You are here

Pay Decision Considerations

19 January, 2016 - 15:28

Besides the motivational aspect of creating a pay structure, there are some other considerations. First, the size of the organization and the expected expansion of the organization will be a factor. For example, if you are the HR manager for a ten-person company, you likely use a going rate or management fit model. While this is appropriate for your company today, as your organization grows, it may be prudent to develop a more formal pay structure. Ascentium Corporation, based in Seattle, Washington, found this to be the case. When the company started with fewer than fifteen employees, a management fit model was used. As the company ballooned to over five hundred employees in four cities, a pay banding model had to be put into place for fairness.

If your organization also operates overseas, a consideration is how domestic workers will be paid in comparison to the global market. One strategy is to develop a centralized compensation system, which would be one pay system for all employees, regardless of where they live. The downside to this is that the cost of living may be much less in some countries, making the centralized system possibly unfair to employees who live and work in more expensive countries. Another consideration is in what currency employees will be paid. Most US companies pay even their overseas workers in dollars, and not in the local currency where the employee is working. Currency valuation fluctuations could cause challenges in this regard.  1 We further discuss some global compensation policies in "International HRM".

How you communicate your pay system is extremely important to enhance the motivation that can be created by fair and equitable wage. In addition, where possible, asking for participation from your employees through the use of pay attitude surveys, for example, can create a transparent compensation process, resulting in higher performing employees.

Organizations should develop market pay surveys and review their wages constantly to ensure the organization is within expected ranges for the industry.

Human Resource Recall

Why do you think a transparent compensation policy is so important to motivating a workforce?

Table 6.3 Types of Pay




Fixed compensation calculated on a weekly, biweekly, or monthly basis. No extra pay for overtime work.

Hourly Wage

Employees are paid on the basis of number of hours worked.

Piecework System

Employees are paid based on the number of items that are produced.

Types of Incentive Plans


Commission Plans

An employee may or may not receive a salary but will be paid extra (e.g., a percentage for every sale made).

Bonus Plans

Extra pay for meeting or beating some goal previously determined. Bonus plans can consist of monetary compensation, but also other forms such as time off or gift certificates.

Profit-Sharing Plans

Annual bonuses paid to employees based on the amount of profit the organization earned.

Stock Options

When an employee is given the right to purchase company stock at a particular rate in time. Please note that a stock “option” is different from the actual giving of stock, since the option infers the employee will buy the stock at a set rate, obviously, usually cheaper than the going rate.

Fringe Benefits

This can include a variety of options. Sick leave, paid vacation time, health club memberships, daycare services.

Health Benefits

Most organizations provide health and dental care benefits for employees. In addition, disability and life insurance benefits are offered.

401(k) Plans

Some organizations provide a retirement plan for employees. The company would work with a financial organization to set up the plan so employees can save money, and often, companies will “match” a percentage of what the employee contributes to the plan.