Strategic compensation

Pay Structure Decisions - Sunil Ramlall, Ph.D.

Introduction Employer’s View: • Pay is critical in attaining strategic goals. • Pay impacts employee attitudes & behaviors. • Employee compensation is significant organizational cost.

Employee’s View: • Policies regarding wages, salaries & other earnings affect their overall income and standard of living. • Both level of pay & fairness compared with others’pay are important.

Pay Structure

Developing Pay Levels

Pay Level Job Structure Pay Policies

Equity Theory

People evaluate the fairness of their situations by comparing them with those of other people.

People compare their own ratio of perceived outcomes (pay, benefits, working conditions) to perceived inputs (effort, ability, experience) to the ratio of a comparison other.

External and Internal Equity Two types of employee social comparisons of pay are especially relevant in making pay level and job structure decisions. PAY STRUCTURE DECISION AREA

ADMINISTRATIVE FOCUS OF TOOL EMPLOYEE PAY COMPARISONS

CONSEQUENCES OF EQUITY PERCEPTIONS

Pay level

Market pay surveys

External Equity

External employee movement; labor costs; employee attitudes

Job structure

Job evaluation

Internal Equity

Internal employee movement; cooperation among employees; employee attitudes

Developing Pay Levels â&#x20AC;&#x201C; Market Pressures

â&#x20AC;˘ Product-market competition - sell goods and services at a quantity and price that will bring ROI.

â&#x20AC;˘ Labor-market competition - amount an organization must pay to compete against other organizations that hire similar employees.

Labor Costs â&#x20AC;˘ Two components of labor costs 1. Average cost per employee: wages, salaries, bonuses, health insurance, Social Security 2. Staffing level: number of employees

Employees as a Resource A philosophy that considers employees to be an investment that will yield valuable returns Controlling costs through noncompetitive pay can result in low employee productivity and quality Pay policies and programs are important HR tools for encouraging desired employee behaviors and discouraging undesired behaviors

Deciding What to Pay  Deciding pay levels is discretionary and is based on a broad range.  The organization has to decide whether to pay at, below, or above the market average.  Efficiency wage theory - wages influence worker productivity.

Market Pay Surveys ď ľBenchmarking - procedure by which an organization compares its own practices against the competition. ď ľ3 issues to consider before using pay surveys: 1. 2. 3.

Which employers should be included in the survey? Which jobs are included in the survey? If multiple surveys are used, how are all rates of pay weighted and combined?

Product Market vs. Labor Market Comparisons Product Market valuable when:

 Labor costs represent a large share of total costs.  Product demand is elastic.  The supply of labor is inelastic.  Employee skills are specific to the product market.

Labor Market valuable when:

 Attracting and retaining qualified employees is difficult.  Costs of recruiting replacements are high.

Rate Ranges, Key and Nonkey Jobs • Rate Ranges  different employees in same job that may have different pay rates

• Key Jobs  benchmark jobs that have relatively stable content and are common so that market-pay survey data can be obtained

• Nonkey Jobs  unique to organizations and cannot be directly valued or compared through the use of market surveys

Developing a Job Structure  Job structure - relative worth of various jobs based on internal comparisons.  Job evaluation - administrative procedure used to measure internal job worth.  Composed of compensable factors, which are characteristics of jobs that an organization values and chooses to pay.  Job evaluators often apply a weighting scheme to account for differing importance of compensable factors to the organization.

Developing a Pay Structure

Market Survey

Pay Policy Line Pay Grades

Conflicts: Market Pay Surveys and Job Evaluation Internal data drives up labor costs and creates product-market problems. If external market data are emphasized and a job is paid lower internally, comparisons that employees make internally would result in dissatisfaction. An organization should consider its strategy, what jobs and/or functions will be critical for success and market-competitive pressures. 15

Monitoring Compensation Costs ď&#x192;ź Examine the difference between policy and practice ď&#x192;ź Compute a compa-ratio, which is an index of the correspondence between actual and intended pay.

Globalization, Geographic Region, and Pay Structures  Pay structures differ across countries in level & relative worth of jobs.  Expatriate pay and benefits depend on assignment’s nature and length.  Most companies have a policy that provides for pay differentials based on geographic location to prevent inequitable treatment of employees who work in more expensive parts of the country.

Participation and Communication in the Process Participation

 Should involve those who will manage and be affected by the process.  Includes recommending, designing and communicating a pay program.  Typically, pay-level decisions are only made by top management.

Communication

 Impacts employees' perceptions of equity, attitudes and behaviors.  Managers must be prepared to explain why the pay structure is designed the way it is and to judge whether changes should be made to the structure. 18

Problems with Job-Based Pay Structures 1. reinforces top-down decision making as well as status differentials. 2. bureaucracy, time and cost required to generate and update job descriptions can become a barrier to change. 3. job-based structure may not reward desired behaviors, where the knowledge, skills, and abilities needed yesterday may not be helpful today and tomorrow. 4. system encourages promotion-seeking behavior, but discourages lateral movement. 5. encourages lack of flexibility and initiative; â&#x20AC;&#x153;not in my job descriptionâ&#x20AC;? 19

Responses to Problems with Job-Based Pay Structures • Delaying and Banding • Skill-based • Competency-based

Can the U.S. Labor Force Compete? • Factors to consider when determining where to locate production  Instability of country differences in labor costs  Skill levels  Productivity  Considerations other than labor costs

Executive Pay Executive pay makes up a small portion of labor costs. Executives have a disproportionate ability to influence organizational performance. Issues include not only how much executives are paid but how they are paid. U.S. executives are highest paid in the world. Ratio of executive pay to average worker pay creates a "trust gap" - workers do not trust executives' intentions and resent their pay.

Equal Employment Opportunity  Equality of treatment in pay percentages has generally risen over the last two to three decades, but significant race and sex differences in pay clearly remain  Asian Americans earn 16% more than Whites  Between 1960 and 2014, whites decreased from 90% to 80% of all employees

Comparable Worth  Comparable worth (or pay equity) is a public policy that advocates remedies for any undervaluation of women's jobs.  Based on the idea that individuals should obtain equal pay, not just for jobs of equal content, but for jobs of equal value or worth.  Courts have consistently ruled that using the going market rates of pay is acceptable defense in comparable worth litigation suits.

Wage Laws  Fair Labor Standards Act (FLSA) of 1938 established a minimum wage and overtime pay rate.  Minimum wage is the lowest amount that employers are legally allowed to pay.  Exempt – those employees (executive, professional, administrative and outside sales) not covered by the FLSA and not eligible for overtime pay.  Davis-Bacon Act and Walsh-Healy Public Contracts Act require federal contractors to pay employees no less than area’s prevailing wages.

Overtime Pay ď śFLSA requires that employees be paid at a rate of one and a half times their hourly rate for each hour of overtime worked beyond 40 hours in a week. The hourly rate includes base wage plus other components such as bonuses and piece-rate payments.

Summary (1 of 2)  Equity theory - social comparisons influence how employees evaluate their pay.  Employees make external comparisons between their pay and pay they believe is received by employees in other organizations which may have consequences for employee attitudes and retention.  Employees make internal comparisons between what they receive and what they perceive others within the organization are paid which may have consequences for internal movement, cooperation and attitudes and play a role in the controversy over executive pay.

Summary (2 of 2)  Pay benchmarking surveys and job evaluation are tools used in managing pay level and job structure components of the pay structure.  Pay surveys permit organizations to benchmark their labor costs.  Globalization is increasing the need to be competitive in labor costs and productivity.  Pay structure is moving to fewer pay levels to reduce labor costs and bureaucracy and shifting from paying employees for narrow jobs to giving broader responsibilities.