otivational tool for aligning employees)nterests with broader
organization
ignificant organizational cost (if not the largest!)
ritical part of business strategy
Pay from EmployeeàView
olicies regarding wages, salaries, and other earnings affect
overall income and standard of living
oth level of pay and fairness compared with others0ay
are important
sign of status and success
Group Conversation
hat is your experience with compensation?
ave you ever felt underpaid? Why? What was the
outcome?
ave you ever felt overpaid? Why? What was the
outcome?
Equity Theory & Fairness
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.
Salary Levels
ay structure
ay level

ob structure
ndividual pay (Next lecture!)
External equity
Social
Comparisons
of Pay
ocus on what employees in
other organizations are paid
for doing same job

arket pay surveys
Internal equity
ocus on what employees
within same organization are
paid

ob evaluations
Group Conversation
oes internal or external equity matter more to
you? Why?
hy might we need to create internal inequity to
reduce external inequity?
Concepts and Consequences
PAY
STRUCTURE
DECISION
AREA
ADMINISTRATIVE
TOOL
FOCUS OF
EMPLOYEE PAY
COMPARISONS
CONSEQUENCES OF
EQUITY PERCEPTIONS
Pay level
Market pay surveys
External Equity
External employee
movement (attraction and
retention of quality
employees); labor costs;
employee attitudes
Job structure
Job evaluation
Internal Equity
Internal employee
movement (promotion,
transfer, job rotation;
cooperation among
employees; employee
attitudes
Pay Levels – Market Pressures
Product market competition
Labor market competition
rganizations must sell goods
and services at a quantity and
price that brings a sufficient
return on investment
laces an upper bound on
labor costs and compensation
abor costs include direct and
indirect payments, staffing
levels
eflects number of workers
available relative to number of
jobs available
hortages and surpluses
influence pay levels
rganizations not competitive
in labor market will not attract
and retain employees of
sufficient numbers and quality
laces a lower bound on pay
levels
Employees as a Resource
mployees as a Resource
nvest in employees and
expect valuable returns
ay policies and programs may
be the most important HR
tool
valuate in terms of cost
and returns
hould attract, retain, and
motivate a high-quality
workforce
Deciding What to Pay
ange of pay depends on the competitive environment
fficiency wage theory
mployees paid more than they would receive elsewhere will
put forth effort to retain good jobs
Market Pay Surveys
enchmarking: comparing an organizationàpractices
against those of the competition
ay surveys require answers to:
1.Which employers should be included in the survey?
2.Which jobs are included in the survey?
3.If multiple surveys are used, how are all rates of pay
weighted and combined?
etermine return of investment in employees
using revenues/employees and revenues/labor
costs ratios
Group Conversation
ick someone from your group and think about
their job
hat jobs and industries would you need to
benchmark their pay against?
ould every job in their organization have a clear
benchmark, or only some jobs? That is, are some
jobs so unique and specialized, that benchmarking
would be challenging?
Market Pay Surveys
Key jobs
Non-key jobs
enchmark jobs
table content,
common to many
organizations
nique to
organizations
annot be directly
valued or
compared through
market surveys
Rate ranges
(pay grades)
ermit company
to recognize
differences in
employee
performance,
seniority, and
training in setting
individual pay

ay be single rate
for all employees
within same job
Developing a Job Structure
Job evaluation
The point-factor system
Composed of compensable factors
and a weighting scheme
First, a priori weights can be assigned
Typically includes input from many
people
Second, weights can be derived
empirically based on how important each
factor seems in determining pay in the
labor market
Job Structure ay Grades
rouping jobs into pay classes
ach job within a grade has same rate range
ermits greater flexibility in moving employees
from job to job
ange spread is larger at higher levels
Sample Pay Grade Structure
Market vs. Job Evaluation
ometimes average pay falls significantly above or below
the policy line
upply and demand
onsider which positions are most central to dealing with
critical environmental challenges and opportunities in reaching
organizationàgoals

ost organizations emphasize external
comparisons/market pricing

onitoring Compensation Costs
ay structure represents organizationàintended policy, but
actual practice may not coincide
rade compa-ratio = Actual average pay for grade/Pay midpoint
for grade
When Market Rates go Global
GDP per
Worker by
Country
Why the US is still competitive
Skill levels
Productivity
uality and
productivity
of national
labor forces
can vary
dramatically
ower labor
costs may
reflect lower
average skill
level of
workforce
abor cost
per hour
divided by
productivity
per hour
worked
ross
domestic
product
Total operating
costs
Location
roduct
development
speed
uick
response to
customers
educed
inventory
levels
Paying the person
ompetency-based pay: compensate
employees to learn more skills and become
more flexible in their jobs
kill-based pay
ncreases workforce flexibility
acilitates decentralization of decision
making to those who are most
knowledgeable
ontributes to a climate of learning and
adaptability and gives employees a broader
view of organization functions

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