Bauer, Human Resource Management
SAGE Publishing, 2020
Lecture Notes
Chapter 11: Developing a Pay Structure
Learning Objectives
11.2 Describe how to develop internally, externally, and individually equitable, and legally
compliant pay structures.
11.4 Identify basic principles underlying person-based pay structures.
11.6 Evaluate issues of pay administration such as compression and pay transparency.
Chapter Summary
This chapter aims to describe the rigorous and systematic approach needed to develop a pay structure
that establishes effective pay policies that promote an organization’s strategic goals. The chapter begins
with an overview on understanding how pay fits into a reward system and distinguishing between two
Annotated Chapter Outline
I. Pay as a Reward: understanding how pay fits into a reward system
A. Reward Systems: the policies, procedures, and practices used by an organization to
determine the amount and types of returns individuals, teams, and the organization
B. Relational Returns: nonmonetary incentives and rewards, such as new learning and
developmental opportunities, enriched and challenging work, job security, and
recognition
Bauer, Human Resource Management
SAGE Publishing, 2020
A. Equity Theory: understanding how an individual’s sense of fairness is influenced by
others with whom they compare themselves
i. In the context of a reward system: individual’s perception of fairness as driven by
the distributed rewards they receive relative to how much they have contributed
and how that ratio of rewards compares to that of others
viii. Useful for correcting misperceptions of the reward system
B. Organizational Justice Theory: stems from equity theory and posits that individuals’
emotions, thoughts, and behaviors are influenced by the extent to which they perceive
distributive, procedural, and interactional justice at work
i. Distributive justice: perceived fairness or equity regarding the allocation of an
outcome or resource, which can include rewards, punishments, or other
organizational consequences
explanation regarding the details of a particular process
III. Developing a Pay Structure: ensuring that resulting policies of a pay structure adhere to
principles of equity and fairness
A. Ensuring Internal Equity
i. Internal equity: fairness of pay rates across jobs within an organization
ii. Job structure: ranking of jobs based on their respective worth
Bauer, Human Resource Management
SAGE Publishing, 2020
B. Ensuring External Equity
i. External equity: extent to which the pay for a particular job is competitive and
fair relative to the pay of the same or similar jobs at other organizations
v. Market reviews: process of collecting pay data for benchmark jobs from other
organizations
a. Three primary sources of market review data
1) Traditional survey: typically collects data from employers and is
conducted by a government agency or professional organization
b. Yield important pay information regarding the mean or median pay
level as well as the 25th and 75th percentiles
c. Often collect and report information about the organizations
vi. Match job descriptions
Bauer, Human Resource Management
SAGE Publishing, 2020
1) Collection occurred in the past
2) Decisions based on the data will be implemented in the future
viii. Apply survey weights
a. Inaccurate data and sampling errors
C. Integrating Internal Equity and External Equity
i. Set pay levels for all benchmark and nonbenchmark jobs by integrating the job
structure data gathered during the job evaluation and the market pay data
gathered from the market review
a. Created by using regression analysis
b. Using a regression equation for calculating the market pay rates for
nonbenchmark jobs
iv. Pay policy line: how an organization translates information about the internal
job structure and external pay rates of competitors into actionable pay practices
a. Can be developed by leading above, matching at, or lagging below the
market pay line
v. Pay grades: groups of jobs with similar job evaluation point values that are then
assigned common pay midpoint, minimum, and maximum values
a. Determining the pay-grade midpoint
D. Ensuring Individual Equity
i. Individual equity: fairness of how pay is administered and distributed to
individual employees working similar jobs within the same organization
a. Differences in pay rates should be attributable to differences in
Bauer, Human Resource Management
1) FLSA defines key concepts relevant for determining how hours
are counted and tracked
ii. Executive Order 11246: expanded protections for different forms of employment
discrimination to include employers with federal contracts or subcontracts in
excess of $10,000
iii. National Labor Relations Act (NLRA): includes a provision related to pay
transparency
a. Section 7 stipulates that employees protected under the act have a right
to discuss pay as part of activities related to collective bargaining and
IV. Person-Based Pay Structures: emphasize individuals’ unique competencies or skills when
determining pay, such that a person who possesses a particular competency or skill receives
additional pay
A. Offer organizations greater agility when managing work flow
B. Linked to greater production quality and quantity, lower labor costs, greater individual
skill change, and better attitudes
V. Executive Pay
A. Pay dispersion: discrepancy between CEO pay and average worker pay
B. Large pay dispersions related to CEOs and other executive positions have been shown to
have negative implications for short- and long-term company performance
Bauer, Human Resource Management
SAGE Publishing, 2020
B. Adherence to Pay Policies
i. Compa-ratio: how much employees are actually paid for a given job or pay grade
as compared to the espoused pay structure and policies
a. Useful metric for identifying the extent to which an organization is
adhering to the pay policies and pay structure
C. Pay Transparency and Secrecy
i. Pay transparency: extent to which an organization communicates pay
information and the extent to which employees are permitted to discuss pay
with each other