COMPENSATING HUMAN

RESOURCES:

ESTABLISHING A
PAY STRUCTURE
MODULE 12
 What Do I Need to Know?
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.
DECISIONS ABOUT PAY
Pay affects both employees’ motivation
and the organization’s costs.

An unplanned approach in which each

employee’s pay is independently
negotiated, will likely result in unfairness,
dissatisfaction and rates that are either
overly expensive or so low that positions
are hard to fill.
TWO ASPECTS OF PAY
STRUCTURE
1. JOB STRUCTURE
Refers to the relative pay for different jobs
within the organization.
Establishes relative pay among different
functions and different levels of responsibility.
2. PAY LEVEL
Average amount the organization pays for a
specific job (include wages, salaries, bonuses).
Determines how much is paid overall for a
certain position.
 PAY STRUCTURE
Combination of job structure and pay level.
A policy framework for determining pay across jobs.
Helps the organization achive goals related to
employee motivation, cost control and the ability
to attract and retain talented human resources.
Provides fairness and consistency in pay decisions.
 LEGAL
REQUIREMENTS
FOR PAY
LEGAL REQUIREMENTS FOR PAY

COMPLIANCE
GUIDE
LEGAL REQUIREMENTS FOR PAY

MINIMUM WAGE
Wage Rationalization Act (R.A. 6727)
Regional Triparitite Wages and Productivity
Boards (RTWPBs) issue Regional Wage Orders
setting minimum wage rates
applies to all private sector workers except
Barangay Micro Busines Enterprises (BMBEs)
possible 1-year exemption for:
-retail/service establishments with 10 workers
-business affected by natural calamities
LEGAL REQUIREMENTS FOR PAY

Working Hours and Employment

Rules
standard work hours of 8 hours per day
Meal and Rest periods
at least 1-hour meal break and short rest
periods (5-20 mns) which are compensable

Monthly Paid: Paid for all calendar days

Daily Paid: Paid only for days worked and unworked

regular holidays
LEGAL REQUIREMENTS FOR PAY

Employer Compliance and

Penalties
employers must comply with prescribed
minimum wage rates (RA 6727 AND RA 8188)
Penalties for non-compliance:
[Link] 25,000-Php 100,000 fine
2. 2-4 years imprisonment
3. No probation allowed
officers (president, manager, director) also liable
Must submit Annual Establishment Report on
Wages (AERW)
LEGAL REQUIREMENTS FOR PAY

HOLIDAY PAY
(Article 94)

Unworked Regular Holiday (100%)

Worked Regular Holiday (200%)
Unworked Double Holiday (200%)
Worked Double Holiday (300%)
LEGAL REQUIREMENTS FOR PAY

HOLIDAY PAY (Article 94)

Applies to all employees EXCEPT:
-Government employees -Field Personnel
-Kasambahays -Retail & service < 10 workers
-Managerial staff
Employees not required to work but must still be paid
Covered holidays declared by law or Presidential
Declamation
Regular holidays are compulsory rest days
Employer must pay even during temporary shutdowns
or maintenance
LEGAL REQUIREMENTS FOR PAY

PREMIUM PAY
(Articles 91-93)
Special (non-working day) (130%)
Special day + Rest day (150%)
LEGAL REQUIREMENTS FOR PAY

PREMIUM PAY
(Articles 91-93)
Applies to worked performed on special (non-
working) days
“NO WORK, NO PAY”
Applies to private sector workers covered by
the Labor Code
Exemptions (similar to holiday pay)
Any voluntary company policy or CBA
granting pay for unworked special days is
allowed
LEGAL REQUIREMENTS FOR PAY

OVERTIME PAY (Article 87)

Work performed beyond 8 hours a day must

be compensated as overtime

COVERAGE :

Applies to all employees covered under the

Labor Code’s premium pay provisions
LEGAL REQUIREMENTS FOR PAY

OVERTIME PAY
LEGAL REQUIREMENTS:
Employers must pay overtime for work
beyond 8 hours per day
Overtime pay must not be less than the
legally prescribed rates under Article 87
The Department of Labor and Employment
(DOLE) issues implementing rules on
computation
LEGAL REQUIREMENTS FOR PAY

OVERTIME PAY
STIPULATED OVERTIME RATES
Employers and employees may agree to
higher overtime rates through contracts or
CBA’s
Premium pay forms part of the regular rate
in computing overtime pay
LEGAL REQUIREMENTS FOR PAY

NIGHT SHIFT DIFFERENTIAL (Article 86)

Additional compensation of at least 10% of regular
wage for each hour of work between 10:00 pm to
6:00 am
EXEMPTED EMPLOYEES:
1. Government employees
2. Retail/service establishments with 5 workers
3. Kasambahays/personal service workers
4. Managerial employees
5. Officers or members of a managerial staff
6. Field Personnel
LEGAL REQUIREMENTS FOR PAY

NIGHT SHIFT DIFFERENTIAL (Article 86)

LEGAL REQUIREMENTS

Employers must pay night shift differential to

covered employees under Article 86
The minimum rate shall not be lower than ten
percent (10%) of the regular wage
LEGAL REQUIREMENTS FOR PAY

SERVICE CHARGES (Article 96/R.A. 11360)

Amount added to a customer’s bill for work or
service rendered

COVERAGE:

Applies to all employees of covered establishments,

except managerial employees, regardless of position
or employment status
LEGAL REQUIREMENTS FOR PAY

SERVICE CHARGES (Article 96/R.A. 11360)

LEGAL REQUIREMENTS
All collected service charges must be
completely and equally distributed among
covered employees based on hours/days worked
Must be paid at least twice a month, with no
more than 16 days between payments
Service charges cannot be used to offset
compliance with minimum wage increases
LEGAL REQUIREMENTS FOR PAY

EMPLOYEES’ COMPENSATION
PROGRAM (P.D. 626)
A mandatory government program providing compensation
for work-related sickness, injury, disability or death
Implemented by the Employees’ Compensation Commission
(ECC) under DOLE
COVERAGE:
[Link] sector employees (SSS members including
OFWs and kasambahays)
[Link] employees (GSIS members including
uniformed personnel)
[Link] self-employed SSS members
LEGAL REQUIREMENTS FOR PAY

EMPLOYEES’ COMPENSATION
PROGRAM (P.D. 626)
CONDITIONS OF COMPENSABILITY:
A case is compensable if the injury, sickness, or death:
-Occured in the course of employment, or
-Is included in the ECC list of occupational diseases, or
-Is proven to be work-aggravated under the increased-risk
theory
Not compensable if due to:
-Intoxication
-Willful intention to harm oneself or others
-Notorious negligence
LEGAL REQUIREMENTS FOR PAY

EMPLOYEES’ COMPENSATION
PROGRAM (P.D. 626)
NOTIFICATION AND FILING OF CLAIMS
Employer must be notified of sickness, injury or
death within 5 days of occurrence
No notice needed if it happened during work hours
and was known to the employer
Private sector: file EC claims at SSS branch
Government sector: file EC claims at GSIS office
LEGAL REQUIREMENTS FOR PAY

EMPLOYEES’ COMPENSATION
PROGRAM (P.D. 626)
EMPLOYER’S CONTRIBUTION OBLIGATIONS
Employers are required by law to pay EC
contributions for all covered employees
Contributions are remitted to SSS or GSIS as
prescribed by P.D. 626
Obligation ceases upon employee’s death,
separation or disability
 ECONOMIC
INFLUENCES ON
PAY
ECONOMIC INFLUENCES ON PAY

PRODUCT MARKETS
Competing organizations sell similar
goods/services to the same
customers
Product markets place an UPPER
LIMIT on pay:
HIGH HIGHER FEWER
LABOR PRODUCT CUSTOMERS
COSTS PRICES

STRATEGIES:
Automation, Productivity gains,
Premium pricing
ECONOMIC INFLUENCES ON PAY

LABOR MARKETS
Organizations compete for workers;
pay influences ability to attract talent
Labor market sets the LOWER LIMIT on
pay:

IF PAY < MARKET

RATE
EMPLOYEES
LEAVE

OTHER INFLUENCES:
High cost of living = Higher salaries
Inflation (tracked by PSA’s CPI) pushes pay up
ECONOMIC INFLUENCES ON PAY

PAY LEVEL
DECISIONS
Organizations can choose to pay:
BELOW MARKET RATE (to cut costs)
AT MARKET RATE (average)
ABOVE MARKET RATE (to attract best
talent)
-Improve innovation and retention
ECONOMIC INFLUENCES ON PAY

HR ANALYTICS AND DECISION

MAKING
HR ANALYTICS
-Use data to assess pay structures,
predict turnover and monitor pay equity
Walmart: Low-cost strategy, $11/hour,
high turnover (60-70%)
Costco: Quality focus, $14/hour, low
turnover (7%), higher satisfaction
Different pay strategies aligned with business goals
ECONOMIC INFLUENCES ON PAY

GATHERING INFORMATION
ABOUT MARKET PAY
BENCHMARKING
Comparing pay practices to competitors
using surveys
SOURCES:
Bureau of Labor Statistics
Consulting firms (Mercer, Aon, SHRM)
PURPOSE:
-Ensure pay competitiveness, attract and
retain talent
ECONOMIC INFLUENCES ON PAY

GATHERING INFORMATION
ABOUT MARKET PAY
CROWDSOURCING PAY DATA
-Obtaining information from large group of
people via the internet
WEBSITES: Glassdoor, PayScale, Indeed
ADVANTAGES:
-Accessible, transparent, low-cost
LIMITATIONS: Accuracy, Self-selection bias
HR ROLE:
-Communicate how pay decisions are made to
maintain transparency
 EMPLOYEE
JUDGMENTS ABOUT
PAY FAIRNESS
EMPLOYEE JUDGEMENTS ABOUT PAY FAIRNESS

BIRD’S EYE VIEW PAY STRUCTURE

INTEGRATION OF

EMPLOYEES’ OPINION
(PAY FAIRNESS)

INTEGRATED NOT INTEGRATED

MOTIVATION MOTIVATION
INPUTS INPUTS
COOPERATION COOPERATION
EMPLOYEE JUDGEMENTS ABOUT PAY FAIRNESS

HOW TO JUDGE
FAIRNESS?
EMPLOYEE JUDGEMENTS ABOUT PAY FAIRNESS

...THROUGH EQUITY
(EQUITABLE THINKING)
“EMPLOYEES EVALUATE THEIR PAY RELATIVE TO THE
PAY OF OTHER EMPLOYEES” (FUNDAMENTALS OF
HUMAN RESOURCE MANAGEMENT 9e. 2020. Mc Graw
Hill)
EMPLOYEE JUDGEMENTS ABOUT PAY FAIRNESS

EQUITY THEORY
OUTCOMES SHOULD EQUATE....

PAY=INPUTS
EMPLOYEE JUDGEMENTS ABOUT PAY FAIRNESS

EQUITY THEORY
POINTS OF COMPARISON

EDUCATION
EXPERIENCE
HRS. OF WORKWEEKS
EMPLOYEE JUDGEMENTS ABOUT PAY FAIRNESS

EQUITY THEORY
TYPES OF EQUITY

EXTERNAL EQUITY INTERNAL EQUITY

Relative pay to Relative pay to
employees form employees form
DIFFERENT the SAME
organizations doing organization doing
the same job the same job
EMPLOYEE JUDGEMENTS ABOUT PAY FAIRNESS

IS THE JUDGEMENT
OF EMPLOYEES
CLOSER TO REALITY
OR MERE
PERCEPTION?
EMPLOYEE JUDGEMENTS ABOUT PAY FAIRNESS

COMMUNICATING
FAIRNESS
An organization can guide
the employees on what to
perceive through proper
communication
EMPLOYEE JUDGEMENTS ABOUT PAY FAIRNESS

COMMUNICATING
FAIRNESS
WHAT TO COMMUNICATE?
Salary levels from conducted research
Paychecks (individual employee’s pay)
Market data (data used for decision making)
Pay planning (pay ranges and potential future earnings)
Pay strategy (pay decisions relate to organiztion’s
objectives)
Open Salary (FULL DISCLOSURE of pay ranges and
salaries paid)
EMPLOYEE JUDGEMENTS ABOUT PAY FAIRNESS

JOB STRUCTURE
Shows the relative value of Jobs

Organizations consider the

relative contribution each job
should make to the organization;
overall performance.
EMPLOYEE JUDGEMENTS ABOUT PAY FAIRNESS

JOB STRUCTURE
THIS IN TURN RESULTS TO:

PAY TO: PAY TO:

EXECUTIVES ENTRY-LEVEL
VP RANK AND
OFFICERS FILE
MAILROOM
EMPLOYEE JUDGEMENTS ABOUT PAY FAIRNESS

HOW DO WE
PROPERLY MEASURE
THE RELATIVE WORTH
OF THE
ORGANIZATION’S
JOBS?
 JOB EVALUATION
STAGE KEY CONCEPT/S DEFINITION

A committee assembled and trained by the

organization who have familiarity upon the jobs
that needs evaluation.
CREATION JOB EVALUATION COMMITTEE
The committee often includes a human resource
specialist, if its budget permits, may hire an
outside consultant. (FHRM 9e. 2020. Mc Graw Hill)

Metric to what an organization pays for.

COMPENSABLE FACTORS
higher points = higher compensation

CONDUCTING Published by trade groups & management

consultants
POINT MANUALS Can be adapted from other published point
manuals or through developing one’s own.

The staple jobs that an organization evaluate on

RESEARCH/
its pay survey before creating a pay structure
“PRE-PAY KEY JOBS because of their significant role in the
STRUCTURE”
organization.
EMPLOYEE JUDGEMENTS ABOUT PAY FAIRNESS

JOB EVALUATION
PAY STRUCTURE

PAY STRUCTURE
Also called a compensation structure or
salary structure.

It provides a systematic framework for

organizing employee compensation and
typically includes the following
components:
a. Pay Rates
b. Pay Grades
c. Pay Ranges
d. Pay Differentials
PAY STRUCTURE

PAY RATES
-amount employees earn for performing a job.
Within this structure, they may state the pay in
terms of:

Hourly wage - Rate of pay per hour worked.

Piecework rates - Rate of pay per unit produced.
Monthly/Annual salaries - Rate of pay per week,
month, or year worked.
 PAY STRUCTURE

PAY RATES
Market-Based Pay
Organizations aim to match employee pay with market rates for
comparable jobs.
Goal: Ensure salaries are competitive and fair, attracting and retaining
talent.
Focus initially on key jobs (critical or high-level positions).

Steps to Determine Pay for Key Jobs:

Collect Market Evaluate Survey

Set Salary
Data Data
 PAY STRUCTURE

PAY RATES
HANDLING NONKEY JOBS
Nonkey jobs - positions without survey data.
Method: Use a graphical approach to estimate pay.
[Link] axis: Range of possible pay rates.
[Link] axis: Job evaluation points.
[Link] key jobs (evaluation points vs. pay) - Can be
calculated via regression analysis
[Link] a pay policy line.
PAY STRUCTURE

PAY RATES
FIGURE 12.4 PAY POLICE LINE
 PAY STRUCTURE

PAY RATES
PAY POLICY LINE
A pay policy line is a visual tool showing the relationship
between a job’s evaluation points and its pay rate.
The pay policy line does not always match rates in the
organization.
Reasons for difference:
Scarce expertise - pay higher than policy line
Oversupply of workers - pay lower than policy line

Organization must decide how to balance: job value vs.

market rates
 PAY STRUCTURE

PAY RATES
Resolving Conflicts Between Market and Job Value

Option 1: Stick to job Option 2: Base pay entirely

evaluation points on market
Pros: Reflects internal Pros: Competitive
worth. externally.
Cons: May pay more/less Cons: Internal
than competitors - dissatisfaction if similar
recruiting challenges. roles paid differently.

Moderation: Pay more for critical positions; less for

less critical ones.
 PAY STRUCTURE

PAY GRADES
Large organizations may have hundreds or
thousands of jobs, making individual pay rates
complex.
Pay grades group jobs with similar worth or content
into the same pay range.
Employees in the same grade receive the same pay,
even if job evaluations differ slightly.
 PAY STRUCTURE

PAY GRADES
Advantages: Drawbacks:
Simplifies salary Pay may not match exact
administration for large market rates.
organizations. Some employees may be
Ensures internal overpaid or underpaid
consistency in pay. relative to market.
Facilitates career Could affect recruitment
progression across and retention of high-
grades. demand roles.
 PAY STRUCTURE

PAY RANGES
Flexibility in Setting Pay
Organizations need flexibility when setting pay for
individual jobs. This flexibility allows them to:
Reward top-performing and valuable employees.
Adjust pay based on market surveys and job evaluations.
Having flexibility ensures fairness and competitiveness in pay
decisions.
Therefore, organizations include pay ranges instead of fixed
salaries.
 PAY STRUCTURE

PAY RANGES
Components of a Pay Range
A pay structure includes a range of pay for each job or pay
grade. Each range has:

Minimum Midpoint Maximum

pay pay pay
 PAY STRUCTURE

PAY RANGES
Setting Pay Ranges
The market rate or pay policy line usually serves as the
midpoint of a pay range.
Minimum and maximum pay values are based on market
survey data.
Pay ranges are most common among:
White-collar jobs, and
Jobs not covered by union contracts.
This approach helps employers reward performance and
maintain consistency in pay levels.
 PAY STRUCTURE

PAY RANGES
FIGURE 12.5

Higher-level
jobs have
wider pay
ranges to
reward strong
performance
and critical
roles.
 PAY STRUCTURE

PAY RANGES
Overlapping Pay Ranges
Pay ranges usually overlap, meaning the top of one grade can
be higher than the bottom of the next.
Advantages of overlap:
Provides flexibility for transfers without changing pay.
Encourages smooth movement within the organization.
However, less overlap increases the importance of promotions
for higher pay.
The right balance between overlap and distinction motivates
employees while maintaining fairness.
 PAY STRUCTURE

PAY DIFFERENTIALS
Organizations sometimes adjust pay to reflect:
Working conditions (e.g., night shifts, hazardous work)
Labor markets (e.g., high-demand locations, high living costs)

Purpose: Fair compensation regardless of work location

or conditions.

Challenges:
Costly for organizations in high-cost or tight labor markets.
Handling transfers to lower-pay locations can be delicate.
 PAY STRUCTURE

Alternatives to Job-Based Pay

Limitations of Traditional Job-Based Pay
Inflexibility – Strict job rules make people say “That’s not my job.”
Discourages Change – Updating job descriptions takes too much time.
Wrong Rewards – Pay only increases with promotion, not new skills.
Empowerment Conflict – Higher pay for higher jobs lowers motivation
for others.

Note: Some companies use a differential for night work to compensate

workers for less desirable hours, regardless of the pay structure type.
 PAY STRUCTURE

Alternatives to Job-Based Pay

Alternative 1: Delayering and Broad Bands
Delayering
Reducing the number of job levels in the organization.
Purpose: Simplifies hierarchy and increases flexibility.

Broad Bands
Combining many salary grades into one wider pay band.
Purpose: Gives managers more freedom to assign tasks and
adjust pay.
 PAY STRUCTURE

Alternatives to Job-Based Pay

Alternative 2: Skill-Based Pay
Pay based on employee’s skills, knowledge, and abilities, not
job title.
Purpose: Encourages continuous learning and adaptability.

Benefits:
Supports Innovation: Fits fast-changing tech environments.
Empowers Employees to grow and make independent
decisions.
 PAY STRUCTURE

Alternatives to Job-Based Pay

Disadvantages of Skill-Based Pay
Overpayment Risk — Employees might get paid more for learning
new skills that they don’t actually use at work.
Pay Plateau — If workers learn new skills too fast, they can reach
the highest pay level quickly, leaving no room for more raises.
Administrative Burden — The company needs to keep many
records of employees’ training, skills, and knowledge.
Market Data Difficulty — It’s difficult to find fair pay rates in the
market because most salary surveys are still based on job titles,
not skills.
PAY STRUCTURE
AND
ACTUAL PAY
 PAY STRUCTURE AND ACTUAL PAY

MEASURING AND MANAGING ACTUAL PAY

The Compa-Ratio
the single most important metric for checking if pay is
consistent with policy goals.
the ratio of average pay to the midpoint of the pay range.
Compa-Ratio = Average Pay / Midpoint
Most organizations aim to be close to 1.
PAY STRUCTURE AND ACTUAL PAY

MEASURING AND MANAGING ACTUAL PAY

Ratio > 1.00 Ratio < 1.00

Pay is, on average, below the
Pay is, on average, above the
intended policy midpoint.
intended policy midpoint.
May be due to many new hires
Indicates successful retention
of experienced talent, but may or a structure that is no longer
warrant a check for market-competitive,
unsustainable costs. potentially leading to high
turnover.
 PAY STRUCTURE AND ACTUAL PAY

CURRENT ISSUES IN PAY STRUCTURE

Executive Pay
Pay During Scrutiny and
Military Duty Equity Concerns
Law:
USERRA lets employees return to their jobs Public Concern:
after military service (up to 5 years). CEOs can earn 270× more than average
Employers are not required to pay during employees which is seen as unfair.
the leave.
Fairness Issue: Links to Equity Theory
Company Decision:
— people compare their pay with others.
Some pay the difference between military
CEO Pay Mix: Small part is base salary,
and company salary.
Most are stocks, bonuses.
Affects morale, public image, and costs.
 SUMMARY
LO 12-1: Define Pay Structure.
A structure is defined by the job structure (relative pay for jobs within
the org) and the pay level (average pay set relative to the market).
LO 12-2: Legal Compliance.
Pay practices must adhere to EEO (equal pay for equal work), the FLSA
(minimum wage, overtime), and the Prevailing Wage laws (for federal
contracts).
LO 12-3: Economic Forces.
Pay must balance product market demands (affordability) with labor
market demands (attraction/retention).
LO 12-4: Equity Theory.
Employees evaluate fairness by comparing their outcome/input ratio
to others. Perceived under-reward leads to dissatisfaction and
changes in behavior.
 SUMMARY
LO 12-5: Designing Structures.
Structures are designed using Job Evaluation (assessing internal
value) and Market Benchmarking (using pay surveys for external
competitiveness).
LO 12-6: Alternatives.
Pay structures can move away from rigid job descriptions through
Skill-Based Pay (rewarding employee capabilities) and Delayering
(creating broad pay bands).
LO 12-7: Actual Pay Management.
The Compa-Ratio is the primary tool to track if actual employee pay
aligns with the pay range midpoint established by policy.
LO 12-8: Current Issues.
Organizations must address high Executive Pay scrutiny and the
policy decision regarding pay for employees on Military Duty.
Thank You