ESTABLISHING A BASE

PAY STRUCTURE
Chapter 9
Week 12
Base Pay
• Base Pay refers to monetary compensation employees receive

on a regular basis for performing their jobs.

• Base Pay does not include incentives and benefits.

 Wages are payments that are directly based on the number of

hours worked.
 Salaries are regular payments, which employees receive in each

period regardless of the number of hours worked.

 Importance of Base Pay
Employer’s View: Employee’s View:
• Pay is powerful tool for meeting • Employees care about pay policies
the organization’s strategic because such policies affect their
goals. income and standard of living.

• It influences what type of people • Besides the level of pay, employees

are attracted to and remain with care about its fairness compared
the organization. with what others earn.

• Pay impacts employee attitudes • Employees consider pay a sign of

and behaviors. status and success.

• Employee compensation is
significant organizational cost
and therefore, requires close
monitoring.
Decisions about Pay
• Organizations make decisions about two aspects of
pay structure:

Job Structure

Pay Level
 Decisions About Pay (continued)

Job Pay
Pay Level
Structure Structure
• The relative • The average • The pay
pay for pay of jobs in policy
different jobs a firm. resulting
within the from job
organization. structure and
pay-level
decisions.
 Job Structure vs Pay Level
Difference in Pay
Job A Job B Average Pay Rate

Organization 1 $40,000 $60,000 $50,000 $20,000

Organization 2 $45,000 $55,000 $50,000 $10,000

 Equity Theory & Fairness
Pay, benefits,
opportunities, etc.

the same,
more or less
OUTCOME OUTCOME
INPUTS
<=> INPUTS
?
Effort, ability,
experience etc.

A person evaluates fairness by comparing their ratio with others.

Equity Theory & Fairness (continued)

Person Referent

Equity Outcomes = Outcomes

Inputs Inputs

Underpayment Outcomes < Outcomes

Inequity Inputs Inputs

Overpayment Outcomes > Outcomes

Inequity Inputs Inputs
Equity Theory & Fairness (continued)

• If employees perceive an underpayment inequity, they

may attempt to restore equity by:

Increasing their outcomes (e.g., ask for a pay raise or

promotion)

Reducing their inputs (e.g., put less effort in their work)

Leaving the company

 Equity Theory and Fairness (continued)

Pay Structure Administrative Focus of Consequences of

Decision Area Tool Employee Pay Equity Perceptions
Comparisons
Pay Level Market pay surveys External equity External employee
movement, labor
costs, employee
attitudes

Job Structure Job evaluation Internal equity Internal employee

movement, cooperation,
employee attitudes
 Developing Pay Levels – Market Pressures

• Product Markets • Labor Markets

• The organization’s product market • Organizations must compete to
includes organizations that offer obtain human resources in labor
competing goods and services and markets.
serve the same customers.
• Organizations need to be
• Organizations compete on multiple competitive in the labor market or
dimensions such as, quality, service, otherwise they will fail to attract
and price. and retain employees of sufficient
quality.
• Product market competition places
an upper limit on the pay an • Labor market competition places a
organization will offer. lower bound on pay levels.
Deciding What to Pay
Pay at a rate above the market
(Market lead policy)

Pay at the rate set by the market

(Market match policy)

Pay at a rate below the market

(Market lag policy)
Pay Surveys
• A pay survey is a collection of data on compensation rates for

workers performing similar jobs in other organizations.

• Because jobs may vary widely in organizations, it is particularly

important to identify benchmark jobs.

• Benchmark jobs are jobs that are found in many organizations

and therefore, can be used for the purposes of comparison.

Key and Non-key Jobs
Key jobs - are benchmark jobs that have relatively stable

content and are common to many organizations so that

market-pay survey data can be obtained.

Non-key jobs are unique to organizations and cannot be

directly valued or compared through the use of market

surveys.
Pay Survey:
An Example
Calculating the Weighted Average Base Pay

• Weighted Average Base Pay = [(4*25000) + (4*31000) +

(3*30000) + (5*33000) + (4*29000) + (4*28000)] / 24

• Weighted Average Base Pay = $29,458.33

Developing a Job Structure
• Although external comparisons are important, employees
also evaluate their pay using internal comparisons.

• Job structure can be defined as the relative worth of

various jobs in the organization, based on internal
comparisons.

• In other words, a job structure orders jobs according to

their relative importance to the organization.
 Developing a Job Structure (continued)
• Job Evaluation • Compensable Factors
• An administrative procedure for • The characteristics of a job that
measuring the relative internal the organization values and
worth of the organization’s jobs. chooses to pay for.

• A job evaluation system is • Examples of such characteristics

composed of compensable include:
factors, which are assigned
weights on basis of their relative  Experience
importance to the organization.  Education
 Complexity
 Working conditions
 Responsibility
The Point Method
• The point method is a quantitative technique, which
evaluates jobs by comparing compensable factors.

• Compensable factors are weighted to represent the relative

importance of each factor to the job or organization.

• In addition, evaluators also divide each factor into a sufficient

number of degrees to identify the level of a factor present in
each job.

• Finally, evaluators assign points across various degrees or

levels of each compensable factor.
 Example of Point Method

Degree

Compensable Weight 1 2 3 4 5 Total

Factor
Skill 60% *60 120 180 240 300 240
Responsibility 25% 25 50 75 100 125 125
Effort 10% 10 20 30 40 50 30
Complexity 5% 5 10 15 20 25 10
Total 100% 405

*Points are calculated by multiplying the weights by the degrees.

 Job Hierarchy
Job hierarchy – A listing of jobs in order of their importance to the
organization, from highest to lowest.
Job Job Evaluation Points
Customer Service Representative 300
Senior General Clerk 225
Word Processing Operator 125
Typist 115
Receptionist 60
Developing the Pay Structure
• Organizations can use two approaches to develop the pay
structure:

 Market Pricing Approach

 Exclusively focuses on external comparisons.
 Directly bases pay on market surveys.

 Pay Policy Line Approach

 Focuses on both internal and external comparisons.
 Integrates job evaluation points with external market pay rates.
Job Evaluation & Pay Survey Data
Job Key Job Job Evaluation Points Pay Survey
A Y 110 $1919
B Y 115 2106
C Y 155 2807
D N 165 -
E N 170 -
F Y 190 3442
G Y 210 4134
H N 225 -
I Y 245 4823
J Y 255 4893
K Y 270 5796
L Y 275 5262
M N 315 -
N Y 320 6875
O N 330 -
 Regression Model (Pay Policy Line)
• Y = a + bX

Where:
Y = Pay rates for key jobs (obtained from the pay survey)
X = Job evaluation points for key jobs

Estimated Model:

Y = - $661 + $22.69 X
Regression Analysis (continued)
• Suppose we wish to estimate the pay rate for jobs ‘A’ and
‘B’ (see slide 23).

• The pay rates for these jobs can be determined as

follows:

Y = - $661 + $22.69 X

Y (Job ‘A’) = - $661 + $22.69 (110) = $1835

Y (Job ‘B’) = - $661 + $22.69 (115) = $1948
Job Key Job Job Evaluation Pay Survey Estimated
Points Salary
A Y 110 $1919 $1835
B Y 115 2106 1948
C Y 155 2807 2856
D N 165 - 3083
E N 170 - 3196
F Y 190 3442 3650
G Y 210 4134 4104
H N 225 - 4444
I Y 245 4823 4898
J Y 255 4893 5125
K Y 270 5796 5465
L Y 275 5262 5579
M N 315 - 6486
N Y 320 6875 6600
O N 330 - 6826
 Pay Policy Line Y = - $661 + $22.69 * job evaluation points
• Pay policy line – shows the
mathematical relationship
between job evaluation
points and pay rate.

• Pay policy line has a positive

slope.

• Pay policy line usually

equates to a market match
policy.

• Pay levels that correspond

with the pay policy line are
Y = - $661 + $22.69(315) = $6486
the market competitive pay
rates.
Job Key Job Market Match Market Lead Market Lag
Policy Policy Policy
Pay Policy
A Y $1835 $1890 $1780
B Y 1948 2006 1890
C Y 2856 2942 2770 Market Lead Policy
D N 3083 3175 2991 3% above market

E N 3196 3292 3100

Market Lag Policy
F Y 3650 3760 3541 3% below market
G Y 4104 4227 3981
H N 4444 4577 4311
I Y 4898 5045 4751
J Y 5125 5279 4971
K Y 5465 5629 5301
L Y 5579 5746 5412
M N 6486 6681 6291
N Y 6600 6798 6402
O N 6826 7031 6621
 Pay Policy Lines

Market Lead Policy

Monthly Salary

Market Match Policy

Market Lag Policy

Job Evaluation Points

Conflicts between Market Pay Surveys & Job
Evaluation

• Sometimes inconsistencies arise between pay rates based on

the market survey and those based on the job evaluation

points.

• So should the organizations base pay rates on market surveys

(external comparisons) or job evaluation points (internal

comparisons).
Conflict between Market Pay Surveys & Job
Evaluation (continued)

VP Marketing VP Finance
Job evaluation points 500 500
Pay based on job evaluation points $50,000 $50,000

Pay based on market survey $40,000 $55,000

Pay Grades
• Pay Grades- Set of jobs having similar worth or content
grouped together to establish pay rates.

• The pay grade widths are set on the basis of job evaluation
points.

• All jobs within a particular grade will have the same pay
range.

• The advantage of this approach is that the administrative

burden of setting separate rates of pay for hundreds of
different jobs is reduced.
Example of Pay Grades
Pay Grade Point Range

1 100 -150

2 151-200

3 201-250

4 251-300

5 301-350
Pay Ranges
• Once pay grades have been established, compensation expert

also must determine the pay range for each grade.

• Pay ranges set upper and lower pay limits for all jobs in each

grade.

• A pay range has three salient features: minimum, maximum,

and midpoint.
 Range Midpoint,
Minimum, and Maximum

Pay ranges help the company to recognize individual differences in performance,

experience, training and so forth.
 Pay Ranges: Establishing the Midpoint
(Market Pricing Approach)
Under the market pricing approach, midpoint usually reflects the
market average or median.

Pay Grade

Job Title Annual Salary Based on Pay Survey

Accountant 1 $33,000
Accountant 2 $34,500
Accountant 3 $36,000
Accountant 4 $40,500

Midpoint of Pay Range = [33,000 + 34,500 + 36,000 + 40,500] / 4

= $36,000
Pay Ranges: Establishing the Midpoint (Pay
Policy Line Approach)
• Under the pay policy line approach, the midpoint can be
determined by following the steps given below:

Find the job evaluation point value in the centre of the pay
grade.

Substitute that point value for X in your equation of the pay line.

Solve the equation for Y; this value is the midpoint of the range.
Establishing the Midpoint (Pay Policy Line Approach)
Pay Grade Point Range

1 100 -150

2 151-200

3 201-250

4 251-300

5 301-350

Job evaluation point value in the centre of the Pay Grade 1 = (100 + 150) / 2 = 125

Midpoint of Pay Range: Y = - $661 + $22.69 (125) = $2175

Minimum value of pay range = 0.80 * 2175 = $1740

Maximum value of pay range = 1.20 * 2175 = $2610
Pay Ranges: Calculating the Minimums &
Maximums

• Once the midpoint (based on the pay policy line or market pricing)

is determined, the next step is to calculate the minimums and

maximums of the pay range.

• A pay range will generally spread +/- 20% from the midpoint.

• This means that the maximum value of a pay range will be 20%

above the midpoint, while the minimum value will be 20% below it.
 Pay Grades & Pay Ranges
Pay Grade Point Range Minimum Pay Mid-Point Pay Maximum Pay

1 100 -150 1740 2175 2610

2 151-200 2657 3321 3985

3 201-250 3565 4456 5347

4 251-300 4472 5590 6708

5 301-350 5380 6725 8070

 Problems with Pay Grades
Job Key Job Job Evaluation Market Pricing Pay Policy Line Pay Grade
A Y 110 $1919 $1835 $2175
B Y 115 2106 1948 2175
C Y 155 2807 2856 3321
D N 165 - 3083 3321
E N 170 - 3196 3321
F Y 190 3442 3650 3321
G Y 210 4134 4104 5347
H N 225 - 4444 5347
I Y 245 4823 4898 5347
J Y 255 4893 5125 6708
K Y 270 5796 5465 6708
L Y 275 5262 5579 6708
M N 315 - 6486 8070
N Y 320 6875 6600 8070
O N 330 - 6826 8070
 Sample Pay
Grade Structure
Rates out of Range
• No matter how well a pay structure is constructed, there are a
few individuals whose pay is lower than the minimum or higher
than the maximum pay rates of their respective pay ranges.

• Red-Circled Employees – An employee who is paid above the

range set for the job.

• Several approaches can be used to bring a red-circled person’s

pay into line.

 Cut the employee’s pay

 Promote the employee to a job in a higher pay grade
 Freeze employee’s pay until the range can be adjusted upwards
Rates out of Range (continued)
• Green-Circled Employees – An employee who is paid below
the range set for the job.

• Such an employee should receive fairly rapid pay increases to

reach the pay grade minimum.
Pay Structure and Actual Pay

• Compa-Ratio (CR) – the

ratio of average pay to the
midpoint of the pay range.
• If the average equals the
midpoint, CR is 1.
• If CR is greater than 1, the
average pay is above the
midpoint.
• IF CR is less than 1, the
average pay is below the
midpoint.