Describe how a company designs a pay structure, and evaluate how to make sure pay structure is in line with actual pay. Your response should be at least 75 words in length. You are required to use at least your textbook as source material for your response. All sources used, including the textbook, must be referenced; paraphrased and quoted material must have accompanying citations.


‘ job sruc-
rrk against
ricl cl’range
process oi

-ion needs
:istir-rg pav
,ally, a p.,al
rtiot-rs tla’,’
Lrough lar-

its ri,itlt .
orre org.l-
te numl.c:
t’rts it’ttr- –
I1L’lltS aar.-
ils. In ri..
‘ grarles :
r retr lac.–

I!] lt)l’. :

I bv IBl.:
t thosc -:

-‘r \\ i1\ : :

‘asetl p -,
ilt fe\1–i.:.1
ls tile : 1’
c.-1gc :-:-. –
ns u”1:.:-
rcr-r iir.:

I pai :.-
. tl::r –

i,’i- -:.
,rr-.-::, ,

-,, r.-i.-..


:..-: — .

– —

CHAPTER 11 Establishing a Pay Structure 34


::trlii’* 1’l “{:
:,il s Nerv Job Evaluatjon Approach
ieiow is an abbrevlated schematic illustration of the new-and simple-lBM job evaluation approach:


Band Skills Required LeadershiplContribution Scope/lmpact







Both the bands and the
approach are global. ln the
U.S., bands 1-5 are nonexempt;
bands 6-10 are exempt. Each cell
in the table contains descriptive
language about key job characteris-
tics. Position descriptions are
compared to the ihart and assigned to
bands on a “best fit” basis. There are no points or scoring mechanisms. Managers assign
employees to bands by selecting a position description tEat most closely reseirbles th6
work being done by an employee using an online position description li6rary.

That’s itl

:-:r A. S. Richter, “Paying the People in Black at Big Blue,” Compensatton and Benefits Revieiv, May-June 1998, pp. 51 59. Copyright
: – Sage Pttblications, lnc. Reproduced wiih pernrission of Sage Publications via Copyright Clearance Center

. lathering market data about skill-based pa), is difficuk, because nosr \r/age
.l:i’ survel,s are job-based.

Factors: Leadership/Contribution
Band 06: Understand the mission of the ‘ ,’:

professional group and visionrin own
area of competence.

Band 07: Understand the departmental mission
and vision.

Band 08: Understand departmental/functional
mission and vision.

Band 09: Has vision of functional or unit;nission.
Band 10: Has vision of overall strategies,

;*;* Strx*e€”J$”# effid &*eexai Fmy
– .. .. rhe human resource department is responsible fbr esrablishing the organiza-
– ” : -:.-. structllre. But buildir-rg a strllcturc is not the end of the organization’s decr-

-.’r-lt la)’slructLtre. The structure represents the organization’s policy, but rrhat
, ::tri:ation actlrally does rnay be different. As part of its rnar-ragemerlr r:esponsi-

” HR department therefore shoulcl compare actllal pay to the pay srrucrlrre,-.- ::lre tl-rat policies and practices rnatch.
– – ir-.ri1rrn \\’Ia)r to tlo tiris is to measure a compa-ratio, tl-re ratio of average pay to

-l:-.’irlt of the pay lange. Figure 11.7 shori’s an exarnple. Assuming the organi-
:.:.: f:1\’grades, the organization ri,ould fit-rd a cornl.,a-latio for each pay grade:
.:-.:c paid to all ernployees in the pay gratle divided by 5hs n’ridpoir-rt for the

– :- li tl-re average eqprals t1-Le n-ridpoint, the compa-ratio is 1. More often, the
‘ ‘ ,-.,.:io is somer,r’hat above 1 (rneirning the average pay is above the miclpoint for

::,r-le) or L.elou, 1 (rneaning the a’erage pa1,rs belorv the rnidpourt).

5-{3i Summarize how
to ensure that pay is
actually in line with the
pay structure.

346 PART 4 Compensating Human Resources

Figure 1 1.7
Finding a ComPa-Ratio

L08 Discuss issues
related to PaYing
emploYees serving in

the militarY and PaYing

Pay Grade: 1

Midpoint of Range: $2,175 Per month,”t.f E”.rPl.Y
Employee 1 $2,306
Employee 2 $2,066
Employee 3 $2,523
Employee 4 $2,414


Average _ 92,327.25 – j.Oj
Midpoint $2,175’00

The em
it may h




focus on


Averaqe S u I ary Pll.P] Plgsg
S9,JOY =4=52,c2i.25 t

Assuming that the pay stfllcture is well planned to suppolt the organization’s

,h;;;;;tior rho.,id be close to 1. A ctmpa-ratio gt.ut”t than I suggests that the
organization is paying *or. thu.r planned fo, h,r*”r].”io.t..”t and may

have difficulty

[.?pf”g .or* .,r-,i”r”.ontro1. A co-pa-r”tio iess than 1 suggests that the otgat\tza’
i-#ir'””a”rpuyirlg fo. h,l^”.r r”rouo”, relative to its target and may

have difficulty

attracting and keeping l”iltft.d empioyees’ \fhen compa-ratios are more or less than
i, an


n”ed fo. the HR department to work with managers to identify

*, to ud1.,rl the pay strucrure or th; organization’s pay practices’ The

.u-ri* *u, indicate that rhe pay structure .ro1o.rg.. reflects market rates of pay’ Or
maybe perlorrnance upfrro”l, need to be more accurate, as discussed

in Chapter B’

Current issues lnvolving Pay Strueture
An organization,s policies regarding. pay structLlre gteatly influence

employees’ and

;;;ii;F”r”l p,rbii.t opiiions ubo”t th” organization’ Issues affecting
pav struc-

ir..,l-r.r.”for”.”r-r hu., o,ir”lp the organization’s reputation and ability
to recruit’

morivate, and keep employees. Recent issues related to
pay slructule include deci-

sions abour paying .dil;;;., “.ti
r” military duty and decisions about how much

to pay the organization’s top executives’

Pay during Military DutY
As -uve noted in chapter 3, the Uniformed services Employment-and


i1[h; A., (USERIitt .”q,.,ios employers to make jobs available to their workers
,fi.” ,f-r”V rerurn ufr., f,-rfrttr.rg -ilttuty duties for up ro fi’e years. During the


these employees are p”J..”.ri”g their military service, the employer
faces decisions

related to paying rrr”r” p””pi”.

. ur.n.a services pay service members during their

time of duty, u”, *irir*v p”v often falis short of what they rvouldearn in
their civilian

ence betrveen their -ilrru.y and civilian .a.nings for extended

periods. First Data’

u,hic1-r processes p”y-“.* *ua” **h credit and J.bit c”rdt, provides this type
of dlf –

ferenrial pay Lo i* “*pioyt”s
during miiitary deployment’ The company also contin-

ues medical and life ir1.u*.. b.r1&ts to employees serving in the military
and their

families. Besides prot,iding this compensation-relafed support,.
First Data encoufage:

irs e’rployees to sLrpport ,L” ,roop, with care packages and
volunteer ser’ices at vet-


)r1 s gc:.-:
s that ii,.
organi:: –
leso. th–.-

o idenrl::.
e co1}1!–:-
,f pa1′. J.
pter 8.

i’ees’ al:
tay strua-
I recrll::
rde dec:-


the tin.
ing ther:

Le diffei-
‘st Darit.
re of dir-

nd thei.
s at \iei-

CHAPTER 11 Establishing a Pay Structure 347

Poiicies to make up the difference between miiitary pa)i and civilian pay are cosrly.
The employer is paying employees while they are not working for the organization, ancl
it may have to hire temporary employees as rveli. This challenge has posed a significant
,br:-4’itpi’r,n’rdnrtnpnJFer:-trice^2J02: asrrhlorboJt-,rtrtbosanad-urtnBsennstf,ano I
‘.”,-.:’nal Guard members har.’e been mobilized. Even so, as the nation copes il’ith this
,.:..’..-uge, hundreds of enployers have decided that maintaining positive relations rvith
::-::-.rr-ees-and the goodrvill of the American public-makes rhe expense worthwhile.

Fay for Executives

lrreCia have drawn public artention ro the issue of executive pa1,. The issue
:,:–::rs notice because of the very high pay that rhe top execurives of major U.S.
. r:.:anies have received in recent years. In recent years, the total compensation paid
-i ;:-…illtlves of large companies rvas typically more than $6 million, of rvhich about
: – ‘ nillion n’as in the form of salary pius bonus. Interestingiy, ar rhe five companies
‘:::,,. rad the highest shareholder returns in 2006, the median compensation r.vas less
::-.,–. i j million, and at the five companies with the lou’est shareholder retlrms, CEOs
:,,-*.:l inore than $12 million.2a Notice, however, that as shorvn i’r Figure 11.8, only
.- ,.:i1 share of the average comperrsarion paid ro CEOs is in ihe form of a salar1,.
, .: CEO compensation takes the form of performance-related pa1’, such as bonuses
,,:-,: ::,rck; this variable pay is discussed in the next chapter.

:-.:|rough these high amounts apply to only a small p.,rspelrion of rhe total ri’ork-
; i-;. ihe issr-re of executive pay is relevant to pay structure in terms of e,1uit,v theory.
*.’ ,t Jiscr-rssed earlier in the chapter, employees drau’conclusions about rhe fairness
: : .’. L.t’nlaking comparisons among employees’ inputs anLi olltcomes. 81’man1’com-

1s.–ir1S: U.S. CEOs’pay is high. For example, when CEO pav is compared u’ith the

“: the organization’s lorvest-levei employees, the resultir-rg ratio has beer-r on the”.,-.: :-i more than tu’o decades, surpassing 500: 1 at large U.S. corporariolls in 2007.

-*- ,, ratict is greater in the United States than in other der-eloped nations and rv


‘ .:’..-i in 2007 than in any period measured before To assess the fairness of
r: ‘ :,:rio, equity theory rvould consider not only the sl:e of erecr-irii’e pai relative to
:’. :.’r other employees but also the amount the CEOs contribure. An organization’s
..:-:.iives potentially har,e a nuch greater effect on tl-re r’rrgani:ation’s !.erformance
:’.’:’. iis lorvest-paid ernployees have. But if they do nor seeln ro conrribute 500 tirnes

F’igur* ‘i ‘l.S

Average CEO Pay in SftP
500 Companies



::rjal ): :


33% i,’,:.;:,t

,. Salary
., ,’ ” Bonus
ZA!a,,.1 Stock Options
,. :. ‘.’. . Stock

j + Other
)ao/JZ /o


SOURCE: Data {or fiscal year 2008 from Edvrari E. Lawler lll, ,,Fixing Executive Compen
sation: RightTime, Wrong Approach,” Chief Executive, May/June 20A9,pp.3A41.

348 PART 4 Compensating Human Resources

felLt: cit



CAIJ TFti: *LJff$Lt’i *F eL:TffiAfKS Ail $iiAnf*

The downturn in the construction
industry took a heavy

tnll on Aquapoint, a company based in New

iJra,-, that makes systems
tor waste-

,r’-il|. ,r*.i*ent. As builders delayed construction

,.t”* f’touring developments’ revenues
began, to slow’

When a big account, a retirement community’
lost bank

i'”.”.'”g, iquapoint’s management knew the

*orrJn inu”” enough cash to pay its bills-.””il;”
companies mlght start with layoffs

or pay cuts

for emolovees, but Aq”uapoint’s leaders thought

;J;:h”u,.J;” puin in”‘top three executives cut their

^av hv half.
Then they asked employees to accept

a 10

:::”::;;’ .ri. t|’,”‘””*, months were a struggle’ but
;;;;;;;;. thousht the companv would ProsPer


soon as the economy began to improve
They didn’t

;i ; lose ualuable “t”ploy”tt iust
be{ore the next

t*g” l; brrin””‘ For a {ew months’ the executives


LO1 Identify the kinds of decisions ir-rvolvec{
in establish-

ing a PaY slrtlcrllre r-r:-^ ^ :..t-
organizarions tnlke ‘lectsttlnS fo

(lcr rrrq d J\ ”
strllct;re’ or relative pa,v tbr different lobs


Stares don,r .or-rtrib.,t.l’,or= – ,i-r”o orgur-riruiior-t’ih”r-,

CEO’ in other cottntries t1o’

;i”‘;;i;.e wor'[d be percei’e’las u’fair’,
Too exectrtir es lrelp to sei the tol]e oI

ctrltr.rre of the organizaLioll, atrtl
etttpltrl’ee: at

i””.:”;, ;;,;;”.;;t;;;;r; “t d-re

top. As a resul, rhe ecluitv of executive

Recog’izing ,tr. ,*pnli’Jli.”*;;;’;;,’h’;’.t;tJ.,:.-s.

(a.d investors), f ”hri

fourr,ler.a’d cEO of wl-,.,1. FooJs, reaciecl
,J,-or fi’a*cial results in zo07 b1 ctrt-

ti’g his salary to $t

i”kir,rg no bonLls or r.oik o1’rtions. He do’ated
his rernai’i’g

cornl,ensarion (frorn “‘;,;;;,:5
bn,.,|.,, plu,-,) ro a charity, the Giohat

Ariirual Partrret-

slrip. Mackey n.’ uto’nfi’rt”‘it’t ttt ‘g^f
htttt’tt”’ executi’es and emplol’ees

()r) lroor

by Jemoralized rvorkers

.r ,ho ne, .f

ees and exec’tives ir-r,rnrf.r, business

r.,r-ritr.2f lr-, b.r.t’r.s, u.its rvhere the diffeter-rce

emploi’ees rhot’ght.pol: *^’ i””o”‘t”ble and tal”t'”a

their behatiur io pro\/ide lower

irrpurs by pirtting ‘”‘;it
j;;”;id” t t”i’rt (.u”n’o”tt’ To aroid this tiire of sirrra-

tion, organiz”r,o,’,, ‘-‘””a’-o;i;;;.,;”;\
Ilow tnnch to pav managers ancl executives’

btrt also ho+u roO”O ,ilJ,rli'”ih” r-,””r.i-rupr”r,
,o,e ,r’ill explore ma’y of the opti.ns


. .r,


their oav aqain, down to zero As the company

ii.: #L pli”., .*. “r the executives
began to work {or

?\ ncrcent of their pay, and the executives hope they

.;”;;;i;”ily .ut””p r”t the lost salaries with a bonus’


1. ln your opinion, how {air was
this approach to cut-‘

ling puy’when times got difficult at Aquapoint?

f xptain Your reasoning’

2. As business improves’ what approach
should the

companv {ollow to restore the pay of the

tives ani the emPloYees? WhY?

3. How can Aquapoint ensure that its

;;;;”;;.” the

‘leaders’ willinsness to share the
nain of the recent economic downturn?

Why is it

il;;;;;;.t utplovtu’ to witness manasement’s
commitment to ethical conduct?

SOURCE: Based on Riva Richmond’
“How to Cut Payroll Costs

;d.”; Layoffs,” BusinessWeek’ April 3′ 2009′

rhe trt’canizat i,,n The1′ estahli’lr relatile
pay for dit-

f’=;;?;;;”,.’^,’a ;in”t”‘.’t le’els of responsibilitv
;;;;;;h i,-,”.tior-r’ organizations also must,estab’
i;h;’;;;l;.;1′, or the u””‘ug” paitl for tire cliftrenr

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