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Chapter 12
Establishing a Pay Structure
This chapter describes how managers weigh the importance and costs of pay to arrive at a
structure for compensation and levels of pay. The chapter first defines the basic decisions in
terms of pay structure and pay level. Next, it looks at several considerations that influence these
decisions: legal requirements related to pay, economic forces, the nature of the organization’s
jobs, and employees’ judgments about the fairness of pay levels. The chapter then describes
methods for evaluating jobs and market data to arrive at a pay structure. This is followed by a
summary of the alternatives to the usual focus on jobs. The chapter closes with a look at two
issues of current importance—pay for employees on leave to serve in the military and pay for
executives.
Chapter Outline
Decisions about Pay
• Organizations make decisions to define a job structure, or relative pay for different jobs
within the organization. Organizations also must establish pay levels, or the average paid
for the different jobs.
• These decisions are based on the organization’s goals, market data, legal requirements,
and principles of fairness.
Legal Requirements for Pay
• Differences in pay must relate to factors such as a person’s qualifications or market levels
of pay.
• Under the Fair Labor Standards Act (FLSA):
• Employer must pay at least minimum wage established by law.
• Overtime pay for hours worked beyond 40 in each week must be paid.
Economic Influences on Pay
• To remain competitive, employers must meet product and labor market demands.
Employee Judgments about Pay Fairness
• According to equity theory, employees think of their pay relative to their inputs, such as
training, experience, and effort. To decide whether their pay is equitable, they compare
their outcome (pay)/input ratio with other people’s outcome/input ratios.
Job Structure: Relative Value of Jobs
• To conduct a job evaluation, the committee identifies each job’s compensable factors,
meaning the characteristics of a job that the organization values and chooses to pay for.
Pay Structure: Putting It All Together
• The traditional approach to building a pay structure is to use a job-based approach.
• Alternatives to the traditional approach include broad banding and skill-based pay.
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Pay Structure and Actual Pay
• The HR department should compare actual pay to the pay structure, making sure that
policies and practices match by using a compa-ratio, the ratio of average pay to the
midpoint of the pay range.
Current Issues Involving Pay Structure
• The Uniformed Services Employment and Reemployment Rights Act (USERRA)
requires employers to make jobs available to any of their employees who leave to fulfill
military duties for up to five years.
• Executive pay has drawn public scrutiny because top executive pay is much higher than
average workers’ pay.
Learning Objectives
LO 12-1: Identify the kinds of decisions involved in establishing a pay structure.
LO 12-2: Summarize legal requirements for pay policies.
LO 12-3: Discuss how economic forces influence decisions about pay.
LO 12-4: Describe how employees evaluate the fairness of a pay structure.
LO 12-5: Explain how organizations design pay structures related to jobs.
LO 12-6: Describe alternatives to job-based pay.
LO 12-7: Summarize how to ensure that pay is actually in line with the pay structure.
LO 12-8: Discuss issues related to paying employees serving in the military and paying
executives.
Society for Human Resource Management Body of Competency &
Knowledge
This chapter contains content, which may be identified within the following content areas:
• Total Rewards
• Employee Relations
• Diversity & Inclusion
• Business & HR Strategy
• Risk Management
• U.S. Employment Law & Regulations
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Human Resource Certification Institute’s A Guide to the HR Body
of Knowledge
This chapter contains content, which may be identified within the following content areas:
• Business Management & Strategy
• Workforce Planning and Employment
• Compensation and Benefits
• Risk Management
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Question Guidance to Vignettes and Discussion Questions
HR How To
Closing the Pay Gap
1. Suppose a company investigates its pay structure and finds that female managers earn
less than male managers because they have not spent much time managing sales and
production functions. Which of the ideas listed here would you recommend as a way to
address this pay gap?
2. Suppose a company investigates its pay structure and finds that female engineers earn
less than male engineers with the same qualifications because the men request higher
salaries when they apply for jobs. Which of the ideas listed here would you recommend?
Did You Know?
A Majority of Workers Are Reluctant to Negotiate Pay
1. Have you ever tried negotiating for higher pay? If so, what did you learn from the
experience? If not, what do you think you might gain or lose from trying?
HRM Social
Crowdsourcing Pay Data
1. Suggest one or two reasons why an employer might want to look up crowdsourced pay
data.
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2. Suppose a customer service supervisor contacts the HR office because he looked up pay
data for that job and learned he is paid $10,000 less than the average. His own manager
didn’t have an answer and referred him to HR. How should HR professionals prepare for
this kind of situation?
skill development programs.
HR Oops!
Employees Doubt Their Pay Is Fair
1. Based on the evidence given, what seem to be likely reasons why most employees doubt
they are paid fairly?
2. Suggest one or two ways that better communication could address the issues you
identified in question 1.
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Best Practices
Parkland Health Rethinks Entry-Level Pay Rates
1. How would you have expected these pay rate changes to affect Parkland Health’s
performance?
2. Do you agree with Jim Dunn’s assertion that these pay decisions were “the right thing to
do”? Why or why not?
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End of Chapter Questions and Cases
Thinking Ethically
Is Pay Disparity in the Fast-Food Business Ethical?
1. Under what conditions, if any, is it ethical for an employer to pay employees a wage low
enough that full-time workers are eligible for public assistance?
2. Under what conditions, if any, is it ethical for a CEO to make a thousand times more than
a front-line worker in the same organization?
Review and Discussion Questions
1. In setting up a pay structure, what legal requirements must an organization meet? Which
of these do you think would be most challenging for a small start-up business? Why? (LO
12-1)
2. In gathering data for its pay policies, what product markets would a city’s hospital want
to use as a basis for comparison? What labor markets would be relevant? How might the
labor markets for surgeons be different from the labor market for nursing aides? (LO 12-
1)
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Hill Education.
Answer: Product markets would include all the organizations that offer competing goods
and services. Labor markets typically include companies with similar products and
companies in other industries that hire similar employees. The labor market for surgeons
would differ from that of nursing aides due to the fact that surgeons are more highly
skilled and educated, so there would be a high demand for and a low supply of surgeons.
Since nursing aides have less training and education, there would be a higher supply and
lower demand for them as opposed to surgeons.
3. Why might an organization choose to pay employees more than the market rate? Why
might it choose to pay less? What are the consequences of paying more or less than the
market rate? (LO 12-3)
4. Suppose you work in the HR department of a manufacturing company that is planning to
enrich jobs by having production workers work in teams and rotate through various jobs.
The pay structure will have to be adjusted to fit this new work design. How would you
expect the employees to evaluate the fairness of their pay in their redesigned jobs? In
terms of equity theory, what comparisons would they be likely to make? (LO 12-4)
5. Summarize the way organizations use information about jobs as a basis for a pay
structure. (LO 12-5)
6. Imagine that you manage human resources for a small business. You have recently
prepared a report on the market rate of pay for salespeople, and the company’s owner
says the market rate is too high. The company cannot afford this level of pay, and
furthermore, paying that much would cause salespeople to earn more than most of the
Fundamentals of Human Resource Management, 8e Instructor’s Manual
company’s managers. Suggest three possible measures the company might take to help
resolve this conflict. (LO 12-5)
7. What are the advantages of establishing pay ranges, rather than specific pay levels, for
each job? What are the drawbacks of this approach? (LO 12-5)
8. Suppose the company in Question 1 wants to establish a skills-based pay structure. What
would be some advantages of this approach? List the issues the company should be
prepared to address in setting up this system. Consider the kinds of information you will
need and the ways employees may react to the new pay structure. (LO 12-6)
9. Why do some employers subsidize the pay of military reserve members called up to
active duty? If the military instead paid these people the wage they command in the
civilian market (that is, the salary they earn at their regular jobs), who would bear the
cost? When neither the reserve members’ employers nor the military pays reservists their
civilian wage, reservists and their families bear the cost. In your opinion, who should
bear this cost—employers, taxpayers, or service members (or someone else)? (LO 12-8)
12–10
10. Do you think U.S. companies pay their chief executives too much? Why or why not? (LO
12-8)
Answer: While the responses given to this question will vary, all of them should indicate
Taking Responsibility
IKEA Tries to Provide a Living Wage
1. What are some risks and challenges that IKEA is likely to face as a result of basing its
minimum pay on the living-wage formula, rather than just legal requirements and the
market rate?
2. Given that IKEA’s management considers the living wage to be consistent with the
company’s mission, what advice would you give the company for implementing it
successfully?
Managing Talent
How Target Aims for Competitive Employee Wages
1. Summarize how economic forces are influencing Target’s decisions about pay.
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2. If you worked in Target’s HR department, how would you recommend that management
communicate the fairness of its pay structure?
HR in Small Business
Jet.com’s No-Haggle Approach to Compensation
1. How would you expect Jet.com’s pay structure to affect its ability to meet legal
requirements for equal employment opportunity?
2. Based on the information given, how does Jet apply the elements of pay structure (pay
rates, pay grades, and pay ranges)? If some elements don’t apply, explain why.
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Recommended Connect Activities
I’m with the Band
Learning Objective: 12-06 Describe alternatives to job-based pay.
Activity Summary: This case analysis introduces students to the terms and goals of a broad-
banding organizational structure.
Follow-Up Activity: Based on what the book and this case present on broad-banding pay
structures, students should research the industries/companies that would most benefit from this
type of pay structure. Further work could be done by having one group of students identify what
an organization would want from broad-banding, and another group of students would take the
perspective of the employees. Breaking it down further, the group that looks at the employee
perspective could be tasked with what each level of employee would want from a broad-banding
structure.
Job Structure: Relative Value of Various Jobs
Learning Objective: 12-05 Explain how organizations design pay structures related to jobs.
Activity Summary: In this case analysis, students learn about the steps used to assess and design
a pay structure in any industry.
Follow-Up Activity: Provide students with the following article, How To Set A Salary And
Create Pay Grades from Zip Recruiter, which comments on ways to set up a pay grade system.
Towards the end of the article, there are best practices to follow provided by SHRM. Once
students have seen an example of how a pay grade system works, they can then apply this type of
approach to any local business. Consider having groups of students design pay grade systems for
a variety of industries and company sizes.
Factors Affecting a Company Pay Structure
Learning Objective: 12-01 Identify the kinds of decisions involved in establishing a pay
structure.
Activity Summary: Matching terms in this activity will help students distinguish between the
various factors that impact an organization’s pay structure.
Follow-Up Activity: Students should assume the role of the HR manager at their current place
of employment. Working individually, and then presenting their choices, students will determine
which definitions/factors would have the greatest impact on improving employee engagement
and achieving organizational outcomes.
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Communicating Executive Pay
Learning Objective: 12-08 Discuss issues related to paying employees serving in the military
and paying executives.
Activity Summary: The video case details the issues surrounding both executive and employee
pay structures.
Follow-Up Activity: The New York Times reported on the salary packages of six CEOs at
leading American companies in May 2018 in an article, Six C.E.O. Pay Packages That Explain
Soaring Executive Compensation. The article gives a brief overview of the ratio of executive to
median salary pay, pay structure, and comparisons across industries. Working in small groups,
students can further research each of the six companies listed. Topics would include financial
performance, organizational pay changes, and arguments for/against high executive pay.
Additionally, students should use terms learned in the textbook and apply them to each scenario.
Fundamentals of Human Resource Management, 8e Instructor’s Manual
Classroom Exercises
Students may benefit from exercises that illustrate the concepts of the chapter. Use these along
with CONNECT activities.
1. Pay Structures
Instructors may engage students in a general discussion meant to support the
understanding of pay structures. Both Review and Discussion questions #1 and #8 may
be used to facilitate this discussion.
2. Pay Gap
To facilitate a discussion concerning pay equity and wage disparity, instructors may use
the HR Oops and HRM Social vignettes. Review and Discussion questions #2 and #3 may
then help contextualize for the students the need to focus on compensable factors and
mitigate pay decisions based on any other factors.
3. Living Wages
Instructors may facilitate a discussion on living wages. Students may first be asked to
focus on the Thinking Ethically vignette to discuss the impact of low-paying wages and
who bears the cost. Then, discuss the Taking Responsibility vignette to contrast different
approaches companies may take in terms of pay structure.
4. HRM Career Considerations
Instructors may wish to have students identify components in Chapter 12 within both the
Society for Human Resource Management Body of Competency & Knowledge and the
Human Resource Certification Institute’s A Guide to the HR Body of Knowledge.
Discussion could focus on how these chapter concepts are important to the development
of their careers and potential certification.
5. Vignette Discussions
Any of the vignettes (see above), may be employed for classroom discussion. Students
could be asked to respond as individuals or placed into groups for discussion. Individuals
and/or groups may then be asked to defend their responses and rationale when comparing
and contrasting other responses.