Designing A Base Pay Structure After determining internal equity relationships among jobs, and Identifying competitive pay

practices in the market place, The next order of business is the design of a pay structure. Designing A Base Pay structure The Architects of the Pay tructure !ust" #. $stablish a pay policy line. %. &esign pay grades using pay grade minimum and maximum and desired spreads of the range. '. &etermine overlap bet(een pay grades. ). &etermine if the organi*ation needs more than one pay structure and (hy. Compensation Policy Guidelines &ecisions that provide guidelines for the compensation manager to follo( in developing a pay structure are made at the highest levels of the organi*ation. THESE POLICY DECISIO S I CL!DE" l l l l l !inimum and maximum levels of pay. The general relationship among pay levels. +hether or not the pay structure should lead or lag or lag,lead the market. The division of the total compensation dollar. enior management decides ho( best to administer its pay policies. -o( much, to (hom, (hen, (here and ho(.

Pay Structure Arc#itecture +ith the generation of internal and external pay data and information, managers are no( ready to design a pay schedule. l To do so they must" - &etermine a trend or pay policy line. - &ecide on the need for one or more pay structures. - &isplay job data - $stablish the characteristics of the pay structure .number, (idth, and height of pay grades, and overlap/ - 0ock overlapping pay structures ((hen using more than one)

$% Determining A Pay Policy Line $ach organi*ation must develop its o(n pay policy line, (hich is a trend line or line of best fit that best represents the middle value of jobs that have been evaluated or classified to have particular (orth. l The procedure most organi*ations follo( in establishing a pay policy or trend line is to identify the market rates for various benchmark jobs that cover the entire spectrum from lo(est to highest rates of pay. l l l l 1y plotting on a chart the pay2rate information obtained through surveys, a scatter diagram or scatter plot can be developed. &ifferent procedures are available for developing a trend line from a scatter diagram...0ine of sight...T(o2point... And the least squares methods. Another simple procedure is to obtain the market rate or going rate of pay for the lo(est and highest paid jobs. 3onnecting these points can also provide a first approximation for a pay policy line. !any organi*ations use the pay policy line to set midpoint values for all their jobs. Pay policy lines are useful (hen plotting survey data and comparing them (ith the internal pay structure. 4rom the pay policy line, organi*ations establish the minimum and maximum pay levels, the relationship bet(een pay grades, and the range of a pay grade.

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&% T#e eed 'or (ore T#an One Pay Structure l l l There are a number of logical and rational considerations for having multiple pay structures that focus on the forces that influence the actual pay of the various occupational groups comprising most organi*ations. A major reason for using multiple pay structures is that rates of pay for more advanced jobs increase geometrically rather than linearly. It is not unusual for large organi*ations to have at least three pay structure lines" l 1lue collar manual labor, craft, and trade (orkers. l 5onexempt (hite collar salaried (orkers. l !anagerial, administrative, and professional exempt employees. ome organi*ations have a fourth pay structure for their highly paid executives.

)% Displaying *o+ Data $ven (hen there is an apparent need for more than one trend line or pay policy line that (ould lead to more than one pay structure, there is a statistical procedure for avoiding multiple structures. l This procedure allo(s pay data to be presented by means of some form of curvilinear relationship rather than a relationship that must be a straight line. l l A pay structure using arithmetic progression (ill produce a straight pay police line. 6eometric progression (here pay rates vary by some constant rate of increase (ill produce a curved pay policy line.

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To display a geometric progression in a straight line a logarithmic scale is used. T(o values of central tendency most used in analy*ing pay relationships are the" - !ean - !edian

+hen the market value or going rate of a job is being determined, the average value or mean is frequently the value selected. 1ut it is not al(ays the best choice... In the final analysis it depends on the distribution of the data. ,% Identi-ying T#e Lo.est And Hig#est /ates O- Pay l In identifying the lo(est rate of pay it is important to pay attention to" - 0egal requirements. - The prevailing union scales in local markets. - All area (age scales. A high lo(2end rate pushes all rates too high.....And a lo( lo(2end rate promotes to much turnover. -ighest rates of pay are a more subjective consideration. The highest and lo(est average values should be the midpoint of the pay for those jobs assigned this rate (hen there is a range of pay available for each category.

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0% Determining Progression 'rom Lo.est To Hig#est Pay /ate l l l l l l The basic design criterion that determines pay differences in moving through a pay structure is the midpoint2to2midpoint differences. !idpoint2to2midpoint pay difference is the percentage change in the middle value from one adjacent pay grade to the next. !idpoint2to2midpoint pay progressions range from as lo( as '7 to as high as %87. and possibly higher is some cases. 5ormally, lo( midpoint2to2midpoint differences are found in pay structures of lo(er2paid, unskilled, semiskilled, and clerical employees. -igh differences are found in pay structures of the executives and the senior managers of an organi*ation. The follo(ing issues should be considered (hen determining the appropriate midpoint2to2midpoint differences" - The smaller the difference bet(een midpoints the more pay rates available to assign to a specific job. - The more rates of pay the more opportunity for assigning different rates of pay to jobs (ith minor differences. The greater the differences bet(een pay rates the easier it is for jobholders to perceive differences in (orth bet(een jobs. A small difference bet(een midpoints may force an organi*ation to have more than one pay structure. 4or jobs at the lo(er end of the pay structure, a 97 to :.87 difference in midpoints may be appropriate;

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4or those in the middle of the pay structure an <7 to #=7 difference (ould typically apply; and At the executive end of the structure the difference (ould normally range from #87 to %87.

1% De2eloping Pay Grades Pay grades are nothing more than convenient groupings of a (ide variety of jobs or classes similar in (ork difficulty and complexity requirements but possibly having nothing else in common. l It may provide for a single rate, or it may allo( for a range of pay (ithin a certain grade. l l l The top or maximum rate of pay of a pay grade states that this is the most that (ork produced by a job in this grade is (orth to the organi*ation. The bottom places a minimal value on the contributions of the assigned job. The distance bet(een minimum and maximum recogni*es the range of performance and experience of incumbents in the assigned job.s/.

General C#aracteristics O- Pay Grade Systems l l l l l l l $ach grade provides for a range of pay. +ithin a pay grade range there is a minimum, a midpoint, and a maximum pay. The range from the minimum to the maximum (ithin a single pay grade may vary from %= to #== percent. The most common range is from '= to 8= percent. The number of steps (ithin a grade may also vary. 6rades having steps (ill normally have from ' to #= steps, (ith 9 to : in2grade steps most common. There is a direct relationship bet(een the rate of increase per step and the number of steps (ithin a grade. The midpoint of each pay grade is normally a constant percentage greater than the one preceding it. This percentage normally varies from 8 to #= percent.

Adjoining pay grades normally overlap. If there is a '= percent range (ithin a pay grade and there is a #= percent difference bet(een midpoints, there (ill be a 9: percent overlap. l The requirements of the organi*ation (ill provide ans(ers to the correct number of grades, the number of steps (ithin grades, and their rates of progression (ithin and bet(een grades. The number of pay grades to be included (ithin a pay structure varies (ith the circumstances22there is no right number. Pay Structure Terms l ingle2>ate Pay 6rade - A flat rate structure that appears in organi*ations in (hich pay rate negotiations bet(een management and unions are common practice, in some small organi*ations, or in industries using skilled craft(orkers. !ultiple2Point Pay tructure

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ome organi*ations that use point2factor job evaluation plans establish a rate of pay for every possible point score. 1roadbanding - The grouping of jobs of significant differences or (orth or value (ithin one band or pay grade. - This pay grouping or expanded pay grade may have a range varying from 8= percent to #== percent and include jobs that have responsibilities and duties that vary in complexity and difficulty and require significantly different kno(ledge and skills. >ange or pread &imension - The difference bet(een the upper and lo(er limits of the grade. It may be expressed in absolute dollar amounts or as a percentage. Pay 6rade +idth - Procedures for establishing a pay grade (idth are not as specific or precise as those related to the spread or height of the pay grade. - +hen using a point2factor plan, points often are the x axis values.

Administering Compensation Systems Pay ecrecy $mployee Participation +age 3ompression Impact of Inflation All2 alaried +ork 4orce +age 3oncessions

Pay ecrecy An organi*ational policy prohibiting employees from revealing their compensation information to anyone. +age2>ate 3ompression 3ompression of differentials bet(een job classes, particularly the differential bet(een hourly (orkers and their managers. +age 3oncessions The concept that male and female jobs that are dissimilar, but equal in terms of value or (orth to the employer, should be paid the same. 0egal >egulation of 3ompensation ystems The 4air 0abor tandards Act .40 A/ !inimum +age -ours of +ork $qual Pay Act .$PA/ ?ther 0a(s Affecting 3ompensation

Compensation as a moti2ational tool

!otivating $mployees through 3ompensation Pay $quity .also &istributive 4airness/ An employee@s perception that compensation received is equal to the value of the (ork performed. A motivation theory that explains ho( people respond to situations in (hich they feel they have received less .or more/ than they deserve. Individuals form a ratio of their inputs to outcomes in their job and then compare the value of that ratio (ith the value of the ratio for other individuals in similar jobs.

>elationship bet(een Pay $quity and !otivation

E3pectancy T#eory and Pay E3pectancy T#eory A t#eory o- moti2ation t#at #olds t#at employees s#ould e3ert greater .or4 e--ort i- t#ey #a2e reason to e3pect t#at it .ill result in a re.ard t#at t#ey 2alue% Employees also must +elie2e t#at good per-ormance is 2alued +y t#eir employer and .ill result in t#eir recei2ing t#e e3pected re.ard%

Pay2 Pay2for2 for2Performance and $xpectancy Theory

Pay Secrecy An organi*ational policy prohibiting employees from revealing their compensation information to anyone. 3reates misperceptions and distrust of compensation fairness and pay2for2performance standards. Arguments against secrecy" Ano(ledge of base pay is the strongest predictor of pay satisfaction, (hich is highly associated (ith (ork engagement Ano(ledge of base pay more strongly predicts pay satisfaction than does the actual amount of pay received by employees. T#e Bases -or Compensation -ourly +ork +ork paid on an hourly basis. Piece(ork +ork paid according to the number of units produced. alary +orkers $mployees (hose compensation is computed on the basis of (eekly, bi(eekly, or monthly pay periods.