Discussion for Human Resource Management

Full order description:Topic: Pay Structure Answer the two questions below

1. Why might an organization pay employees more or less than the market rate?

2. Communicate employee rights and significant federal laws affecting employers when establishing a pay structure.

Pay Structure: Putting it All
Together
Job Evaluation
Along with market forces and principles of fairness, organizations consider the relative
contribution each job should make to the organization’s overall performance. Creating a
pay structure requires the organization to develop an internal structure showing the
relative contribution of its various jobs. One typical way of doing this is with a job
evaluation. Job evaluation is an administrative procedure for measuring the relative
internal worth of the organization’s jobs.
There are five characteristics of a job that the organization values and chooses to pay for:
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Experience
Education
Complexity
Working conditions
Responsibility
To conduct a job evaluation, the organization’s job evaluation committee identifies each
job’s compensable factors – the characteristics of a job that the organization values and
chooses to pay for. An organization might value the experience and education of people
performing computer-related jobs, as well as the complexity of those jobs. Other
compensable factors might include working conditions and responsibility. Based on the
job attributes defined by the job analysis, the jobs are rated for each factor. Job evaluation
points are assigned to each factor. The scores for each factor are totaled to arrive at an
overall evaluation for each job.
Key Jobs
Key jobs have relatively stable content and are common among many organizations.
Organizations can make the process of creating job and pay structures more practical by
defining key jobs. Think of them like a “baseline” in which other jobs can be compared as
more/less significant. Pay for key jobs can be based on survey data, and pay for the
organization’s other jobs can be based on the organization’s job structure. A job with a
higher evaluation score than a particular key job would receive higher pay than that key
job.
Doing External and Internal Research
The pay structure reflects decisions about how much to pay (pay level) and the relative
value of each job (job structure). The organization’s pay structure should reflect what the
organization knows about market forces, as well as its own unique goals and the relative
contribution of each job to achieving the goals. By balancing this external and internal
information, the organization’s goal is to set levels of pay that employees will consider
equitable and motivating. Organizations typically apply the information by establishing
some combination of:
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Pay rates
Pay grades
Pay ranges
If the organization’s main concern is to match what people are earning in comparable jobs,
the organization can base pay directly on market research for as many of its key jobs as
possible. Organizations must weigh all the objectives of their pay structure to arrive at
suitable rates.
The Pay Policy Line
The pay policy line is a graphed line showing the mathematical relationship between job
evaluation points and pay rate. The pay policy line reflects the pay structure of the
external market in relationship to the job evaluation points for the organization’s key jobs.
It is then used to determine salaries for non-key jobs for which the organization has no
survey data.
A typical approach is to use the market rate or the pay policy line as the midpoint of the
job or pay grade range. The minimum and maximum values for the range may also be
based on market surveys of those amounts. Pay ranges are most common for white-collar
jobs and for jobs that are not covered by union contracts.
Pay Range
A pay range is 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.
Employees holding the same job may receive somewhat different pay, depending on
where their pay falls within the range. The red-circle rate is pay at a rate that falls above
pay range for the job; green-circle rate is pay at a rate that falls below pay range for the
job.
In some situations, organizations adjust pay to reflect differences in working conditions or
labor markets. Pay differential is an 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.
Job-Based vs. Skill-Based Pay
The traditional and most widely used approach to developing a pay structure focuses on
setting pay for jobs or groups of jobs. This emphasis on jobs has some limitations. One
approach is to move away from job-based pay toward pay structures that reward
employees based on their knowledge and skills.
Delayering is reducing the number of levels in organization’s job structure. More
assignments are combined into a single layer called broad bands. There is more emphasis
on acquiring experience, rather than promotions. Skill-based pay systems are pay
structures that set pay according to employees’ levels of skill or knowledge and what they
are capable of doing. They are appropriate where changing technology requires
employees to continually widen and deepen their knowledge.
Compensation Ratio
Usually, HR is responsible for establishing the organization’s pay structure. But building a
structure is not the end of the organization’s decisions about pay structure. The structure
represents the organization’s policy, but what the organization actually does may be
different. As part of its management responsibility, HR should compare actual pay to the
pay structure, making sure that policies and practices match. Using the compensation
ratio is the common way to do this.
The figure below shows an example of a compensation ratio, the ratio of average pay to
the midpoint of the pay range. When compensation ratios are more or less than 1, the
numbers signal a need for the HR department to work with managers to identify whether
to adjust the pay structure or the organization’s pay practices. Compensation ratios may
indicate that the pay structure no longer reflects market rates of pay. Or perhaps
performance appraisals need to be more accurate.
(Noe, Hollenbeck, Gerhart, & Wright, 2021)
Pay Structure and Public Opinion
An organization’s policies regarding pay structure greatly influence employees’ and even
the general public’s opinions about the organization. Recent hot topics in pay structure
include pay during military duty and pay for executives. Let’s explore each of these in
more detail.
Pay during Military Duty
How should companies handle employees called for active duty in the military for
extended periods? For 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 their
military pay is often a fraction of what they earn as a civilian. Some companies will pay the
difference between the military pay and their normal pay, 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 makes the expense
worthwhile.
Pay for Executives
Based on equity theory, how does executive compensation affect employees? Equity
theory would suggest that the amount CEOs are paid 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 fairer.
References:
Noe, R., Hollenbeck, J. R., Gerhart, B. & Wright, P. M. (2021)
Fundamentals of Human Resource Management (9th
ed.) McGraw-Hill Education.