministry of Employment and Labor

• Exemptions: Babysitting, acting, newspaper delivery

Middle school students

• Even if 15 or older, cannot work during compulsory educatuin period

15-17 years old

• Cannot work in hazardous or dangerous industries

• Light or safe work allowed under legal guidelines

18 (but under 19) years old

• Cannot work in industries restricted by the Youth Protection Act:

  • Adult entertainment venues

  • Video/phone rooms

  • Lodging

  • Jobs involving hazardous chemicals

19 years and older

• No youth-specific restrictions. General labor laws and workplace safety rules apply

• All legal occupations

Legal Requirements: (5) Prevailing Wages

• Prevailing wage refers to the average or standard hourly wage, benefits, and overtime paid to the majority of workers ina specific occupation within a geographic area

• It is commonly used in government-funded public works projects to ensure fair compensation/

• Federal contractors must pay employees at least equal to the prevailing wages in the area.

Legal Requirements: (6) Pay Ratio Reporting (US)

Must report ratio of CEO pay to pay of median employee.

Intended to increase transparency and make social responsibility a more vital part of pay policies.

Economic Influences on Pay: (1) Product Markets

• 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.

Economic Influences on Pay: (2) Labor Markets

• 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.

• May be influenced by cost of living.

Economic Influences on Pay: (3) Pay Level: Deciding what to pay

• Pay ranges depend on the competitive environment.

• Market rate vs. paying above market rate to acquire top talent

• Pay policies are one of the most important human resource tools for encouraging desired employee behaviors and discouraging undesired behaviors.

Economic Influences on Pay: (4) Gathering Information about Market Pay

Benchmarking - a procedure in which an organization compares its own practices against those of successful competitors

Multiple sources of data:

• Pay surveys

• Bureau of Labor Statistics (BLS)

• Society for Human Resource Management (SHRM)

• Consulting groups

Employee Judgements About Pay Fairness: (1) Judging Fairness (Equity)

• Employees compare their pay and contributions against three yardsticks:

1. What they think employees in other organizations earn for doing the same job. (External equity)

2. What they think other employees holding different jobs within the organization earn for doing work at the same or different levels. (Internal Equity - different jobs)

3. What they think other employees in the organization earn for doing the same job as theirs. (Internal Equity - Same Job)

Employee Judgements About Pay Fairness: (2) Communicating Fairness

• Employees care about their pay relative to othre’s pay.

• These feelings are based on what employees perceive

• Employees can easily gather pay data using Internet

Companies should be transparent about pay policies with employees, including:

• Paycheck: Details about the individual’s pay.

• Market data: Data used for decision making.

• Pay planning: Data about pay ranges and potential for future earnings.

• Pay strategy: Explanation of how pay decisions relate to the organization’s objectives.

• Open salary: Full disclosure of organization’s pay ranges and salaries.

Job Evaluation - What is it?

Definition

• Job evaluation is an administrative process used to measure the relative internal worth of jobs within an organization.

Purpose

• To ensure fair and consistent compensation by evaluating each job’s value.

Key Activities

• A committee identifies compensable factors.

• Jobs are rated based on these factors.

What Are Compensable Factors?

Definition

• Compensable factors are the important job characteristics that an organization values and is willing to pay for.

Function

• These factors help determine how much each job should be paid.

5 Common Compensable Factors

1. Experience

   • How much previous work experience is required?

2. Education

   • What level of formal education is necessary?

3. Complexity

   • How complex or mentally demanding is the job?

4. Working Conditions

   • Are the physical or environmental conditions difficult?

5. Responsibility

   • Does the job involve accountability for people, money, or decisions?

Why Job Evaluation Matters

• Ensures internal fairness

  • Different jobs with similar value receive similar pay.

• Supports transparent pay decisions

  • Shows why some jobs are paid more than others.

• Aligns pay with organizational values

  • Companies pay for what they care about.

Key Jobs

• Jobs that have relatively stable content and are common among many organizations.

• Organizations define key jobs to help create pay structures

• Pay for key jobs can be based on survey data

• Examples: Chief Executive Officer (CEO), Chief Financial Officer (CFO), Human Resources Director, Marketing Manager, Sales Representative, Software Engineer, Customer Service Representative, Operations Manager, Project Manager, Administrative Assistant, Operations Supervisor, Research Scientist, Quality Control Inspector, Financial Analyst, IT Support Specialist, etc.

Potential Uses of Job Evaluations

Job evaluations are not just about setting pay - they serve many purposes in human resource management.

Here are the main uses:

Key Uses

• Provide a basis for a simpler, more rational wage structure

• Provide an agreed-on means of classifying new or changed jobs

• Provied a means of comparing jobs and pay rates with those of other organizations

• Provide a based for employee performance measurements

• Reduce pay grievances by reducing their scope and providing an agreed-on means of resolving disputes

• Provide incentives for employees to strive for higher-level jobs

• Provide information for wage negotiations

• Provide data on job relationships for use in internal and external selection, human resource planning, career management, and other personnel functions

Pay Structure: Putting It All Together

Reflecting:

• What the organization knows about market forces

• org’s own unique goals

• the relative contribution of each job achieving the goals

→ Pay rates, pay grades, and pay ranges are established

→ Pay structure is set

In terms of:

1. Hourly wage

   Pay in terms of a rate per hour

2. Piecework rate

   Rate of pay for each unit produced

3. Salary

   Rate of pay per month or year

Pay Rates

• Determining salaries for non-key jobs

• Rates of key jobs can be based on market research (wage survey)

• Non-key jobs often have no survey data available; professionals must base the rate off job evaluation by plotting data on graph

• Pay policy line on graph shows relationship between job evaluation points and pay rates.

  • Reflects the pay structure in the market, which does not always match rates in the organization.

Pay Grades

• “Sets of jobs” having similar worth or content, grouped together to establish rates of pay

• May not match market rate

Pay Range

• 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.

• Flexibility helps organizations balance conflicting information from job evaluations and market surveys.

• Usually pay ranges overlap somewhat.

Pay differentials

• Adjustment to a pay rate to reflect differences in working conditions (night shift) 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.

Alternatives to Job-Based Pay

Delayering

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

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

• More emphasis on acquiring experience, rather than promotions.

Skill-Based Pay Systems

• Pay structures that set pay according to employees’ levels of skill or knowledge and what they are capable of doing (mechanics, machine operators, program developers, consultants, etc.)

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

Pay Structure and Actual Pay

Compa-Ratio

Ratio of average pay to the midpoint of pay range.

Ensures that pay policies and practices match.

• If average equals midpoint, CR is 1.

• If CR is greater than 1, average pay is above midpoint. (the organization is paying more than planned for human resources and may have difficulty keeping costs under control)

• If CR is less than 1, the average pay is below the midpoint. (The organization is underpaying for human resources relative to its target and may have difficulty)