Developing a pay structure:-

Managers should follow the following guidelines in developing a pay structure:-

i) The minimum and maximum level of pay:- Taking into consideration:-

Ability and willingness to pay
Profitability of the firm
Government policy/regulations
Union influence
Market and competitive pressures

ii) General relationship among the levels of pay:-

Between the exempt and the non-exempt
Senior management and operative management
Operatives and supervisors

iii) Whether the pay structure should

Lead the market
Lag the market
Lead-lag the market

iv) The division of the total compensation dollar; portion goes to:-
Basic wages/basic pay
Benefits
Merit pay
Pay for performance

Pay Pay structure Total compensation error

Managers compensation package develop

 Compensation Package

Its all about

Pay Differentials Performance criteria (seniority vs merit)

Employee commitment and organization citizenship

Environmental condition

Skills, abilities to be acquired or needed for the

job:- Employees will be motivated to learn new
skills and techniques if their knowledge is paid in
the form of perfectly designed compensation

Figure 1:- Basis of designing compensation package

Managers are ready design pay structure based on the data they have collected so far.

Manager Figure 1 compensation package structure design

information survey
collect (compensation survey to generate data regarding the pay
comparable jobs or pay differential jobs conducted in relevant geographic and industry
labor markets).

With the generation of internal and external pay data and information, managers are
now ready to design a pay structure. To do so, they must:-

i) Determine a trend or pay policy line (also known as line of best fit)
ii) Deicide on the need for one or more pay structures
These five technical features
significantly determine the unique
compensation characteristics of an
organization
iii) Display job data
iv) Establish the characteristics of the pay structure(number, width, and height of pay
grades and the overlap among them)
v) Lock overlapping pay structures (when using more than one)

1) Determine a trend or pay policy line (also known as line of best fit):-

Each organization must develop its own pay policy line which is a trend line or line of best fit
that best represent the middle pay value of jobs that have been evaluated or classified to
have particular worth.

Organization own pay policy line trend

line / line of best fit

Representing the middle pay

value of jobs that have been
evaluated or classified to
have particular worth.

a) Lowest to highest rate of pay:-

Establishing the lowest and highest rates of pay for the organization
Drawing a line connecting them
Figure 2:- Lowest to highest rate of pay policy line
 b) Midpoint of lowest rated job to midpoint of highest rated job

obtain the
market rate or going rate of pay

Obtaining the market rate or going rate of

pay or average or median rate of pay
through survey/market survey (surveying
competitors; a market is a collection of
buyers and competitors). Such going rate or
average rate is also known as competitive
midpoint . Thereafter, connecting the
midpoints
Figure 3:-mid-point method
 c) Scatter Diagram

Like other methods, scatter diagram also has two axes: - horizontal and vertical.

A scatter diagram uses job points, an assigned pay grade, or some other job-worth
indicator as a scale for the horizontal axis. That is, the horizontal axis ranks jobs according

to their importance or significance.

The vertical axis represents the dollar value of the jobs. The vertical axis of the scatter
diagram is simply a set of money figures from low to high. This amount may come from
either (1) the current pay rate or range for the job within the organization or (2) the value
placed upon the job in the market survey.
 Figure 3:- Lowest to highest rate of pay policy line

Different procedures are available for developing a trend line from a scatter
diagram:-
Line-of-sight (freehand) procedure
Two-point straight line method/ two-point procedure
Least-square method
 Regression analysis

i) Line-of-sight (freehand) procedure

It is a simple way to determine the trend line. In most cases, this procedure provides an

acceptable first approach to what the trend line will look like. Using this approach requires

the data analyst to perceive visually (to eyeball) a line that cuts through the center of the

points on the scatter diagram and that minimizes the vertical differences among points in

the same vertical plane.

Basically, line-of-sight (freehand) procedure scatter diagram scatter
diagram

i) The two-point procedure:-

It is also simple and involves drawing a line that connects the lowest and highest
values.
When this procedure is used, the lowest and highest points can be aberrations-
illogical or unacceptable pay data-and should have been eliminated from
consideration.
An arithmetic procedure that minimizes the likelihood of such an error is to array
the pay data and divide them into two groups (lower and top groups) having the
same number of values,

Pay data

Lower group Top group

As the name suggests two-points, now, we have to select two points from these two
groups. That is, selecting the median (middle) value of the lower group as one point, and
the median value of the top group for other point.

Pay data

Lower group Top group

Middle value of this Middle value of this

group group
Connecting them

Another two-point procedure that is useful when plotting many jobs is to locate the central
point or a cluster of low paying.
 ii) Least-square method:-

y dependent variable
independent variable or predictor (used as a
x
predictor of y)
random error or residual (actual y value - mean

of y)
0 y-intercept
1 slope

http://dlc.erieri.com/onlinetextbook/index.cfm?fuseaction=textbook.chpt05&pa
ge=05
2. The Need for More than One Pay Structure:-

Whether more than one pay structure is needed must be established early by those

responsible for structure design. A number of logical and rational consideration

can be given for having multiple pay structures (rationales for having more than one or

multiple pay structures) that focus on the forces that influence the actual pay of the various

occupational groups comprising most organizations

Rationales for having Actual pay of the various

multiple pay structures occupational groups in most
organizations

In general, large organizations have at least three pay structure lines:-

i) For blue-collar manual labor, craft, and trade workers

ii) For non-exempt white collar, salaried workers
iii) For managerial, administrative, and professional exempt employees.
Furthermore, some organizations have a fourth pay structure: - for their highly paid
executives.

Note: -
i. Exempt employees:-
They are not entitled to minimum wage, overtime regulations, and other
rights and protections that non-exempt employees enjoy.
 They are paid a salary rather than an hourly wage for their position
Typically, only executive, supervisory, professional or outside sales
positions are exempt positions.

ii. Non-exempt employees:-

They enjoy minimum wage, overtime regulations, and other certain
rights and protections prescribed and controlled by FLSA requirements.
Employees who fall within this category must be paid at least the federal
minimum wage for each hour worked and given overtime pay of not less
than one-and-a-half times their hourly rate for any hours worked
beyond 40 each week.

iii. Crafts:-
A craft is a pastime or a profession that requires particular skills and
knowledge of skilled work. (Wikipedia, 2016)
A trade-worker, or tradesman, tradesperson or skilled tradesman refers
to a worker that specializes in a particular trade or craft requiring skill.
(Wikipedia, 2016).
The term craft and trade-worker overlaps in usages. All describe people with
specialized training in the skills needed for a particular kind of work.
 red marked para revision

There are many occupational groups who require different pay treatments and this
(different pay treatments) require different pay structure design:-

Occupational groups:-

Clerical workers:-

Rate:- Pay received normally relates to local labor market rates

Who influenced the rate of pay:- In the past, unions have had little impact
on the pay of this occupation
 Unskilled and semiskilled workers:-
This group is related to local labor markets; it might also be a highly
unionized labor force. (local labor market + union)
Who influence the rate of pay: - Local, regional, and even national labor
contracts strongly influence rates of pay of jobs in these occupational
groups.

http://www.monster.com/career-advice/article/whats-the-difference-between-exempt

https://en.wikipedia.org/wiki/Craft

https://en.wikipedia.org/wiki/Tradesman