Does Pay Structure Matter? A Comparison of a Flat and Hierarchical Pay Structure
Posted: 7 Apr 1998
This paper details the experiences of one manufacturing company in the Midwest that operates a flat rate pay structure in one division and a hierarchical pay structure in a second division that is located on the same site and operates in the same product and labor markets. In "Division F" all production employees receive $8.32 per hour irrespective of seniority, performance, skill or shift. In "Division H" there is a hierarchical system of pay: three pay grades and annual individual adjustments based on a supervisory assessment of performance.
The paper finds that employees working under a flat rate structure felt that they had less cooperative relationship with coworkers, were more concerned about supervisory favoritism and the lack of recognition for good performance, but indicated a greater level of overall job satisfaction than did their counterparts working under a hierarchical pay structure. The paper concludes that the choice between a flat and a hierarchical pay structure is not clear cut.
JEL Classification: J31
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